PESTEL analysis for GAP (LEGAL PART) - Unemployedprofessor.net

CONTENTS 11

PART 4 Strategy Evaluation and
Governance 298

Chapter 9 Strategy Evaluation and
Governance 299

The Strategy-Evaluation Process 300

EXEMPLARY STRATEGIST SHOWCASED: ANTHONY WOOD,
FOUNDER AND CEO OF ROKU, INC. 300

GLOBAL CAPSULE 9: WHAT COUNTRY’S NEW STRATEGY IS
CALLED “VISION 2030”? 302

Three Strategy-Evaluation Activities 302

Reviewing Bases of Strategy 303 • Measuring Organizational
Performance 304 • Taking Corrective Actions 306

The Balanced Scorecard 307

Boards of Directors: Governance Issues 308

Challenges in Strategic Management 310

The Art or Science Issue 311 • The Visible or Hidden Issue 311

ETHICS CAPSULE 9: ACHIEVING EXEMPLARY BUSINESS ETHICS
THROUGH EXEMPLARY TRANSPARENCY 312

Promote Workplace Democracy 312 • Contingency Planning 313

• Auditing 314

Guidelines for Effective Strategic Management 314

IMPLICATIONS FOR STRATEGISTS 317

IMPLICATIONS FOR STUDENTS 317

Chapter Summary 318

Key Terms and Concepts 318

Issues for Review and Discussion 318

ASSURANCE-OF-LEARNING EXERCISES 319

Set 1: Strategic Planning for Coca-Cola 319

Exercise 9A: Develop a Balanced Scorecard for Coca-Cola 319

Set 2: Strategic Planning for My University 320

Exercise 9B: Prepare a Strategy Evaluation Report for My
University 320

Set 3: Strategic Planning to Enhance My Employability 320

Exercise 9C: A Balanced Scorecard to Evaluate My Professional versus
Personal Objectives 320

Set 4: Individual versus Group Strategic Planning 321

Exercise 9D: How Important Are Various Guidelines for Effective
Strategic Management? 321

MINI-CASE ON TJX COMPANIES, INC. (TJX): SECRET STRATEGIC
PLANNING WORKS GREAT FOR TJX 323

Web Resources 324
Current Readings 324
Endnotes 325

PART 5 Key Strategic-Management
Topics 326

Chapter 10 Business Ethics, Environmental
Sustainability, and Corporate Social
Responsibility 327

EXEMPLARY STRATEGIST SHOWCASED: BILL GATES, FORMER
CEO AND CHAIRMAN OF MICROSOFT CORPORATION 328

Why “Good Ethics Is Good Business” 329

Does It Pay to Be Ethical? 329 • How to Establish an Ethics
Culture 330

Whistle-Blowing, Bribery, and Workplace Romance 331

Whistle-Blowing 331 • Avoid Bribery 332 • Workplace
Romance 332

Environmental Sustainability 334

GLOBAL CAPSULE 10: INDIA IS TURNING GARBAGE INTO
CASH 334

Sustainability Reports and the Environmental Protection Agency
(EPA) 335 • International Standardization Organization (ISO)
Certification 336

Corporate Social Responsibility (CSR) 338

ETHICS CAPSULE 10: TOMS SHOES, INC.: SHOES ARE MAGIC,
PUT SHOES ON EVERY CHILD ON THE PLANET 339

Food Suppliers and Livestock Welfare 339 • Wildlife
Welfare 340 • What Firms Are the Best CSR Stewards? 340

IMPLICATIONS FOR STRATEGISTS 342

IMPLICATIONS FOR STUDENTS 342

Chapter Summary 343

Key Terms and Concepts 343

Issues for Review and Discussion 343

ASSURANCE-OF-LEARNING EXERCISES 344

Set 1: Strategic Planning for Coca-Cola 344

Exercise 10A: Does Coca-Cola or PepsiCo Win on Sustainability? 344

Set 2: Strategic Planning for My University 344

Exercise 10B: How Does My University Compare to Others on the Use of
Green Power? 344

Set 3: Strategic Planning for Myself 345

Exercise 10C: What Is My Business Ethics Quotient? 345

Set 4: Individual versus Group Strategic Planning 346

Exercise 10D: How Potentially Severe Are the Various Reasons Why
Workplace Romance Should Be Discouraged? 346

MINI-CASE ON CHICK-FIL-A: WHAT COMPANY HAS THE MOST
ETHICAL BUSINESS CULTURE? 347
Web Resources 348
Current Readings 348
Endnotes 349

Chapter 11 Global and International Issues 351
The Nature of Doing Business Globally 352

EXEMPLARY STRATEGIST: ANDRE CALANTZOPOULOS, CEO OF
PHILIP MORRIS INTERNATIONAL 352

Multinational Firms 353 • Labor Unions 354 • Tax
Rates 354

Advantages and Disadvantages of Doing Business
Globally 355

The Global Challenge 356

Outsourcing and Reshoring 357

U.S. versus Foreign Business Culture 358

Communication Differences across Countries 360

Business Culture across Countries 361

Mexico 361

ETHICS CAPSULE 11: WHICH TWO U.S.-BASED AIRLINES ARE
WORST ON CUSTOMER SERVICE? 361

Japan 362 • China 362 • India 363

Business Climate across Countries 363

The African Continent 364 • China 365 • Indonesia 365 •
India 365

GLOBAL CAPSULE 11: CHINA AIMS FOR SUPERIORITY IN
QUANTUM COMPUTING 366

Mexico 366

12 CONTENTS

IMPLICATIONS FOR STRATEGISTS 367

IMPLICATIONS FOR STUDENTS 367

Chapter Summary 368

Key Terms and Concepts 368

Issues for Review and Discussion 368

ASSURANCE-OF-LEARNING EXERCISES 369

Set 1: Strategic Planning for Coca-Cola 369

Exercise 11A: Business Culture Variation across Countries: A Report for
Coca-Cola Company 369

Exercise 11B: Coca-Cola Wants to Further Penetrate Africa. Can You Help
Them? 370

Set 2: Strategic Planning for My University 370

Exercise 11C: Does My University Recruit in Foreign Countries? 370

Set 3: Strategic Planning to Enhance My Employability 370

Exercise 11D: How Well-Traveled Are You Compared to Your
Colleagues? 370

Set 4: Individual versus Group Strategic Planning 371

Exercise 11E: How Important Are Various Potential Advantages
to Initiating, Continuing, or Expanding a Firm’s International
Operations? 371

MINI-CASE ON LYNK & COMPANY: YOU MAY DRIVE A LYNK
SOON 373

Web Resources 374
Current Readings 374
Endnotes 375

PART 6 Strategic-Management Case
Analysis 376

How to Prepare and Present a Case
Analysis 377
Guidelines for Preparing to Discuss a Case in Class 378

Be Practical 378 • Be Thorough 379 • Be
Realistic 379 • Be Specific 379 • Be Original 379

Listen and Contribute 379

Developing and Delivering a Written Case Analysis 380

Making an Oral Presentation 381

Controlling Your Voice 381 • Managing Body
Language 381 • Speaking from Slides 382 • Answering
Questions 382 • Presenting a Case Analysis Orally 382

Tips for Success in Case Analysis 382

ASSURANCE-OF-LEARNING EXERCISE 383

Strategic Planning to Enhance My Employability: How Important Are
Various Reasons to Use the Free Excel Strategic Planning Template at
www.strategyclub.com? 383

Glossary 659

Name Index 667

Subject Index 673

http://www.toms.com/about-toms#companyInfo

1. Honda Motor Co., Ltd. (HMC) 385
2. The Gap Inc. (GPS) 395
3. Samsung Electronics Co., Ltd. (005930) 404
4. Lenovo Group Limited (992) 415
5. Dick’s Sporting Goods (DKS) 424
6. 11 Bit Studios S.A. (11B) 433
7. JPMorgan & Chase Co. (JPM) 442
8. PPB Group Berhad (4065) 450
9. Nestlé S.A. (NESN) 460

10. Domino’s Pizza, Inc. (DPZ) 471
11. PetMed Express, Inc. (PETS) 481
12. AstraZeneca plc (AZN) 488
13. Shell plc (SHEL) 497
14. The Walt Disney Company (DIS) 506
15. Adidas AG (ADS) 516
16. Shoprite Holdings Ltd. (SHP) 525
17. Woolworths Group (WOW) 534
18. Microsoft Corporation (MSFT) 543
19. Amazon.com (AMZN) 550
20. Nike, Inc. (NKE) 561
21. Under Armour, Inc. (UA) 570
22. Polaris Industries, Inc. (PII) 580
23. PT Matahari Putra Prima Tbk. (MPPA) 587
24. Emirates Group 596
25. General Electric, Inc. (GE) 604
26. Barwa Group (BRES) 615
27. Starbucks Corporation (SBUX) 623
28. PepsiCo, Inc. (PEP) 631
29. National Audubon Society (www.audubon.org) 642
30. MTN Group Limited (MTN) 651

Cases

http://www.audubon.org

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New to This Edition
With this edition we have updated 40 percent of the chapter material, 11 end-of-chapter mini-

cases, and virtually all new examples in the chapters. Specifically, new material includes the

following items outlined in this section.

Chapter 1 Cohesion Case on Coca-Cola
Company (2018)
Students apply strategy concepts to Coca-Cola

through 25 new, innovative Assurance-of-Learning

Exercises provided at the end of chapters. Coca-Cola

is one of the most successful, well-known, and best-

managed global companies in the world.

Mini-Cases
11 new mini-cases, one at the end of each chapter.

Complete with questions designed to apply

chapter concepts, the new mini-cases focus on the

following companies:

• Chapter 1: Tesla, Inc.

• Chapter 2: Ford Motor Company

• Chapter 3: Sam’s Club

• Chapter 4: Procter & Gamble (P&G)

• Chapter 5: Facebook, Inc.

• Chapter 6: Boston Consulting Group

• Chapter 7: De Beers Group

• Chapter 8: Hasbro, Inc.

• Chapter 9: TJX Companies, Inc.

• Chapter 10: Chick-fil-A

• Chapter 11: Lynk & Company

Chapter Capsules—All NEW
Within each chapter, a new EXEMPLARY

STRATEGIST, GLOBAL CAPSULE, and

ETHICS CAPSULE are provided.

Strategist Capsules—one at the beginning

of each chapter to showcase an individual that

is employing strategic management exception-

ally well.

Global Capsules—provided to showcase

the strategic relevance of material to global op-

erations, issues, and conditions.

Ethics Capsules—developed to accent the

fact that “good ethics is good business” across

all aspects of the strategic-management process.

Preface

THE COHESION CASE

Coca-Cola Company, 2018
BY FRED R. DAVID

www.coca-cola.com, KO

Headquartered in Atlanta, Georgia, Coca-Cola Company (Coke) is the world’s largest producer

and distributor of beverages, marketing over 500 nonalcoholic brands in more than 200 countries.

Coke has 21 billion-dollar brands, 19 of which are available in lower- and no-sugar options. Four

of the top five beverages sold globally are Coke products: 1) Coca-Cola, 2) Diet Coke, 3) Fanta,

and 4) Sprite. Other Coke products include Dasani waters, Fanta, Gold Peak teas and coffees,

Honest Tea, Powerade sports drinks, Simply juices, Glaceau Smartwater, Sprite, and Zico coconut

water. However, company’s revenues for 2017 declined 15 percent, so rumblings are spreading

within the firm.

MINI-CASE ON THE BOSTON CONSULTING GROUP

WHAT AMERICAN FIRM HELPS THE
MOST COMPANIES DO STRATEGIC
PLANNING?
The answer to the question posed above might be the Boston Consulting Group (BCG) headquartered

in Boston, Massachusetts. A worldwide management-consulting firm founded in 1963, BCG had rev-

enues of $6.3 billion in 2017 and more than 16,000 employees. BCG’s President and CEO is Rich

Lesser. BCG was ranked third among Fortune’s “100 Best Companies to Work For” in 2017 and was

ranked first among Consulting Magazine’s 2016 “Best Firms to Work For.”

In formulating strategies, some firms use BCG’s Advantage Matrix to portray on the x-axis the

“size of a firm’s competitive advantage (Low versus High)” and on the y-axis “the number of ap-

proaches a firm can use to achieve competitive advantage (Low versus High).” Based on these two

axes, strategic implications for firms located in one of four quadrants can be labeled, according to

BCG, as: Fragmented, Specialization, Volume, and Stalemate, as illustrated below:

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EXEMPLARY STRATEGIST SHOWCASED

Anthony Wood, Founder and CEO
of Roku, Inc.

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ETHICS CAPSULE 10

TOMS Shoes, Inc.: Shoes Are Magic, Put Shoes on Every Child on the Planet

Headquartered in Santa Monica, California, TOMS Shoes exhibits

high social responsibility, excellent business ethics, and a daily com-

mitment to fair-labor practices and environmentally sustainable

design and manufacturing. Founded by Blake Mycoskie, TOMS

emphasizes philanthropy as an integral part of its business model—

as evidenced with its “One for One” program through which the

company donates a pair of shoes or provides vision care with every

respective shoe or pair of sunglasses purchased. Another key te-

net of TOMS’ business model is its nonprofit foundation, Friends

of TOMS, which organizes and leads several meaningful service

activities, including the One Day Without Shoes initiative aimed at

raising global awareness of health risks associated with not wear-

ing shoes. Supporters of TOMS have the opportunity to volunteer

for service trips to countries where the company’s donations will be

distributed to local communities in need. On their website, www

.tomscampusprograms.com, TOMS provides students with infor-

mation related to how they too can become involved with the

company’s philanthropic efforts. TOMS Shoes showcases how good

ethics, sustainability, and social responsibility is good business; the

company not only has excellent financial performance but is doing

noticeably well in all three areas of the triple-bottom line perfor –

mance (profits, people, and planet).

Source: Based on http://www.toms.com/about-toms#companyInfo and

https://www.privco.com/private-company/toms-shoes#.

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GLOBAL CAPSULE 6

India’s Economy Is Booming
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http://www.coca-cola.com

https://www.privco.com/private-company/toms-shoes#

16 PREFACE

Chapter
Exemplary Strategist Capsules
focus on the following people:

Global Capsules focus on the
following topics:

Ethics Capsules address the
following issues:

1 Legendary Coach of the Green Bay

Packers—Vince Lombardi

Mobike: Global Bike Renting Takes off

Like a Jet Plane

What Ethics Variable Is Most Important

in Doing Business?

2 CEO and Founder of FedEx

Corporation—Frederick Smith

LinkedIn: Clear Core Values,

Vision, and Mission Lead to Global

Prominence

Facebook: Changing Our Mission to

Enhance Our Ethics and Integrity

3 CEO and Cofounder of Pinterest—

Ben Silbermann

What Company Is Growing Fastest

Globally?

Preserve Alaska Wildlife or Boost Alaska

Economy?

4 CEO and Cofounder of Tesla and

SpaceX—Elon Musk

Bitcoin: The New Global Currency The Sagebrush Lizard versus the Big Oil

Man

5 CEO of Apple, Inc.—Tim Cook How Can a Firm Determine Where to

Initiate New Business? Use GDP as a

Guide

Are CEOs Less Ethical Today Than in

the Past?

6 CEO of Hobby Lobby—David Green India’s Economy Is Booming As We Strategize We Must Not

Jeopardize Animal Welfare

7 Former CEO of PepsiCo—Indra

Nooyi

Four Guidelines to Follow in Global

Marketing

Do Firms Need a Policy against

Workplace Phubbing?

8 CEO of JPMorgan Chase, Jamie

Dimon

The Least (and Most) Corrupt

Countries in the World for Doing

Business

Projected Financial Statement

Manipulation

9 CEO and Founder of Roku Inc.—

Anthony Wood

What Country’s New Strategy Is

Called “Vision 2030”?

Achieving Exemplary Business Ethics

through Exemplary Transparency

10 CEO (former) and Chairman of

Microsoft—Bill Gates

India Is Turning Garbage into Cash TOMS Shoes, Inc.: Shoes Are Magic, Put

Shoes on Every Child on the Planet

11 CEO of Philip Morris International—

Andre Calantzopoulos

China Aims for Superiority in

Quantum Computing

Which Two U.S.-Based Airlines Are

Worst on Customer Service?

Assurance-of-Learning Exercises —nearly all new and, for the first time ever, organized into

four sets as follows that apply chapter concepts, tools, and techniques:

Set 1: Strategic Planning for Coca-Cola—25 exercises apply chapter material to the Coca-

Cola Cohesion Case to prepare students for doing case analysis on for-profit companies.

Set 2: Strategic Planning for My University—12 exercises apply chapter material to your

college or university to prepare students for doing case analysis on nonprofit organizations.

Set 3: Strategic Planning to Enhance My Employability—14 exercises apply chapter

material to individuals instead of companies to prepare students for making career choices.

Set 4: Individual versus Group Strategic Planning—11 exercises apply chapter material

by comparing the effectiveness of individual versus group decisions; these are fun, in-class

group exercises that yield “a winning individual and winning group” for each activity.

Detailed Chapter-by-Chapter Changes
Chapter 1: THE NATURE OF STRATEGIC MANAGEMENT—SWOT analysis is intro-

duced; the integrative comprehensive strategic-management model is repositioned to the

opening page of each chapter; the model is enhanced to accent the process of strategic

planning being fluid rather than merely a sequence of silo activities.

Chapter 2: BUSINESS VISION AND MISSION—new material is provided on core value state-

ments; new examples abound throughout.

Chapter 3: THE EXTERNAL ASSESSMENT—new material is provided on Porter’s Five-Forces

Model; more guidance is provided regarding how to assign weights and ratings in matrices;

new examples abound throughout; the ratings for a Competitive Profile Matrix now match

the EFE Matrix in form and meaning.

PREFACE 17

Chapter 4: THE INTERNAL ASSESSMENT—this chapter has been revamped and shortened;

the marketing material is enhanced; new examples abound throughout; the ratings for an IFE

Matrix now match the EFE Matrix ratings in form and meaning.

Chapter 5: STRATEGIES IN ACTION—new material includes Blue Ocean Strategy, Value

Chain Analysis, Porter’s Two Generic Strategies, and the need for firms to “BUILD, BOR-

ROW, or BUY.”

Chapter 6: STRATEGY ANALYSIS AND CHOICE—the presentation of this chapter that in-

cludes SWOT, BCG, IE, SPACE, GRAND, and QSPM analyses is enhanced and shortened;

two new pages reveal how to estimate costs of recommendations.

Chapter 7: IMPLEMENTING STRATEGIES: MANAGEMENT AND MARKETING ISSUES—

the title of this chapter changed to reflect new marketing material; our new coauthor is a

marketing professor at Baylor University; this chapter is fully updated and enhanced, espe-

cially with new target marketing, segmentation, and positioning analyses.

Chapter 8: IMPLEMENTING STRATEGIES: FINANCE AND ACCOUNTING ISSUES—the

title of this chapter changed since marketing material moved; there is enhanced presentation

of financial and accounting tools, such as EPS/EBIT analysis, Corporate Valuation, and Pro-

jected Financial Statements; a new running example for P&G is provided; numerous author

comments are given regarding the strategic planning template at www.strategyclub.com.

Chapter 9: STRATEGY EVALUATION AND GOVERNANCE—the title of this chapter changed

due to excellent new material on corporate governance being presented.

Chapter 10: BUSINESS ETHICS, ENVIRONMENTAL SUSTAINABILITY, AND CORPORATE

SOCIAL RESPONSIBILITY—this chapter provides updated and new coverage of ethics, work-

place romance, hiring away rival firms’ employees, wildlife welfare, and sustainability. This text

reveals why “good ethics is good business” and why this is a strategic issue. The sustainability

discussion is improved to promote and encourage firms to conduct operations with respect for

the environment, an important concern for consumers, companies, society, and AACSB.

Chapter 11: GLOBAL AND INTERNATIONAL ISSUES—this chapter is enhanced and short-

ened but provides new coverage of cultural and conceptual strategic-management differ-

ences across countries. Doing business globally has become a necessity in most industries.

Part 6: STRATEGIC MANAGEMENT CASE ANALYSIS—this section that follows all chapters

has been totally rewritten to be more concise and revealing for students performing case analysis.

22 Author-Created Video Assignments in the MyLab
We have added 11 videos introducing the content of each chapter and 11 videos discussing a

variety of important topics such as mission statement delivery, BCG matrix, corporate evaluation,

etc. created by the author. Each video is associated with multiple-choice questions to help students

assess their learning.

Solving Teaching and Learning Challenges
The primary challenge facing strategy professors is to keep students engaged while making sure

business skills are learned. This text leads all others in being practical, skills- oriented, and unfolding

in the same manner as the process of actually doing strategic planning unfolds. Students and pro-

fessors alike appreciate this practical approach presented in a concise, conversational, and exciting

manner— beginning with the integrative model of the strategic-management process that unifies all

chapters. All of the 11 end-of- chapter Mini- Cases, 471 Review Questions, and 62 Assurance-of-

Learning Exercises are designed specifically to apply chapter concepts.

The Case Rationale
Case analysis remains the primary learning vehicle used in most strategic-management classes,

for five important reasons:

1. Analyzing cases gives students the opportunity to work in teams to evaluate the internal operations

and external issues facing various organizations and to craft strategies that can lead these firms to

18 PREFACE

success. Working in teams gives students practical

experience in solving problems as part of a group.

In the business world, important decisions are gen-

erally made within groups; strategic-management

students learn to deal with overly aggressive group

members as well as timid, noncontributing group

members. This experience is valuable because

strategic-management students are near graduation

and will soon enter the working world full-time.

2. Analyzing cases enables students to improve

their oral and written communication skills as

well as their analytical and interpersonal skills

by proposing and defending particular courses

of action for the case companies.

3. Analyzing cases allows students to view a com-

pany, its competitors, and its industry concur-

rently, thus simulating the complex business

world. Through case analysis, students learn

how to apply concepts, evaluate situations, for-

mulate strategies, and resolve implementation

problems.

4. Analyzing cases allows students to apply con-

cepts learned in many business courses. Students

gain experience dealing with a wide range of or-

ganizational problems that impact all the business

functions.

5. Analyzing cases gives students practice in applying concepts, evaluating situations, formu-

lating a “game plan,” and resolving implementation problems in a variety of business and

industry settings.

The New Concepts-by-Cases Matrix
All 30 cases facilitate coverage of all strategy concepts, but as revealed by shaded cells, some

cases especially exemplify particular key strategy concepts. The shaded cells reveal which con-

cepts are tested with multiple-choice questions in the MyLab. The Concepts-by-Cases matrix

enables professors to effectively utilize different cases to assure student learning of various chap-

ter concepts. Note from the shaded boxes that two, three, or four cases are used to test each

strategic-management concept. This new, innovative ancillary promises to elevate the case learn-

ing method to new heights in teaching strategic management.

The Case MyLab Testing Feature
The Concepts-by-Cases matrix facilitates student learning of 30 key strategic-management con-

cepts applied to 30 cases. The Case MyLab Testing feature assures that the students can test

their understanding of cases and the key strategic-management concepts, thus serving as a great

mechanism for professors to achieve AACSB Assurance-of-Learning Objectives. This new test-

ing feature simplifies grading for professors in both traditional and online class settings.

This MyLab assessment includes 25 multiple-choice questions for each case, comprising

10 Basic questions that simply test whether the student read the case before class, and 15 Applied

questions that test the student’s ability to apply various strategic-management concepts. The 15

Applied questions are presented in three sets of five that pertain to key concepts of particular

importance for the respective case. This testing feature enables professors to determine, before

class if desired, whether students (1) read the case in Basic terms, and/or (2) are able to Apply

strategy concepts to resolve issues in the case. For example, the MyLab case Basic question may

be: In what country is Domino’s Pizza headquartered? Whereas a MyLab case Applied question

may be: What are three aspects of the organizational chart given in the Domino’s Pizza case that

violate strategic-management guidelines?

Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 1
(February 1989): 91. See also Anik Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and Putu
Artama Wiguna, “Balance Scorecard of David’s Strategic Modeling at Industrial Business for National
Construction Contractor of Indonesia,” Journal of Mathematics and Technology, no. 4 (October 2010): 20.

PREFACE 19

The Chapter Warm-up assessment helps you hold your students

accountable for READING and demonstrating their knowledge on key

concepts in each chapter before coming to class.

Chapter Quizzes
Every chapter has quizzes written by the textbook authors so you can as-

sess your students’ understanding of chapter learning objectives.

The David Approach Is Unique

This textbook is globally considered to be the most practical, skills-oriented strategic manage-

ment textbook on the market. All chapters unfold from a widely used integrative model of strate-

gic planning, so students learn the “process of doing strategic planning,” rather than focusing on

seminal theories in strategy. The David approach is “learning by doing”—students develop skills

that can enhance their own employability through numerous features, such as 62 new Assurance-

of-Learning end-of-chapter exercises in this edition.

20 CONCEPTS-BY-CASES MATRIX

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Case 1 Honda Motor Co., Ltd.

Case 2 The Gap Inc.

Case 3 Samsung Electronics Co., Ltd.

Case 4 Lenovo Group Limited

Case 5 Dick’s Sporting Goods

Case 6 11 Bit Studios S.A.

Case 7 JPMorgan & Chase Co.

Case 8 PPB Group Berhad

Case 9 Nestlé S.A.

Case 10 Domino’s Pizza, Inc.

Case 11 PetMed Express, Inc.

Case 12 AstraZeneca plc

Case 13 Shell plc

Case 14 The Walt Disney Company

Case 15 Adidas AG

Case 16 Shoprite Holdings Ltd.

Case 17 Woolworths Group

Case 18 Microsoft Corporation

Case 19 Amazon.com

Case 20 Nike, Inc.

Case 21 Under Armour, Inc.

Case 22 Polaris Industries, Inc.

Case 23 PT Matahari Putra Prima Tbk.

Case 24 Emirates Group

Case 25 General Electric, Inc.

Case 26 Barwa Group

Case 27 Starbucks Corporation

Case 28 PepsiCo, Inc.

Case 29 National Audubon Society

Case 30 MTN Group Limited

http://Amazon.com

CONCEPTS-BY-CASES MATRIX 21

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22 PREFACE

In addition, we offer more coverage on important topics, such as business ethics, social re-

sponsibility, and sustainability, than any other strategic-management textbook, including topics

such as bribery, workplace romance, devising codes of ethics, taking a position (or not) on so-

cial issues, and preserving wildlife—topics that

other textbooks do not mention, even though

companies continually face strategic decisions

in these areas.

We also offer more overage of global/interna-

tional issues than any other strategic- management

textbook, including topics such as how business

culture, taxes, tariffs, political stability, and eco-

nomic conditions vary across countries—all

framed from a strategic-planning perspective.

Lastly, this textbook is trusted across five

continents to provide students (and managers) the latest skills and concepts needed to effectively

formulate and efficiently implement a strategic plan—a game plan, if you will—that can lead to

sustainable competitive advantages for any type of business. This text meets all AACSB Inter-

national guidelines for the strategic-management course at both the graduate and undergraduate

levels, and previous editions have been used at more than 500 colleges and universities globally.

Developing Employability Skills

Using this text, students learn how to actually do strategic planning—this is a huge employability

skill because employers recognize the benefits of employees having an understanding of what a

firm is trying to achieve and why. Nearly all students using this text also use the free strategic-

planning template at the www.strategyclub.com author website; many students include this skill

on their resume to showcase their experience using this Excel software commonly used by busi-

nesses for doing actual strategic planning.

Instructor Teaching Resources

The following supplements are available with this text:

The Association to Advance Collegiate
Schools of Business (AACSB) Interna-
tional increasingly advocates a more
skills-oriented, practical approach
in business books, which this text
provides, rather than a theory-based
approach.

Supplements available
to instructors at www.
pearsonglobaleditions.com Features of the Supplement

Chapter Instructor’s Resource

Manual

authored by Forest David

• Chapter-by-chapter summaries

• Chapter Outlines with teaching tips

• Answers to end-of-chapter Review Questions

• Answers to the end-of-chapter Assurance-of-Learning Exercises

• Answers to the end-of-chapter two Mini-Case Questions

• Examples and activities not in the main book

Case Instructor’s Manual

authored by Forest David

• Case abstract followed by a complete strategic plan for the firm

• Vision and mission statements

• External and internal assessments with ratio analyses

• Analyses that include SWOT, BCG, IE, SPACE, GRAND, QSPM

• Recommendations and projected financial statements

Test Bank

authored by Ramachandran

Subramanian from Stetson

University

Over 1,500 multiple-choice and true/false questions with these annotations:

• Difficulty level (1 for straight recall, 2 for some analysis, 3 for complex analysis)

• Type (multiple-choice, true/false, and essay questions)

• Learning Objective (the concept the question supports)

• AACSB learning standard (Written and Oral Communication; Ethical Understanding and Reasoning;

Analytical Thinking; Information Technology; Interpersonal Relations and Teamwork; Diverse and

Multicultural Work; Reflective Thinking; Application of Knowledge)

http://www.pearsonglobaleditions.com

PREFACE 23

Supplements available
to instructors at www.
pearsonglobaleditions.com Features of the Supplement

Computerized TestGen TestGen allows instructors to:

• Customize, save, and generate classroom tests

• Edit, add, or delete questions from the Test Item files

• Analyze test results

• Organize a database of tests and student results.

PowerPoint Presentation

authored by Ramachandran

Subramanian from Stetson

University

PowerPoints meet accessibility standards for students with disabilities. Features include, but are not

limited to:

• Keyboard and Screen Reader access

• Alternative text for images

• High color contrast between background and foreground colors

• Image Library includes graphs, tables, and equations.

http://www.pearsonglobaleditions.com

This page is intentionally left blank

Acknowledgments

The strength of this text is largely attributed to the collective wisdom, work, and experiences of

strategic-management professors, researchers, students, and practitioners. Names of individuals

whose published research is referenced in this edition are listed alphabetically in the Name Index.

To all individuals involved in making this text so popular and successful, we are indebted and

thankful. Thank you also Dr. Yajiang Wang at Hebei University for your emails to us regarding

the weights versus ratings in an IFE Matrix.

Many special persons and reviewers contributed valuable material and suggestions for this

edition. We would like to thank our colleagues and friends at Baylor University, Auburn Uni-

versity, Mississippi State University, East Carolina University, the University of South Carolina,

Campbell University, the University of North Carolina at Pembroke, and Francis Marion Univer-

sity. We have taught strategic management or marketing courses at all these universities. Scores

of students and professors at these schools helped shape the development of this text.

We thank you, the reader, for investing the time and effort to read and study this text. It will

help you formulate, implement, and evaluate strategies for any organization with which you be-

come associated. We hope you come to share our enthusiasm for the rich subject area of strategic

management and for the systematic learning approach taken in this text. We want to welcome

and invite your suggestions, ideas, thoughts, comments, and questions regarding any part of this

text or the ancillary materials.

Please contact Dr. Fred R. David at [email protected], or write him at the School of

Business, Francis Marion University, Florence, SC 29501. We sincerely appreciate and need your

input to continually improve this text in future editions. Your willingness to draw our attention to

specific errors or deficiencies in coverage or exposition will especially be appreciated.

Thank you for using this text.

—Fred R. David

—Forest R. David

—Meredith E. David

Global Edition Acknowledgments

Pearson would like to thank the following reviewers for their work on the Global Edition.

Global Edition Reviewers
Gouri Appasamy, Universiti Teknologi MARA

Yusof Ismail, International Islamic University Malaysia

Noorain Mohd Nordin, Universiti Teknologi MARA

Karan Vishwanath, University of London

Fred, Forest, and Meredith would like to especially thank the family matriarch, Joy

David, who has been married to Fred for 45 years, is Forest and Meredith’s mom,

and has supported the family book-writing activities for decades.

About the Authors

Fred R. David, Forest R. David, and Meredith E. David are a father–son-daughter team that have

published more than 50 articles in journals such as Academy of Management Review, Academy of

Management Executive, Journal of Applied Psychology, Long Range Planning, International Jour-

nal of Management, Journal of Business Strategy, and Advanced Management Journal. Six recent

journal articles by the authors, listed below, are changing the way strategic-management courses are

taught.

David, Meredith E. and Fred R. David, “Strategic Planning for Individuals: A Proposed

Framework and Method,” SAM Advanced Management Journal, (Winter 2018).

David, Fred R., Meredith E. David, and Forest R. David, “The Integration of Marketing

Concepts in Strategic Management Courses: An Empirical Analysis,” SAM Advanced

Management Journal, (Winter 2017).

David, Fred R., Meredith E. David, and Forest R. David, “How Important Is Finance Coverage

in Strategic Management? A Content Analysis of Textbooks,” International Journal of

Business, Marketing, and Decision Sciences (IJBMDS), 4, no. 1, (Winter 2016), pp. 64–78.

David, Fred R., Forest R. David, and Meredith E. David, “Benefits, Characteristics, Components,

and Examples of Customer-Oriented Mission Statements,” International Journal of

Business, Marketing, and Decision Sciences (IJBMDS), 9, no. 1, (Fall 2016), pp. 1–14.

David, Meredith E., Fred R. David, and Forest R. David, “The Quantitative Strategic Planning

Matrix: A New Marketing Tool,” Journal of Strategic Marketing, 3, (April 2016), pp. 1–11.

David, Meredith E. and Fred R. David, “Are Key Marketing Topics Adequately Covered in

Strategic Management?” Journal of Strategic Marketing, 24, (March 2016), pp. 1–13.

Fred has been lead author of this textbook for three decades. This text is a

global leader in the field of strategic management providing an applications,

practitioner-approach to the discipline. About 500 colleges and universities cur-

rently use this textbook across about 20 countries. With a Ph.D. in Management

from the University of South Carolina, Dr. David is currently the TranSouth

Professor of Strategic Planning at Francis Marion University in Florence, South

Carolina. He has published more than 100 academic journal articles and cases.

Fred R. David

Forest R. David

Forest has been sole author of the Case Instructor’s Manual for seven editions

of this textbook. This Manual provides extensive teachers’ notes (solutions)

for all the cases. Forest has also been sole author of the Chapter Instructor’s

Manual, Case MyLab, and Chapter MyLab ancillaries, as well as the free

Excel Student Template found on the author website (www.strategyclub.

com). Forest has published more than 80 strategic management cases, ar-

ticles, and papers. He has taught strategic-management courses at Mississippi

State University and Francis Marion University, and management courses at

Campbell University.

28 ABOUT THE AUTHORS

Meredith holds a Ph.D. in Business Administration from the University of South

Carolina and an MBA Degree from Wake Forest University. She is currently an

Assistant Professor of Marketing at Baylor University in Waco, Texas. She has

published more than 30 articles, cases, and papers on marketing and strategic

management in such journals as Journal of Consumer Behavior, Journal of

Advertising, Journal of Strategic Marketing, European Journal of Marketing,

and Journal of Business Research. Meredith has traveled the world over as a pro-

fessor and student. Meredith recently received the prestigious Young Researcher

Award in the Hankamer School of Business at Baylor University, and taught

strategic management at Jiao Tong University in Shanghai, China.

Meredith E. David

STRATEGIC
MANAGEMENT
Concepts and Cases

A COMPETITIVE ADVANTAGE APPROACH

1
PART 1

OVERVIEW OF STRATEGIC MANAGEMENT

Strategy
Formulation

Feedback Loop

Strategy
Implementation

Strategy
Evaluation

Chapter 10: Business Ethics, Environmental Sustainability, and Social Responsibility

Chapter 11: Global and International Issues

Strategy
Evaluation

and
Governance
Chapter 9

Implementing
Strategies:

Finance and
Accounting

Issues
Chapter 8

Implementing
Strategies:

Management
and Marketing

Issues
Chapter 7

Business
Vision and

Mission
Chapter 2

Strategies
in Action
Chapter 5

Strategy
Analysis and

Choice
Chapter 6

The
Internal

Assessment
Chapter 4

The External
Assessment
Chapter 3

FIGURE 1- 1

The Comprehensive, Integrative Strategic-Management Model

LEARNING OBJECTIVES

After studying this chapter, you should be able to do the following:

1- 1. Describe the strategic-management process.

1- 2. Discuss the three stages of activities for strategy formulation, implementation,
and evaluation activities.

1- 3. Explain the need for integrating analysis and intuition in strategic management.

1- 4. Define and give examples of key terms in strategic management.

1- 5. Describe the benefits of engaging in strategic management.

1- 6. Explain why some firms do not engage in strategic planning.

1- 7. Describe the pitfalls in doing strategic planning.

1- 8. Discuss the connection between business and military strategies.

1- 9. Explain how this course can enhance a student’s employability.

ASSURANCE-OF-LEARNING EXERCISES

The following exercises are found at the end of this chapter:

SET 1: Strategic Planning for Coca-Cola

EXERCISE 1A: Gather Strategy Information for Coca-Cola Company

EXERCISE 1B: Enter Coca-Cola Vitals into the Strategic Planning Template

SET 2: Strategic Planning for My University

EXERCISE 1C: Perform SWOT Analysis for My University

SET 3: Strategic Planning to Enhance My Employability

EXERCISE 1D: Perform SWOT Analysis on Myself

SET 4: Individual versus Group Strategic Planning

EXERCISE 1E: How Detrimental Are Various Pitfalls in Strategic Planning?

The Nature of Strategic
Management

MyLab Management

Improve Your Grade!

If your instructor is using MyLab Management, visit www.pearson.com/mylab/management

for videos, simulations, and writing exercises.

http://www.aol.com/article/2016/01/16/a-harvard-psychologist-says-people-judge-you-based-on-2-criteria/21298315/?cps=gravity_4816_5749740174701162847

32 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT

C
hapter 1 provides an overview of strategic management, introduces a practical, integra-

tive model of the strategic-management process (illustrated in Figure 1-1), and defines

basic activities and terms in strategic management. The primary focus of this textbook

is on “learning by doing.” From this text, students learn “how to do strategic planning.” The

integrative model reveals the “layout of this text” and the “process of strategic planning” so

students can follow the journey in a meaningful way.

An exciting new feature of this edition at the beginning of each chapter is an exemplary strate-

gist capsule to showcase a famous strategist for doing an exemplary job applying strategic-planning

concepts, tools, and techniques. The first person featured for excellent strategic-management prac-

tices is Vince Lombardi, former head coach and General Manager of the Green Bay Packers pro-

fessional football team. At the end of each chapter, a new, one-page, mini-case on a company is

provided with respective questions that apply various concepts, tools, and techniques presented.

What Is Strategic Management?
Strategic management is the art and science of formulating, implementing, and evaluating

cross-functional decisions that enable an organization to achieve its objectives. As this definition

implies, strategic management focuses on integrating management, marketing, finance, account-

ing, production, and information systems to achieve organizational success. Strategic manage-

ment can also be defined as the executive-level activity of distributing resources across products

and regions to gain a sustainable competitive advantage over rivals.

Firms have liberty to compete many different ways in a variety of geographic areas, so deci-

sions must be made regarding what markets to enter, what markets to avoid, which competitor’s

space to invade, and which to avoid. A firm’s survival can hinge on these decisions being right;

this textbook unveils the process needed for making effective strategic decisions. For example,

Westinghouse Electric’s recent strategy to build a new generation of nuclear power plants was

ill formulated and thus resulted in bankruptcy and eventual acquisition (in 2018) by Canada’s

Brookfield Business Partners LP.

LO 1.1

EXEMPLARY STRATEGIST SHOWCASED

Coach Vince Lombardi
The legendary football coach of the Green Bay Packers, Vince Lombardi

(1913–1970) changed a losing culture into a winning culture. Founded

in 1919 and headquartered in the small, frigid Wisconsin town of Green

Bay, the Packers are the only nonprofit, community-owned major league

professional sports team in the United States. The third-oldest franchise

in the National Football League (NFL), the Packers were perennial losers

until Vince Lombardi took over in 1959 as head coach and general man-

ager. The very existence of the Packer franchise was in jeopardy when

Lombardi arrived in Green Bay. Coming off a 1–10–1 season and 11

straight losing seasons, Lombardi led the Packers to 3 NFL champion-

ships in his first 7 seasons. The Pro Football Hall of Fame says: “Lombardi

is arguably the greatest football coach of all time and is on the short

list of history’s greatest coach, regardless of sport.” Because of his suc-

cess as both a manager and strategist, Lombardi became a national sym-

bol of single-minded determination to win. The following quotes from

Vince Lombardi reveal his basic strategy for winning, which was based

on building character, commitment, and setting an exemplary example:

1. Winning is not everything, but making the effort to win is.

2. The objective is to win—fairly, squarely, decently, by the rules,

but to win.

3. The difference between a successful person and others is not a lack

of strength and not a lack of knowledge, but rather a lack of will.

4. Winning is a habit. Watch your thoughts, they become your

beliefs. Watch your beliefs, they become your words. Watch your

words, they become your actions. Watch your actions, they be-

come your habits. Watch your habits, they become your character.

Source: Based on Michael Mink, “Coach Vince Lombardi Set A Superb

Standard,” Investors Business Daily, (February 5, 2016): A3.

C
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CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 33

Formulating strategies such as deciding what to produce and where, when, and how to

compete is what leads to a sustainable competitive advantage. Even the best strategies must

be implemented well through operational- or tactical-level activities like hiring and motivating

employees, cutting costs, benchmarking, outsourcing, securing financing, and keeping facilities

warm (or cool). Implementation activities are vitally important and must be monitored by strate-

gists, but effectively formulated strategies, more so than operational tactics, is generally what

leads to sustained competitive advantages.

To gain a sustainable competitive advantage, firms need to provide unique products and

services. Uniqueness matters. For example, Apple’s computers, iPads, and iPhones all run on

Apple’s unique operating system; the only way to have an iPhone is to also be a user of Apple’s

operating system. To assure “effective uniqueness,” firms must accept concessions in the strategy

process to gain a sustainable competitive as exemplified in the Apple example. Another example

is Rolex, and the company not offering cheaper lines of watches. Rolex has resisted increasing

market share by offering new cheaper product lines to attract new customers. Instead, Rolex has

maintained its unique reputation and market share as the top luxury watch brand in the world.

Rolex, and all successful firms, thus make tradeoffs and tough decisions throughout the process

of developing, producing, and selling products.

Chapter 2 discusses core values, vision, and mission—items that represent the starting point

for developing and nurturing a firm’s uniqueness. Everything in strategy flows from a particular

firm’s core values, vision, and mission, and all successful firms are different (unique) from rival

firms in some key ways.

The term strategic management is used at many colleges and universities as the title for the

capstone course in business administration. This course integrates material from all business

courses, and in addition, introduces new strategic-management concepts and techniques being

widely used by firms. Two special features of this text are a Cohesion Case (on Coca-Cola) and

end-of-chapter assurance-of-learning exercises, as described in Table 1-1.

Strategic Planning

The term strategic management in this text is used synonymously with the term strategic plan-

ning. The latter term is more often used in the business world, whereas the former is often used

in academia. Sometimes the term strategic management is used to refer to strategy formulation,

TABLE 1-1 A Cohesion Case and Assurance-of-Learning Exercises

A distinguishing, popular feature of this text is the Cohesion Case, named so because a written case on

a company (Coca-Cola) appears at the end of this chapter, and then all other subsequent chapters feature

end-of-chapter assurance-of-learning exercises to apply strategic-planning concepts, tools, and techniques

to the Cohesion Case company. Coca-Cola is a well-known, well-managed global firm undergoing stra-

tegic change. By working through the Coca-Cola–related exercises, students become well prepared to

develop an effective strategic plan for any company (case) assigned to them. Case analysis is a core part

of almost every strategic-management course globally.

We are thrilled to provide new sets of end-of chapter assurance-of-learning exercises. All exercises

have been carefully designed to “assure learning” by applying chapter concepts, tools, and techniques

in a fun and meaningful way to best assure that competence is gained in particular employability skills

discussed near the end of this chapter. The four sets of assurance-of-learning exercises that appear at the

end of each chapter are as follows:

Set 1: Strategic Planning for Coca-Cola—Exercises that apply chapter material to the Coca-Cola Cohesion

Case Company; these exercises ready students for doing case analysis as “knowledge application and

analysis” and “information technology” skills are honed.

Set 2: Strategic Planning for My University—Exercises that apply chapter material to your college or

university; these exercises ready students for doing case analysis in nonprofit organizations as “business

ethics and social responsibility” and “data literacy” skills are honed.

Set 3: Strategic Planning to Enhance My Employability—Exercises that apply chapter material to in-

dividuals instead of companies; these exercises prepare students for making career choices and enable

students to apply strategy tools, techniques, and concepts to enhance their own career.

Set 4: Individual versus Group Strategic Planning—Exercises that apply chapter material by comparing the

effectiveness of individual versus group decisions; these are fun in-class group activities that yield “a winning

individual and a winning group” for each exercise as critical-thinking and collaboration skills are honed.

34 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT

implementation, and evaluation, with strategic planning referring only to strategy formulation.

The purpose of strategic planning is to exploit and create new and different opportunities for

tomorrow; long-range planning, in contrast, tries to optimize for tomorrow the trends of today.

The term strategic planning originated in the 1950s and was popular between the mid-1960s

and the mid-1970s. During these years, strategic planning was widely believed to be the answer

for all problems. At the time, much of corporate America was “obsessed” with strategic plan-

ning. Following that boom, however, strategic planning was cast aside during the 1980s as vari-

ous planning models did not yield higher returns. The 1990s, however, brought the revival of

strategic planning, and the process is widely practiced today in the business world.

A strategic plan is, in essence, a company’s game plan. Just as an athletic team needs a good

game plan to have a chance for success, a company must have a good strategic plan to compete

successfully. Profit margins among firms in most industries are so slim that there is little room

for error in the overall strategic plan. A strategic plan results from tough managerial choices

among numerous good alternatives, and it signals commitment to specific markets, policies, pro-

cedures, and operations in lieu of other, “less desirable” courses of action.

The Strategic-Management Model

The strategic-management model shown in Figure 1-1 is a widely accepted, comprehensive

depiction of the strategic-management process.1 The process conveyed does not guarantee suc-

cess, but it does represent a clear and practical approach for formulating, implementing, and

evaluating strategies. Relationships among major components of the strategic-management pro-

cess are shown in the model, which appears on the opening page of all subsequent chapters with

appropriate area of the model shaded to show the particular focus of the chapter. This text is

organized around the model because it reveals how organizations actually do strategic planning.

There are three important questions to answer in preparing a strategic plan:

Where are we now?

Where do we want to go?

How are we going to get there?

Identifying an organization’s existing vision, mission, objectives, and strategies is the logi-

cal starting point for strategic management because a firm’s present situation and condition may

preclude certain strategies and may even dictate a particular course of action. Every organiza-

tion has a vision, mission, objectives, and strategy, even if these elements are not consciously

designed, written, or communicated. The answer to where an organization is going can be deter-

mined largely by where the organization has been!

The strategic-management process is dynamic and continuous. A change in any one of the

major components in the model can necessitate a change in any or all of the other components.

For instance, various third-world countries coming online could represent a major opportunity

and require a change in long-term objectives and strategies; a failure to accomplish annual objec-

tives might require a change in policy; or a major competitor’s change in strategy might require

a change in the firm’s mission. The activities represented in Figure 1-1 are not independent silos;

they represent an interrelated process. Thus, activities for strategy formulation, implementation,

and evaluation should be performed on a continual basis, not just at the end of the year or semi-

annually. The strategic-management process never really ends.

In Figure 1-1, perhaps the most important “activity” is the feedback loop because strategy

must be thought of as a “verb rather than a noun.” The stages of strategic management (formula-

tion, implementation, and evaluation) are so fluid as to be virtually indistinguishable when one

starts and the other ends. Continuous feedback enables firms to readily adapt to changing condi-

tions; when anyone is preparing an external or internal assessment or even implementing strategies,

they should be mindful of the firm’s vision and mission. The feedback loop reveals that a change

in any strategic-planning activity can impact any or all other activities. For example, changes in

a firm’s mission can impact all other activities; everything a firm does should be mission driven.

Note in Figure 1-1 that business ethics, social responsibility, environmental sustainability,

and international issues impact all activities in the model, as discussed in Chapters 10 and 11,

respectively. Regarding business ethics, recent research revealed in the Ethics Capsule 1 con-

cludes that “trustworthiness” is the most important variable in doing business.

CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 35

The strategic-management process is not as cleanly divided and neatly performed in practice

as the strategic-management model suggests. Strategists do not go through the process in lock-

step fashion. Generally, there is give-and-take among hierarchical levels of an organization. To

develop a strategic plan, many organizations conduct formal meetings semiannually to discuss

and update the firm’s vision, mission, opportunities, threats, strengths, weaknesses, strategies,

objectives, policies, and performance. These meetings are commonly held off premises and are

called retreats. The rationale for periodically conducting strategic-management meetings away

from the work site is to encourage more creativity and candor from participants. Good communi-

cation and feedback are needed throughout the strategic-management process.

Application of the strategic-management process is typically more formal in larger and well-

established organizations. Formality refers to the extent that participants, responsibilities, author-

ity, duties, and “basic approach” are objective and clear rather than subjective and vague. Smaller

businesses tend to be less formal. Firms that compete in complex, rapidly changing environ-

ments, such as technology companies, tend to be more formal in strategic planning. Firms that

have many divisions, products, markets, and technologies also tend to be more formal in apply-

ing strategic-management concepts. Greater formality in applying the strategic-management

process is usually positively associated with organizational success.2

Stages of Strategic Management
The strategic-management process consists of three stages: strategy formulation, strategy

implementation, and strategy evaluation. Strategy formulation includes developing a vision and

mission, identifying an organization’s external opportunities and threats, determining internal

strengths and weaknesses, establishing long-term objectives, generating alternative strategies,

and choosing particular strategies to pursue. Strategy-formulation issues include deciding what

new businesses to enter, what businesses to abandon, whether to expand operations or diversify,

whether to enter international markets, whether to merge or form a joint venture, and how to

avoid a hostile takeover.

LO 1.2

ETHICS CAPSULE 1

What Ethics Variable Is Most Important in Doing Business?

Three professors from Harvard Business School, Amy Cuddy, Susan

Fiske, and Peter Glick, recently revealed in a new book, Presence,

that the most important variable in doing business with someone

you do not know is trustworthiness. The authors say that within

seconds of meeting someone, people determine first and foremost

the extent that the person is trustworthy. They say that variable is

far more important than competence, intelligence, looks, strength,

height, and numerous other variables.

Professor Cuddy explains, “From an evolutionary perspective, it

was more crucial to our survival that we know quickly whether a

person(s) deserves our trust.” In other words, for nearly a million

years of man’s evolution, when people first met other people, they

assessed within seconds whether the new person(s) was trustwor-

thy, meaning is this person going to steal from us or try to kill us.

Trustworthiness, these authors report, was always assessed before

competence (i.e., can this person start a fire or catch a fish). Cuddy

says competence is evaluated today only after trust is established

because physically and psychologically, man today is the result of

various traits being promoted and others extinguished over the

millennia, and trustworthiness is number one according to these

researchers.

Curry, Fiske, and Glick go on to say that focusing too much

today on displaying your strengths or that you are smart, whether

in a job interview or in seeking to do business with someone, can

backfire. Cuddy says, “A warm, trustworthy person who is also

strong elicits admiration, but only after you’ve established trust does

your strength become a gift, rather than a threat.”

Based on Jenna Goudreau, A Harvard psychologist says people judge

you based on 2 criteria when they first meet you, http://www.aol.com/

article/2016/01/16/a-harvard-psychologist-says-people-judge-you-

based-on-2-criteria/21298315/?cps=gravity_4816_5749740174701162847

Who Is This Approaching?

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36 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT

Because no organization has unlimited resources, strategists must decide which alterna-

tive strategies will benefit the firm most. Strategy-formulation decisions commit an organiza-

tion to specific products, markets, resources, and technologies over an extended period of time.

Strategies determine long-term competitive advantages. For better or worse, strategic decisions

have major multifunctional consequences and enduring effects on an organization. Top managers

have the best perspective to understand fully the ramifications of strategy-formulation decisions;

they have the authority to commit the resources necessary for implementation.

Strategy implementation requires a firm to establish annual objectives, devise policies,

motivate employees, and allocate resources so that formulated strategies can be executed effi-

ciently. Strategy implementation includes developing a strategy-supportive culture, creating an

organizational structure, redirecting marketing efforts, preparing budgets, developing and using

information systems, devising tactics, and linking employee compensation to organizational

performance.

Strategy implementation often is called the “action stage” of strategic management.

Implementing strategy means mobilizing employees and managers to put formulated strategies

into action. Often considered to be the most difficult stage in strategic management, strategy

implementation requires personal discipline, commitment, and sacrifice. Successful strategy

implementation hinges on managers’ ability to motivate employees, which is more an art than a

science. Strategies formulated but not implemented serve no useful purpose.

Interpersonal skills are especially critical for successful strategy implementation. Strategy-

implementation activities affect all employees and managers in an organization. Every division

and department must decide on answers to questions such as “What must we do to implement

our part of the organization’s strategy?” and “How best can we get the job done?” The challenge

of implementation is to stimulate managers and employees throughout an organization to work

with pride and enthusiasm toward achieving stated objectives.

Strategy evaluation is the final stage in strategic management. Managers desperately need

to know when particular strategies are not working well; strategy evaluation is the primary means

for obtaining this information. All strategies are subject to future modification because external

and internal factors constantly change. Three fundamental strategy-evaluation activities are (1)

reviewing external and internal factors that are the bases for current strategies, (2) measuring

performance, and (3) taking corrective actions. Strategy evaluation is needed because success

today is no guarantee of success tomorrow! Success always creates new and different problems;

complacent organizations experience demise.

Formulation, implementation, and evaluation of strategy activities occur at three hierarchi-

cal levels in a large organization: corporate, divisional or strategic business unit, and functional.

By fostering communication and interaction among managers and employees across hierarchical

levels, strategic management helps a firm function as a competitive team. Most small businesses

and some large businesses do not have divisions or strategic business units; they have only the

corporate and functional levels. Nevertheless, managers and employees at these two levels should

be actively involved in strategic-management activities.

Peter Drucker says the prime task of strategic management is thinking through the overall

mission of a business—

that is, of asking the question, “What is our business?” This leads to the setting of objec-

tives, the development of strategies, and the making of today’s decisions for tomorrow’s

results. This clearly must be done by a part of the organization that can see the entire busi-

ness; that can balance objectives and the needs of today against the needs of tomorrow; and

that can allocate resources of men and money to key results.3

Integrating Analysis and Intuition
Edward Deming once said, “In God we trust. All others bring data.” The strategic-management

process can be described as an objective, logical, systematic approach for making major

decisions in an organization. It attempts to organize qualitative and quantitative informa-

tion in a way that allows effective decisions to be made under conditions of uncertainty. Yet

strategic management is not a pure science that lends itself to a nice, neat, one-two-three

approach.

LO 1.3

CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 37

Based on past experiences, judgment, and feelings, most people recognize that intuition

is essential to making good strategic decisions. Some managers and owners of businesses pro-

fess to have extraordinary abilities for using intuition alone in devising brilliant strategies. For

example, Will Durant, who organized General Motors (GM), was described by Alfred Sloan as

“a man who would proceed on a course of action guided solely, as far as I could tell, by some

intuitive flash of brilliance. He never felt obliged to make an engineering hunt for the facts. Yet at

times, he was astoundingly correct in his judgment.”4 Albert Einstein acknowledged the impor-

tance of intuition when he said, “I believe in intuition and inspiration. At times I feel certain that

I am right while not knowing the reason. Imagination is more important than knowledge because

knowledge is limited, whereas imagination embraces the entire world.”5

Although some organizations today may survive and prosper because they have intuitive

geniuses managing them, most are not so fortunate. Most organizations can benefit from inte-

grating intuition and analysis in decision making. Choosing an intuitive or analytic approach to

decision making is not an either–or proposition. Managers at all levels in an organization inject

their intuition and judgment into strategic-management analyses. Analytical thinking and intui-

tive thinking complement each other.

Operating from the I’ve-already-made-up-my-mind-don’t-bother-me-with-the-facts mode is

not management by intuition; it is management by ignorance.6 Drucker says, “I believe in intu-

ition only if you discipline it. ‘Hunch’ artists, who make a diagnosis but don’t check it out with

the facts, are the ones in medicine who kill people, and in management kill businesses.”7 In a

sense, the strategic-management process is an attempt to duplicate what goes on in the mind of a

brilliant, intuitive person who knows the business and assimilates and integrates that knowledge

through analysis in formulating strategies.

As Henderson notes:

The accelerating rate of change today is producing a business world in which custom-

ary managerial habits in organizations are increasingly inadequate. Experience alone was

an adequate guide when changes could be made in small increments. But intuitive and

experience-based management philosophies are grossly inadequate when decisions are

strategic and have major, irreversible consequences.8

Adapting to Change

The strategic-management process is based on the belief that organizations should continually

monitor internal and external events and trends so that timely changes can be made as needed.

The rate and magnitude of changes that affect organizations are increasing dramatically, as evi-

denced by how the drop in oil prices caught so many firms by surprise. Firms, like organisms,

must be “adept at adapting” or they will not survive.

To survive, all organizations must astutely identify and adapt to change, as the Chinese Mobike

Company does as revealed in the Global Capsule 1 on page 38. The strategic-management process

is aimed at allowing organizations to adapt effectively to change over the long run. Waterman noted:

In today’s business environment, more than in any preceding era, the only constant is

change. Successful organizations effectively manage change, continuously adapting their

bureaucracies, strategies, systems, products, and cultures to survive the shocks and prosper

from the forces that decimate the competition.9

The need to adapt to change leads organizations to key strategic-management questions,

such as “What kind of business should we become?” “Are we in the right field(s)?” “Should

we reshape our business?” “What new competitors are entering our industry?” “What strate-

gies should we pursue?” “How are our customers changing?”; and “Are new technologies being

developed that could put us out of business?”

Online commerce is forcing hundreds of brick-and-mortar retailers to change or liquidate.

The fashion retailer Bebe Stores recently announced it is closing all its 168 stores and going

online only. Yarden Research reports that 29.1 percent of retail sales of general merchandise,

apparel and accessories, and furniture in America is now purchased online. Companies such

as Macy’s and Target are converting more and more of their retail store space to warehouse/

distribution area rather than being open for customer shopping.

38 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT

Key Terms in Strategic Management
Before we further discuss strategic management, we should define ten key terms: competitive

advantage, strategists, vision and mission statements, external opportunities and threats, inter-

nal strengths and weaknesses, long-term objectives, strategies, annual objectives, and policies.

Competitive Advantage

Strategic management is all about gaining and maintaining competitive advantage. This term

can be defined as any activity a firm does especially well compared with activities done by

rival firms, or any resource a firm possesses that rival firms desire. For example, having fewer

fixed assets than rival firms can provide major competitive advantages. Apple Inc. has virtually

no manufacturing facilities of its own, whereas rival Sony owns 57 electronics factories. Apple

relies almost entirely on contract manufacturers for production of its products.

Normally, a firm can sustain a competitive advantage for only a certain period because of rival

firms imitating and undermining that advantage. Thus, it is not adequate simply to obtain competitive

advantage. A firm must strive to achieve sustained competitive advantage by doing the following:

1. Continually adapting to changes in external trends and events and internal capabilities,

competencies, and resources.

2. Effectively formulating, implementing, and evaluating strategies that capitalize on those factors.

3. Offering products that are unique and not easily duplicated by rivals.

4. Accepting tradeoffs by deciding what not to do; no firm can be everything to everybody.

Strategists

Strategists are the individuals most responsible for the success or failure of an organization. They

have various job titles, such as chief executive officer, chief strategy officer, president, owner,

chair of the board, executive director, chancellor, dean, and entrepreneur. Jay Conger, professor

of organizational behavior at the London Business School and author of Building Leaders, says,

“All strategists have to be chief learning officers. We are in an extended period of change. If our

LO 1.4

GLOBAL CAPSULE 1

Mobike: Global Bike Renting Takes off Like a Jet Plane
On a political map, the boundaries between

countries may be clear, but on a competi-

tive map showing the real flow of financial

and industrial activity, as well as idea shar-

ing, the boundaries have largely disap-

peared. The speedy flow of information has

eaten away at national boundaries so that

people worldwide readily see for themselves

how other people live and work. We have

become a borderless world with global citi-

zens, global competitors, global customers,

global suppliers, global distributors, and

global entrepreneurs.

There are millions of start-up businesses rolling out services

globally. For example, Mobike in Beijing, China, is a bicycle-sharing

business with more than 100 million users who use the com-

pany’s 6 million “connected” bikes. Members pay a fee for the

privilege and retrieve a bike from one docking station and return

it to another, but recently Mobike members simply download the

company app, find a bike near them, scan a code to unlock it,

and then drop the bike off wherever they

like. GPS and wireless technology built

into the bike enable Mobike to track the

bike’s whereabouts. No docking stations

are needed. This type of small business

likely would be viable in many cities all

over the globe.

In the United States, the largest bike-

share fleet resides in Dallas, Texas where

18,000 bikes flood Dallas streets and users

are not required to use racks; racks are

required in New York City. The rackless

business model is the norm in China, but

there, and in Dallas, bikes end up in trees, creeks, yards, and block

sidewalks.

Source: Based on Clifton Leaf, “Ideas Know No Borders,” Fortune, August 1,

2017, p. 10. Also, Ken Smith, “A Bike-Share Invasion From China,”

Bloomberg Businessweek, November 13, 2017, p. 22. Also, Eliot Brown, “It’s

the Wild West for Bike Sharing,” March 27, 2018, p. B4.

Follow Me Biking

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CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 39

leaders aren’t highly adaptive and great models during this period, then our companies won’t

adapt either, because ultimately leadership is about being a role model.”

Strategists help an organization gather, analyze, and organize information. They track indus-

try and competitive trends, develop forecasting models and scenario analyses, evaluate corporate

and divisional performance, spot emerging market opportunities, identify business threats, and

develop creative action plans. Strategic planners usually serve in a support or staff role. Usually

found in higher levels of management, they typically have considerable authority for decision

making in the firm. The CEO is the most visible and critical strategic manager. Any manager

who has responsibility for a unit or division, responsibility for profit and loss outcomes, or direct

authority over a major piece of the business is a strategic manager (strategist).

The chief strategy officer (CSO) position has become common in many organizations. Hundreds

of companies have appointed a new chief strategy officer in the last couple of years, including Talon

International, TeleTech, Fleet Complete, Ringler Associates, LRES, Amber Engine, Beaver-Visitec

International, Momentum Worldwide, PGi, TIA, World Surf League, Bank of Hawaii, Snapdeal,

Oramed, Saatva, Centrillion, Geisinger Health System, and Amplifi Commerce.

Strategists differ as much as organizations do, and these differences must be considered

in the formulation, implementation, and evaluation of strategies. Strategists differ in their atti-

tudes, values, ethics, willingness to take risks, concern for social responsibility, concern for

profitability, concern for short-run versus long-run aims, and management style; some will not

even consider various types of strategies because of their personal philosophies. The founder of

Hershey, Milton Hershey, built the company so that he could afford to manage an orphanage.

From corporate profits, Hershey today cares for about 850 boys and 950 girls in its boarding

school for pre-K through grade 12.

Athletic coaches are also strategists. Football, basketball, baseball, soccer, and in fact many ath-

letic contests are often won or lost based on a team’s game plan. For example, a basketball coach may

plan to fast break and play up-tempo, rather than play more half-court, if the players are smaller and

faster, or if the team has more depth than the opposing team. Some inspirational, strategic-planning-

related quotes from legendary National Football League (NFL) coaches are provided in Table 1-2.

Vision and Mission Statements

Many organizations today develop a vision statement that answers the question “What do we

want to become?” Developing a vision statement is often considered the first step in strategic

planning, preceding even development of a mission statement. Many vision statements are a

single sentence as revealed through numerous examples in Chapter 2.

TABLE 1-2 Eight Famous, Strategic-Planning–Relevant Quotes from NFL Coaches

1. “Perfection is not attainable. But if we chase perfection, we can catch excellence.”—Vince

Lombardi, Head Coach Green Bay Packers (1959–1967)

2. “Leadership is a matter of having people look at you and gain confidence . . . If you’re in control,

they’re in control.”—Tom Landry, Head Coach Dallas Cowboys (1960–1988)

3. “If you want to win, do the ordinary things better than anyone else does them, day in and day

out.”—Chuck Noll, Head Coach Pittsburgh Steelers (1969–1991)

4. “Leaders are made, they are not born. They are made by hard effort, which is the price which all

of us must pay to achieve any goal that is worthwhile.”—Vince Lombardi, Head Coach Green

Bay Packers (1959–1967)

5. “You fail all the time, but you aren’t a failure until you start blaming someone else.”—Bum

Phillips, Head Coach Houston Oilers (1975–1980), New Orleans Saints (1981–1985)

6. “Success demands singleness of purpose.”—Vince Lombardi, Head Coach Green Bay Packers

(1959–1967)

7. “Stay focused. Your start does not determine how you’re going to finish.”—Herm Edwards, Head

Football Coach of the New York Jets (2001–2005), Kansas City Chiefs (2006–2008), and Arizona

State University (2018 to present).

8. “Nobody who ever gave his best regretted it.”—George S. Halas, Head Coach Chicago Bears

(1933–1942, 1946–1955, 1958–1967)

Source: A variety of sources.

40 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT

A mission statement is an “enduring statement of purpose that distinguishes one busi-

ness from other similar firms. A mission statement identifies the scope of a firm’s opera-

tions in product and market terms.”10 It addresses the basic question that faces all strategists:

“What is our business?” A clear mission statement describes the values and priorities of an

organization. Developing a mission statement compels strategists to think about the nature

and scope of present operations and to assess the potential attractiveness of future markets

and activities. A mission statement broadly charts the future direction of an organization and

serves as a constant reminder to its employees of why the organization exists and what the

founders envisioned when they put their fame and fortune (and names) at risk to breathe life

into their dreams.

External Opportunities and Threats

External opportunities and external threats refer to economic, social, cultural, demographic,

environmental, political, legal, governmental, technological, and competitive trends and events

that could significantly benefit or harm an organization in the future. Opportunities and threats

are largely beyond the control of a single organization, thus, the word external. Some general

categories of opportunities and threats are listed in Table 1-3. Dollars, numbers, percentages,

ratios, and quantification are essential so strategists can assess the magnitude of opportunities and

threats and take appropriate actions. For example, in Table 1-3, rather than saying “Marketing is

moving rapidly to the Internet,” strategists need to conduct research and find, for example, that

“spending on online advertisements globally is rising 18 percent annually and represents about

44 percent of total advertising spending in the USA.” Strategies must be formulated and imple-

mented based on specific factual information to the extent possible because so much is at stake

in having a good game plan.

External trends and events are creating a different type of consumer and consequently a

need for different types of products, services, and strategies. A competitor’s strength could be a

threat, or a rival firm’s weakness could be an opportunity. A basic tenet of strategic management

is that firms need to formulate strategies to take advantage of external opportunities and avoid

or reduce the impact of external threats. For this reason, identifying, monitoring, and evaluating

external opportunities and threats are essential for success. This process of conducting research

and gathering and assimilating external information is sometimes called environmental scanning

or industry analysis. Lobbying is one activity that some organizations use to influence external

opportunities and threats.

Internal Strengths and Weaknesses

Internal strengths and internal weaknesses are an organization’s controllable activities that

are performed especially well or poorly. They arise in the activities of management, market-

ing, finance/accounting, production, and information systems of a business. Identifying and

TABLE 1-3 Some General Categories of Opportunities and Threats

• Consumers’s expectation for green operations and products is rising 8 percent annually in Western

Europe.

• Internet marketing is growing 11 percent annually in the United States.

• Commodity food prices rose 6 percent the prior year.

• Oil and gas prices declined 18 percent in the last twelve months.

• Computer hacker problems are increasing 14 percent annually.

• Interest rates are 4 percent but rising in the United States.

• State and local governments’s finances worsened 12 percent last year.

• The number of births declined 5 percent annually in many countries over the last three years.

• The gross domestic product (GDP) of Brazil fell from 6 percent to 5 percent in the last year.

• Competitor XYZ just introduced product ABC at a 10 percent lower price than our product.

• Social-media networking is growing 9 percent annually in China.

CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 41

evaluating organizational strengths and weaknesses in the functional areas of a business is an

essential strategic-management activity. Organizations strive to pursue strategies that capitalize

on internal strengths and improve internal weaknesses.

Strengths and weaknesses are determined relative to competitors. Relative deficiency or supe-

riority is important information. Also, strengths and weaknesses can be determined by elements of

being rather than performance. For example, a strength may involve ownership of natural resources

or a historic reputation for quality. Strengths and weaknesses may be determined relative to a firm’s

own objectives. For instance, high levels of inventory turnover may not be a strength for a firm that

seeks never to stock-out.

In performing a strategic-management case analysis, it is important to be as divisional

as possible when determining and stating internal strengths and weaknesses. In other words,

for a company such as Walmart, saying, “Sam Club’s revenues grew 11 percent in the recent

quarter,” is far better than saying “Walmart’s revenues grew 6 percent in the recent quarter.”

Being divisional enables strategies to be more effectively formulated and targeted. This is

important because all firms must allocate resources across divisions (segments) of the firm

(that is, by product, region, customer, or whatever the various units of the firm are), such as

Walmart’s Sam’s Club compared with Walmart Supercenters, Walmart Mexico, or Walmart

Europe.

Both internal and external factors should be stated as specifically as possible, using numbers,

percentages, dollars, and ratios, as well as comparisons over time to rival firms. Quantification is

important because strategies will be formulated and resources allocated based on this informa-

tion. The more specific the underlying external and internal factors, the more effectively strategies

can be formulated and resources allocated. Determining the numbers takes more time, but survival

of the firm often is at stake, so doing some research and incorporating numbers associated with

key factors is essential.

Internal factors can be determined in a number of ways, including computing ratios, measur-

ing performance, and comparing to past periods and industry averages. Various types of surveys

also can be developed and administered to examine internal factors, such as employee morale,

production efficiency, advertising effectiveness, and customer loyalty.

Long-Term Objectives

Objectives can be defined as specific results that an organization seeks to achieve in pursuing

its mission. Long term means more than one year. Objectives are essential for organizational

success because they provide direction; aid in evaluation; foster synergy; reveal priorities;

focus coordination; and provide a basis for effective planning, organizing, motivating, and

controlling activities. Objectives should be challenging, measurable, consistent, reasonable,

and clear. In a multidimensional firm, objectives are needed both for the overall company and

each division.

Headquartered in New York City, Foot Locker, Inc. recently posted the following long-term

objectives on its corporate website (paraphrased):

1. Annual revenues: $7.5 billion

2. Annual revenues per square foot: $500

3. EBIT margin: 11 percent

4. Profit margin: 7 percent

5. Return on invested capital: 14 percent

6. Inventory turnover: 3+ times

In contrast, Macy’s, Inc.’s Annual Report lists as objectives to “to grow sales profitably” and

“to maximize total shareholder return.” Avoid vagueness like this throughout a strategic-planning

project!

Strategies

Strategies are the means by which long-term objectives will be achieved. Business strategies

may include geographic expansion, diversification, acquisition, product development, market

penetration, retrenchment, divestiture, liquidation, and joint venture. Strategies are potential

actions that require top-management decisions and significant amounts of the firm’s resources.

42 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT

They affect an organization’s long-term prosperity, typically for at least five years, and thus

are future oriented. Strategies also have multifunctional and multidivisional consequences and

require consideration of both the external and internal factors facing the firm.

Strategies currently being pursued by Amazon are described in Table 1-4.

TABLE 1-4 Amazon’s Strategies

The world’s largest bookseller, Amazon, is surprisingly embracing the brick-and-mortar bookstore retail

format it’s been killing for 20 years. Amazon’s physical bookstore front fits with the company’s increas-

ing reliance on storefronts including AmazonBooks, Amazon Go, and AmazonFresh Pickup to build

sales and meet customers where they are. AmazonBooks now has more than 10 physical stores. Another

reason for Amazon’s new strategy is that physical bookstores are experiencing something of a comeback.

From 2010 to 2017, the number of independent bookstores increased by nearly 30 percent. These stores

are capitalizing on a loyal customer base that appreciates the value of a real bookstore that hosts read-

ings and events, offers conversation and discussion areas, and enables in-store browsing and discovery.

Amazon also recently acquired the brick-and-mortar grocery store chain Whole Foods Market. Entire

industries are being rocked or crushed by Amazon’s competitive size, scale, diversity, automation, and

prowess.

Source: Based on Jeremy Bowman, “3 Reasons Amazon Is Opening a Brick-and-Mortar Bookstore Chain,”
https://www.aol.com/article/finance/2017/06/07/3-reasons-amazon-is-opening-a-brick-and-mortar-bookstore-
chain/22130842/

TABLE 1-5 Matching Key External and Internal Factors to Formulate Strategies

Key Internal Factor Key External Factor Resultant Strategy

S1: Demand for Dunkin Donuts

up 6 percent annually (internal

strength)

+ O1: Desire for healthy products

up 8 percent annually (external

opportunity)

= SO1: Dunkin Donuts elimi-

nated all artificial dyes and colors

in its donuts in 2018

W1: Insufficient production

capacity by 1 million units

annually (internal weakness)

+ O2: Exit of two major foreign

competitors from the area

(external opportunity)

= WO1: Purchase competitors’

production facilities

S2: R&D has developed four

new products in twelve months

(internal strength)

+ T1: Sugary drink consumption

is declining 5 percent annually

(external threat)

= ST1: Spend $1 million to

promote healthiness of four new

products

W2: Poor employee morale

(internal weakness)
+ T2: Healthcare costs rose 7

percent last year (external threat)

= WT1: Implement a new

corporate wellness program

SWOT Analysis

Strengths-Weaknesses-Opportunities-Threats (SWOT) Analysis is an important matching

tool that helps managers develop four types of strategies: SO (strengths-opportunities) strate-

gies, WO (weaknesses-opportunities) strategies, ST (strengths-threats) strategies, and WT

(weaknesses-threats) strategies.11 Matching key external and internal factors is a critically impor-

tant activity in strategic planning. Note in Table 1-5 that the resultant strategies 1, 2, 3, and 4 are

SO, WO, ST, and WT strategies, respectively. SWOT analysis is explained further in Chapter 6,

but the matching of external with internal factors to generate strategies results in a SWOT Matrix

as illustrated in Figure 1-2.

Annual Objectives

Annual objectives are short-term milestones that organizations must achieve to reach long-

term objectives. Like long-term objectives, annual objectives should be measurable, quan-

titative, challenging, realistic, consistent, and prioritized. They must also be established at

the corporate, divisional, and functional levels in a large organization. Annual objectives

should be stated in terms of management, marketing, finance/accounting, and production

accomplishments. A set of annual objectives is needed for each long-term objective. These

https://www.aol.com/article/finance/2017/06/07/3-reasons-amazon-is-opening-a-brick-and-mortar-bookstore-chain/22130842/

S W

STRENGTHS (S) WEAKNESSES (W)

10.

OPPORTUNITIES (O) SO STRATEGIES

ST STRATEGIES

WO STRATEGIES

WT STRATEGIES

ETC.

10.

THREATS (T)

ETC.

FIGURE 1-2

The Basic SWOT Matrix Format

44 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT

objectives are especially important in strategy implementation, whereas long-term objectives

are particularly important in strategy formulation. Annual objectives provide the basis for

allocating resources.

Policies

Policies are the means by which annual objectives will be achieved. Policies include guide-

lines, rules, and procedures established to support efforts to achieve stated objectives. Policies

are guides to decision making and address repetitive or recurring situations. Usually, policies

are stated in terms of management, marketing, finance/accounting, production/operations, R&D,

and MIS activities. They may be established at the corporate level and apply to an entire orga-

nization, at the divisional level and apply to a single division, or they may be established at the

functional level and apply to particular operational activities or departments.

Like annual objectives, policies are especially important in strategy implementation because

they outline an organization’s expectations of its employees and managers. Policies allow con-

sistency and coordination within and between organizational departments. For example, IBM

recently instituted a new policy requiring employees to work from an IBM office rather than work-

ing remotely, reversing a 30-year policy. IBM had previously for decades boasted that more than

40 percent of its employees worked remotely, but the company’s new policy is aimed at improving

employee collaboration and accelerating the pace of work. The policy is also aimed at reversing

IBM’s two consecutive quarters of declining revenue. Several large companies are following the

IBM lead, recalling at-home employees, including Yahoo, Bank of America, and Aetna Inc.

Benefits of Engaging in Strategic Management
Strategic management allows an organization to be more proactive than reactive in shaping its

own future; it allows an organization to initiate and influence (rather than just respond to) activi-

ties, and thus, to exert control over its own destiny. Small business owners, chief executive offi-

cers, presidents, and managers of many for-profit and nonprofit organizations have recognized

and realized the benefits of strategic management.

Historically, the principal benefit of strategic management has been to help organiza-

tions formulate better strategies through the use of a more systematic, logical, and rational

approach for decision making. In addition, the process, rather than the decision or document,

is also a major benefit of engaging in strategic management. Through involvement in the

process (i.e., dialogue and participation), managers and employees become committed to sup-

porting the organization. A key to successful strategic management is communication, and

it may be the most important word in all of management. Figure 1-3 illustrates this intrinsic

benefit of a firm engaging in strategic planning; note that all firms need all employees “on a

mission” to help the firm succeed.

Dale McConkey said, “Plans are less important than planning.” The manner in which strate-

gic management is carried out is therefore exceptionally important. A major aim of the process

LO 1.5

a. Dialogue
b. Participation

Enhanced
Communication

Deeper/Improved
Understanding

a. Of others’ views
b. Of what the firm
is doing/planning
and why

THE RESULT

All Managers and
Employees on a
Mission to Help the
Firm Succeed

Greater
Commitment

a. To achieve
objectives
b. To implement
strategies
c. To work hard

FIGURE 1-3

Benefits to a Firm that Does Strategic Planning

CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 45

is to achieve understanding and commitment from all managers and employees. Understanding

may be the most important benefit of strategic management, followed by commitment. When

managers and employees understand what the organization is doing and why, they often feel

a part of the firm and become committed to assisting it. This is especially true when employ-

ees also understand links between their own compensation and organizational performance.

Managers and employees become surprisingly creative and innovative when they understand and

support the firm’s mission, objectives, and strategies. A great benefit of strategic management,

then, is the opportunity that the process provides to empower individuals. Empowerment is the

act of strengthening employees’ sense of effectiveness by encouraging them to participate in

decision making and to exercise initiative and imagination and rewarding them for doing so. You

want your people to run the business as it if were their own.

Strategic planning is a learning, helping, educating, and supporting process, not merely a

paper-shuffling activity among top executives. Strategic-management dialogue is more impor-

tant than a nicely bound strategic-management document. A strategist must avoid developing

a strategic plan alone and then present the plan to operating managers to execute. Through

involvement in the process, line managers must become “owners” of the strategy. Ownership

of a strategic plan by the people who have to execute the plan is a key to success in any

organization.

Although making good strategic decisions is the major responsibility of an organization’s

owner or chief executive officer, both managers and employees must also be involved in strategy

formulation, implementation, and evaluation activities. Participation is a key to gaining com-

mitment for needed changes. An increasing number of corporations and institutions are using

strategic management to make effective decisions. But strategic management is not a guarantee

for success; it can be dysfunctional if conducted haphazardly.

Financial Benefits

Organizations that use strategic-management concepts are generally more successful, showing

significant improvement in sales, profitability, and productivity, compared to firms without sys-

tematic planning activities. High-performing firms tend to do systematic planning to prepare for

future fluctuations in their external and internal environments. Firms with management systems

that use strategic-planning concepts, tools, and techniques generally exhibit superior long-term

financial performance relative to their industry.

High-performing firms seem to make more informed decisions with good anticipation of

both short- and long-term consequences. In contrast, firms that perform poorly often engage in

activities that are shortsighted and do not reflect good forecasting of future conditions. Strategists

of low-performing organizations are often preoccupied with solving internal problems and meet-

ing paperwork deadlines. They typically underestimate their competitors’ strengths and overesti-

mate their own firm’s strengths. They often attribute weak performance to uncontrollable factors

such as a poor economy, technological change, or foreign competition.

More than 100,000 businesses in the United States fail annually. Business failures include

bankruptcies, foreclosures, liquidations, and court-mandated receiverships. Although many

factors besides a lack of effective strategic management can lead to business failure, the plan-

ning concepts and tools described in this text can yield substantial financial benefits for any

organization.

Nonfinancial Benefits

Besides helping firms avoid financial demise, strategic management offers other tangible

benefits, such as enhanced awareness of external threats, improved understanding of com-

petitors’ strategies, increased employee productivity, reduced resistance to change, and a

clearer understanding of performance–reward relationships. Strategic management enhances

the problem-prevention capabilities of organizations because it promotes interaction among

managers at all divisional and functional levels. Firms that have nurtured their managers and

employees, shared organizational objectives with them, empowered them to help improve the

product or service, and recognized their contributions can turn to them for help in a pinch

because of this interaction.

46 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT

In addition to empowering managers and employees, strategic management often brings

order and discipline to an otherwise floundering firm. It can be the beginning of an efficient and

effective managerial system. Strategic management may renew confidence in the current busi-

ness strategy or point to the need for corrective actions. The strategic-management process pro-

vides a basis for identifying and rationalizing the need for change to all managers and employees

of a firm; it helps them view change as an opportunity rather than as a threat. Some nonfinancial

benefits of a firm using strategic management are increased discipline, improved coordination,

enhanced communication, increased forward thinking, improved decision making, increased

synergy, and more effective allocation of time and resources.

Why Some Firms Do No Strategic Planning
Some firms do not engage in formal strategic planning, and some firms do engage in strategic

planning but receive little support from managers and employees. Ten reasons (excuses) often

given for minimal or no strategic planning in a firm are as follows:

1. No formal training in strategic management

2. No understanding of or appreciation for the benefits of planning

3. No monetary rewards for doing planning

4. No punishment for not planning

5. Too busy “firefighting” (resolving internal crises) to plan ahead

6. View planning as a waste of time because no product/service is made

7. Laziness; effective planning takes time and effort; time is money

8. Content with current success; failure to realize that success today is no guarantee for suc-

cess tomorrow;

9. Overconfidence

10. Prior bad experience with strategic planning done sometime, somewhere

Pitfalls in Strategic Planning
Strategic planning is an involved, intricate, and complex process that takes an organization into

uncharted territory. It does not provide a ready-to-use prescription for success; instead, it takes the

organization through a journey and offers a framework for addressing questions and solving prob-

lems. Being aware of potential pitfalls and being prepared to address them is essential to success.

There are some pitfalls in doing strategic planning; avoid the following:

• Using strategic planning to gain control over decisions and resources
• Doing strategic planning only to satisfy accreditation or regulatory requirements
• Too hastily moving from mission development to strategy formulation
• Not communicating the plan to employees, who continue working in the dark
• Top managers making many intuitive decisions that conflict with the formal plan
• Top managers not actively supporting the strategic-planning process
• Not using plans as a standard for measuring performance
• Delegating planning to a “planner” rather than involving all managers
• Not involving key employees in all phases of planning
• Not creating a collaborative climate supportive of change
• Viewing planning as unnecessary or unimportant
• Viewing planning activities as silos comprised of independent parts
• Becoming so engrossed in current problems that insufficient or no planning is done
• Being so formal in planning that flexibility and creativity are stifled12

Comparing Business and Military Strategies
A strong military heritage underlies the study of strategic management. Terms such as objec-

tives, mission, strengths, and weaknesses were first formulated to address problems on the

battlefield. According to Webster’s New World Dictionary, strategy is “the science of planning

LO 1.6

LO 1.7

LO 1.8

CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 47

and directing large-scale military operations, of maneuvering forces into the most advanta-

geous position prior to actual engagement with the enemy.”13 The word strategy comes from

the Greek strategos, which refers to a military general and combines stratos (the army) and

agos (to lead). The history of strategic planning began in the military. A key aim of both busi-

ness and military strategy is “to gain competitive advantage.” In many respects, business strat-

egy is like military strategy, and military strategists have learned much over the centuries that

can benefit business strategists today.

Both business and military organizations try to use their own strengths to exploit com-

petitors’ weaknesses. If an organization’s overall strategy is wrong (ineffective), then all the

efficiency in the world may not be enough to allow success. Business or military success

is generally not the happy result of accidental strategies. Rather, success is the product of

both continuous attention to changing external and internal conditions and the formulation

and implementation of insightful adaptations to those conditions. The element of surprise

provides great competitive advantages in both military and business strategy; information

systems that provide data on opponents’ or competitors’ strategies and resources are also

vitally important.

A fundamental difference between military and business strategy is that business strategy

is formulated, implemented, and evaluated with an assumption of competition, whereas mili-

tary strategy is based on an assumption of conflict. In a military setting there is generally one

winner, but in business there are usually multiple winners. For example, several firms can win

in the hamburger business; you do not have to confront McDonald’s head on, instead offer a

different mix of burgers, restaurant design, and customer service and still be successful. This

example explains competition and avoiding conflict with a larger player such as McDonald’s. In

military situations, it is often impossible to avoid conflict with the larger army. Business strate-

gists have access to valuable insights that military thinkers have refined over time. Superior

strategy formulation and implementation can overcome an opponent’s superiority in numbers

and resources.

Born in Pella in 356 bce, Alexander the Great was king of Macedon, a state in northern

ancient Greece. Tutored by Aristotle until the age of 16, Alexander had created one of the largest

empires of the ancient world by the age of thirty, stretching from the Ionian Sea to the Himalayas.

Alexander was undefeated in battle and is considered one of history’s most successful command-

ers. He became the measure against which military leaders even today compare themselves, and

military academies throughout the world still teach his strategies and tactics. Alexander the Great

once said, “Greater is an army of sheep led by a lion, than an army of lions led by a sheep.” This

quote reveals the overwhelming importance of an excellent strategic plan for any organization

to succeed.

Both business and military organizations must adapt to change and constantly improve

to be successful. Too often, firms do not change their strategies when their environment and

competitive conditions dictate the need to change. Gluck offered a classic military example

of this:

When Napoleon won, it was because his opponents were committed to the strategy, tac-

tics, and organization of earlier wars. When he lost—against Wellington, the Russians,

and the Spaniards—it was because he, in turn, used tried-and-true strategies against en-

emies who thought afresh, who were developing the strategies not of the last war but of

the next.14

Sun Tzu’s The Art of War has been applied to many fields well outside of the military.

Much of the text is about how to fight wars without actually having to do battle: It gives tips on

how to outsmart one’s opponent so that physical battle is not necessary. As such, the book has

found application as a training guide for many competitive endeavors that do not involve actual

combat, such as in devising courtroom trial strategy or acquiring a rival company. Similarities

can be construed from Sun Tzu’s writings to the practice of formulating and implementing

strategies among businesses today. Table 1-6, on page 48, provides narrative excerpts from

The Art of War; which of the principles listed do you believe are most applicable or analogous

to companies as compared to armies?

48 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT

TABLE 1-6 Excerpts from Sun Tzu’s The Art of War Writings

• Strategic planning is a matter of vital importance to the state: a matter of life or death, the road either

to survival or ruin. Hence, it is imperative that it be studied thoroughly.

• Strategic planning is based on deception. When near the enemy, make it seem that you are far away;

when far away, make it seem that you are near. Hold out baits to lure the enemy. Strike the enemy

when he is in disorder. Avoid the enemy when he is stronger. Attack the enemy where he is unpre-

pared. Appear where you are not expected.

• A speedy victory is the main object in strategic planning. If this is long in coming, weapons are

blunted and morale depressed. When the army engages in protracted campaigns, the resources of the

state will fall short. Thus, while we have heard of stupid haste in war, we have not yet seen a clever

operation that was prolonged.

• Generally, in strategic planning the best policy is to take a state intact; to ruin it is inferior to this. To

capture the enemy’s entire army is better than to destroy it; to take intact a regiment, a company, or

a squad is better than to destroy it. For to win one hundred victories in one hundred battles is not the

epitome of skill. To subdue the enemy without fighting is the supreme excellence. Those skilled in

war subdue the enemy’s army without battle.

• The art of using troops is this: When ten to the enemy’s one, surround him. When five times his

strength, attack him. If double his strength, divide him. If equally matched, you may engage him with

some good plan. If weaker, be capable of withdrawing. And if in all respects unequal, be capable of

eluding him.

• Know your enemy and know yourself, and in a hundred battles you will never be defeated. When you

are ignorant of the enemy but know yourself, your chances of winning or losing are equal. If ignorant

both of your enemy and of yourself, you are sure to be defeated in every battle.

• He who occupies the field of battle first and awaits his enemy is at ease, and he who comes later to

the scene and rushes into the fight is weary; those skilled in war bring the enemy to the field of battle

rather than being brought there by him.

• Analyze the enemy’s plans so that you will know his deficiencies as well as his strengths. Agitate him

to ascertain the pattern of his movement. Lure him out to reveal his dispositions and position. Launch

probing attacks to decipher strengths and weaknesses.

• Avoid strength. Strike weakness. Anyone able to win the victory by modifying his tactics in accor-

dance with the enemy situation may be said to be divine.

• If you decide to go into battle, do not announce your intentions or plans. Project “business as usual.”

• Unskilled leaders work out their conflicts on battlefields. Brilliant strategists rarely go to battle; they

achieve their objectives through tactical positioning well in advance of confrontation.

• When you do decide to challenge another company (or army), much calculating, estimating, analyz-

ing, and positioning bring triumph. Little computation brings defeat.

• Skillful leaders do not let a strategy inhibit creative counter-movement. Thus, commands from a

distance should not interfere with spontaneous maneuvering at the point of attack.

• When a decisive advantage is gained over a rival, skillful leaders do not press on. They hold their

position and give their rivals the opportunity to surrender or merge. Never allow your forces to be

damaged by those who have nothing to lose.

Note: The word strategic planning is substituted for war or warfare.

Source: Based on Sun Tzu’s The Art of War Writings, 1910, Lionel Giles.

Developing Employability Skills
The how-to, skills-oriented, practical approach of this textbook’s content and layout enables

students to gain numerous career-enhancing (employability) skills that experts say are vital

for success in the twenty-first-century workplace. “Employability” skills include actual

tools, techniques, and concepts being used by businesses and learned by students using this

text; the skills can be grouped into 6 broad categories and 14 specific categories, as shown in

Table 1-7.

LO 1.9

CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 49

IMPLICATIONS FOR STRATEGISTS

Figure 1-4 reveals that to gain and sustain competitive advantages,

a firm must create and nurture a clear vision and mission, and

then systematically formulate, implement, and evaluate strategies.

Consistent business success rarely happens by chance; it most often

results from careful planning followed by diligent, intelligent, hard

work. If the process were easy, every business would be success-

ful. Consistent success requires that strategists gather and assimilate

relevant data, make tough trade-off decisions among various op-

tions that would benefit the firm, energize and reward employees,

and continually adapt to change. To survive and prosper, a business

must gain and sustain at least several major competitive advantages

over rival firms. In the process, many attractive options will be dis-

carded in favor of a few; strategic planning in a sense can be de-

fined as “choosing what not to do.”

TABLE 1-7 Employability Skills to Be Gained by Students Using This Text

Broad Skills to Be Developed
1. Critical thinking: to define and solve problems and make decisions or form judgments about a

particular situation or set of circumstances.

2. Collaboration: to work with colleagues on reports, presentations, and projects.

3. Knowledge application and analysis: to learn a concept and then apply that knowledge to other

challenges.

4. Business ethics and social responsibility: to know in your heart that good ethics is good business.

5. Information technology: to enhance one’s word-processing, spreadsheets, database, presentation,

and software skills.

6. Data literacy: to access, assess, interpret, manipulate, summarize, and communicate data.

Specific Skills to Be Gained; Learn How to:
1. Develop a three-year strategic plan for any for-profit or nonprofit company or organization.

2. Write and evaluate vision and mission statements.

3. Conduct an external and internal strategic planning assessment.

4. Formulate strategies using SWOT analysis.

5. Develop and use a BCG and IE portfolio matrix analysis.

6. Develop and use a QSPM analysis.

7. Determine an appropriate set of recommendations with associated costs for any firm.

8. Develop and use perceptual maps to better position firms versus rival companies.

9. Determine the value of any firm using various corporate valuation methods.

10. Perform EPS-EBIT analysis to determine the extent that debt versus stock should be used to

raise needed capital for the firm.

11. Develop and use value chain analysis, balance scorecards, and financial ratio analysis.

12. Evaluate corporate structures and develop effective organizational charts.

13. Develop and use projected financial statements to support any proposed strategic plan.

14. Use a popular corporate strategic planning Excel template.

Means Used to Develop Skills
This text has:

11 concise chapters organized around a practical, integrative strategic-planning model

61 end-of-chapter assurance-of-learning exercises organized in four effective, fun categories

355 end-of-chapter review questions

30 brand-new, student-friendly cases on companies in the news undergoing change

11 mini-cases with chapter relevant questions

1 Cohesion Case on Coca-Cola at the end of this chapter and many associated end-of-chapter exercises

1 popular Excel-based, Strategic Planning Template widely used by both companies and students doing

strategic planning (see the author website at www.strategyclub.com)

750 chapter MyLab questions written by the authors

750 case MyLab questions written by the authors

50 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT

The strategic-management process represents a systematic means

for creating, maintaining, and strengthening a firm’s competitive ad-

vantages. This text provides step-by-step guidance throughout the

process to help strategists gain and sustain a firm’s competitive advan-

tages. As the eleven chapters unfold, more than one hundred key ele-

ments of the process, ranging from developing portfolio matrices to

managing workplace romance, are examined to help strategists lead

the firm in delivering prosperity to shareholders, customers, and em-

ployees. The 11 chapters provide a clear, planned, journey through the

strategic-management process, with numerous highlights accented

along the way, so strategists can perform essential analyses and an-

ticipate and resolve potential problems in leading their firm to success.

Use the free Excel template at www.strategyclub.com to keep your

firm’s strategic-planning process track.

Establish A Clear
Vision & Mission

Evaluate & Monitor
Results:

Take Corrective
Actions; Adapt

To Change

Gain & Sustain
Competitive
Advantages

Formulate Strategies:
Collect, Analyze, &

Prioritize Data Using
Matrices; Establish A
Clear Strategic Plan

Implement Strategies:
Establish Structure;
Allocate Resources;
Motivate & Reward;
Attract Customers;
Manage Finances

FIGURE 1-4

How to Gain and Sustain Competitive Advantages

IMPLICATIONS FOR STUDENTS

In performing strategic-management case analysis, emphasize

throughout your project, beginning with the first page or slide,

where your firm has competitive advantages and disadvantages.

More importantly, emphasize throughout how you recommend the

firm sustain and grow its competitive advantages and how you rec-

ommend the firm overcome its competitive disadvantages. Pave the

way early and often in your presentation for what you ultimately

recommend your firm should do over the next three years. The no-

tion of competitive advantage should be integral to the discussion

of every page or PowerPoint slide. Therefore, avoid being merely

descriptive in your written or oral analysis; rather, be prescriptive,

insightful, and forward-looking throughout your project.

CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 51

TABLE 1-8 Twelve Reasons Students (and Companies) Use the Strategic
Planning Template at www.strategyclub.com

1. To save time in preparing a strategic-management case analysis; enables user to focus on the

“thinking rather than the mechanics” of developing matrices and performing analyses.

2. To follow the correct process in formulating and implementing strategies.

3. To avoid mistakes in math calculations, plotting points, and drawing graphs.

4. To develop professional-looking charts, graphs, and matrices.

5. To develop existing and projected financial ratios.

6. To correctly place firms in BCG and IE portfolio matrices.

7. To examine many different scenarios for using debt versus stock to raise needed capital, using

EPS-EBIT analysis.

8. To vary weights and ratings in matrices and to see the resultant impact on total weighted scores.

9. To more easily share information with team members and colleagues.

10. To more easily develop projected financial statements to reveal the expected impact of various

strategies.

11. To develop skills with perceptual mapping or product positioning.

12. To gain experience using actual corporate strategic planning software; many business jobs require

proficiency in Excel, which students gain in using the template.

Chapter Summary
All firms have a strategy, even if it is informal, unstructured, and sporadic. All organizations are

heading somewhere, but unfortunately some organizations do not know where they are going.

The old saying “If you do not know where you are going, then any road will lead you there!”

accents the need for organizations to use strategic-management concepts and techniques. The

strategic-management process is becoming more widely used by small firms, large companies,

nonprofit institutions, governmental organizations, and multinational conglomerates alike. The

process of empowering managers and employees has almost limitless benefits.

Organizations should take a proactive rather than a reactive approach in their industry, and

they should strive to influence, anticipate, and initiate rather than just respond to events. The

strategic-management process embodies this approach to decision making. It represents a logical,

systematic, and objective approach for determining an enterprise’s future direction. The stakes

are generally too high for strategists to use intuition alone in choosing among alternative courses

of action. Successful strategists take the time to think about their businesses, where they are with

their businesses, and what they want to be as organizations; and then they implement programs

and policies to get from where they are to where they want to be in a reasonable period of time.

It is a known and accepted fact that people and organizations that plan ahead are much more

likely to become what they want to become than those that do not plan at all. A good strategist

plans and controls his or her plans, whereas a bad strategist never plans and then tries to control

people! This text is devoted to providing you with the tools necessary to be a good strategist.

Key Terms and Concepts
annual objectives (p. 42)

competitive advantage (p. 38)

employability (p. 48)

empowerment (p. 45)

environmental scanning (p. 40)

external opportunities (p. 40)

For all the reasons given in Table 1-8, use the free Excel strategic planning template at

www.strategyclub.com to develop your three-year strategic plan for any assigned case company.

external threats (p. 40)

internal strengths (p. 40)

internal weaknesses (p. 40)

intuition (p. 37)

long-range planning (p. 34)

long-term objectives (p. 41)

mission statement (p. 40)

policies (p. 44)

retreats (p. 35)

strategic management (p. 32)

strategic-management model (p. 34)

strategic-management process (p. 35)

strategic planning (p. 33)

strategies (p. 41)

strategists (p. 38)

strategy evaluation (p. 36)

strategy formulation (p. 35)

strategy implementation (p. 36)

sustained competitive

advantage (p. 38)

SWOT analysis (p. 42)

vision statement (p. 39)

Issues for Review and Discussion

1-1. Why do you believe SWOT analysis is so commonly

used by businesses in doing strategic planning?

1-2. What variable does recent research reveal to be most

important of all in doing business? Explain why this

variable is so important.

1-3. For your college or university, identify a strategy that

would exemplify the matching concept evidenced in

SWOT analysis.

1-4. Diagram the comprehensive strategic-management

model.

1-5. Develop a diagram to reveal the benefits to a firm for

doing strategic planning. Include “improved understand-

ing,” “enhanced communication,” “all managers and

employees on a mission,” and “greater commitment”—

in the correct order.

1-6. How important do you believe “having an excellent

game plan” is to winning a basketball or football game

against your university’s major rival? Discuss.

1-7. Are strategic management and strategic planning

synonymous terms? Explain.

1-8. Why do many firms move too hastily from vision

and mission development to devising alternative

strategies?

1-9. Why are strategic-planning retreats often conducted

away from the worksite? How often should firms have a

retreat, and who should participate in them?

1-10. Distinguish between long-range planning and strategic

planning.

1-11. How important do you think “being adept at adapting”

is for business firms? Explain.

1-12. As cited in the chapter, famous businessman Edward

Deming once said, “In God we trust. All others bring

data.” What did Deming mean in terms of developing a

strategic plan?

1-13. What strategies do you believe can save newspaper

companies from extinction?

1-14. Distinguish between the concepts of vision and mission.

1-15. Your university has fierce competitors. List three ex-

ternal opportunities and three external threats that face

your university.

1-16. List three internal strengths and three internal weak-

nesses that characterize your university.

1-17. List reasons why objectives are essential for organiza-

tional success.

1-18. Why are policies especially important in strategy

implementation?

1-19. What is a “retreat,” and why do firms take the time and

spend the money to have these?

1-20. Discuss the notion of strategic planning being more

formal versus informal in an organization. On a 1- to

10-scale from formal to informal, what number best

represents your view of the most effective approach?

Why?

1-21. List what you believe are the five most important les-

sons for business that can be garnered from The Art of

War.

1-22. What is the fundamental difference between business

strategy and military strategies in terms of basic as-

sumptions?

1-23. Explain why the strategic-management class is often

called a “capstone course.”

1-24. What aspect of strategy formulation do you think

requires the most time? Why?

1-25. Why is strategy implementation often considered

the most difficult stage in the strategic-management

process?

1-26. Why is it so important to integrate intuition and analysis

in strategic management?

1-27. Explain the importance of a vision and a mission state-

ment.

1-28. Discuss relationships among objectives, strategies, and

policies.

1-29. Why do you think some chief executive officers fail to use

a strategic-management approach to decision making?

52 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT

1- 30. Discuss the importance of feedback in the strategic-

management model.

1- 31. How can strategists best ensure that strategies will be

effectively implemented?

1- 32. Give an example of a recent political development that

changed the overall strategy of an organization.

1- 33. Who are the major competitors of your college or uni-

versity? What are their strengths and weaknesses? What

are their strategies? How successful are these institu-

tions compared to your college?

1- 34. In your opinion, what is the single major benefit of

using a strategic-management approach to decision

making? Justify your answer.

1- 35. Most students will never become a chief executive

officer or even a top manager in a large company. So

why is it important for all business majors to study

strategic management?

1- 36. Describe the content available at the Strategy Club

website at www.strategyclub.com .

1- 37. List four financial and four nonfinancial benefits of a

firm engaging in strategic planning.

1- 38. Why is it that a firm can normally sustain a competitive

advantage for only a limited period of time?

1- 39. Why it is not adequate simply to obtain competitive

advantage?

1- 40. How can a firm best achieve sustained competitive

advantage?

1- 41. In sequential order in the strategic-planning process,

arrange the following appropriately: policies,

objectives, vision, strategies, mission, strengths.

1- 42. Label the following as an opportunity, a strategy, or

a strength.

a. XYZ Inc. is hiring fifty more salespersons.

b. XYZ Inc. has fifty salespersons.

c. XYZ Inc.’s rival firm has only fifty salespersons.

1- 43. Explain why internal strengths and weaknesses should

be stated in divisional terms to the extent possible.

1- 44. Explain why both internal and external factors should

be stated in specific terms (that is, using numbers, per-

centages, money ratios, and comparisons over time) to

the extent possible.

1- 45. Identify the three activities that comprise strategy evaluation.

1- 46. List six characteristics of annual objectives.

1- 47. Would strategic-management concepts and techniques

benefit foreign businesses as much as domestic firms?

Justify your answer.

1- 48. What do you believe are some potential pitfalls or risks in us-

ing a strategic-management approach to decision making?

1- 49. What does recent research reveal to be the most important

component or activity in the strategic-management process?

CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 53

MINI-CASE ON TESLA, INC. (TSLA)

WHICH AMERICAN COMPANY DOES THE
BEST JOB OF STRATEGIC PLANNING, AND
HOW IS IT DONE?
The answer to the first part of the question posed may be Tesla Inc., the U.S. electric automobile

manufacturer founded in 2003 and headquartered in Palo Alto, California. The answer to the second

part of the question may be “by matching internal strengths/weaknesses with external opportunity/

threats” using SWOT analysis. For the first time ever, in 2017, Tesla joined the Fortune 500 largest

companies in the United States; the company’s annual revenues exceed $7 billion.

An integral part of Tesla’s excellent strategic plan is to capitalize on the 6.5 percent annual gross

domestic product (GDP) growth in China, compared to the GDP growth of about 2 percent in the United

States. Tesla’s sales in China skyrocketed in recent years as CEO Elon Musk of Tesla capitalizes heavily

on the firm’s technological prowess (internal strength) matched with China’s booming GDP (external

opportunity) and China’s strong preference for electric vehicles (external opportunity). In 2016, sales

of electric and plug-in hybrid automobiles in China rose 50 percent to 507,000, more than triple the

comparable figure in the United States. Electric vehicles are viewed in China as a way to help clear

smoggy skies (an external opportunity), and that is a primary reason why China’s government has ex-

empted electric cars from rigid license plate restrictions in six large cities: Shanghai, Beijing, Shenzhen,

Hangzhou, Guangzhou, and Tianjin; these six cities report the highest Tesla sales.

Tesla’s strategic plan includes manufacturing cars in China by the end of 2018, because shipping

cars from California to China is costly. Tariffs and taxes incurred to export cars to China increases

the price of Tesla sedans and SUVs by 50 percent (external threat). The number of electric vehi-

cle charging stations in China exceeds one thousand (external opportunity). Tesla mass produces its

A New Tesla Anybody?

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54 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT

Model X SUV because China’s obsession with SUVs is a decade old and growing rapidly. Sales of

SUVs in China now comprise nearly 40 percent of all passenger-vehicle sales in that country.

Turning to Australia, Tesla recently supplied the largest battery in the world to Jamestown, Aus-

tralia. The battery is storing electricity from a new wind farm that supplies thirty thousand homes with

power. The battery has a 100-megawatt capacity. Tesla’s strategic plan is for the whole world to use its

batteries in cars, trucks, homes, and businesses.

Questions

1. Identify several external opportunities and threats that face Tesla.

2. Identify several internal strengths and weaknesses that face Tesla.

3. Match several of your external and internal factors to formulate several strategies that Tesla is (or

could) use going forward.

4. What is Tesla’s competitive advantage in the automobile industry?

Source: Based on Scott Cendrowski, “Tesla Makes a U-Turn in China,” Fortune, p. 128–136. June 15, 2017.

Web Resources
1. The Author Website The website for this textbook is

widely used by both companies and students for actually
doing strategic planning. The downloadable template at the
website receives more than thirty thousand hits per year.
www.strategyclub.com

2. SWOT Analysis Narrative and Worksheet This website
explains SWOT analysis and provides a downloadable
worksheet.
https://www.mindtools.com/pages/article/newTMC_05.htm

3. SWOT Analysis Images This website provides more
than one hundred jpeg images of SWOT matrices that
can be used in a case project or strategic planning report.
https://www.google.com/search?q=swot+analysis&tbm=is
ch&tbo=u&source=univ&sa=X&ved=0ahUKEwjokNTano
nWAhUIPiYKHdfeAOQQsAQIeQ&biw=1295&bih=743

4. Strategic-Management Models This website provides
more than one hundred jpeg images of strategic-planning

models that can be used to guide a strategic planning un-
dertaking https://www.google.com/search?q=strategic+ma
nagement+models&client=safari&rls=en&tbm=isch&tbo=
u&source=univ&sa=X&ved=0ahUKEwjh7ZfjoYnWAhV
G7CYKHcNgBQcQsAQIgwE&biw=1295&bih=743

5. Strategic-Management Organizations Some popular
strategy websites are as follows:
Strategic Management Society (SMS)—
https://strategicmanagement.net/—publishes the Strategic
Management Journal and holds annual strategic management
conferences
Association for Strategic Planning—www
.strategyassociation.org/—provides a Strategic
Management Professional (SMP) certification program
McKinsey & Company—www.mckinsey.com—perhaps
the largest management-consulting firm in the world; the
company does extensive strategic planning consulting

Current Readings
Arend, Richard J., Y. Lisa Zhao, Michael Song, and Im Subin.

“Strategic Planning as a Complex and Enabling Mana-

gerial Tool.” Strategic Management Journal 38, Issue 8

(August 2017): 1741–1752.
Chen, Tianxu, Lihong Olan, and Vadake Narayanan. “Battle on

the Wrong Field? Entrant Type, Dominant Designs, and
Technology Exit.” Strategic Management Journal 38, Issue
13 (December 2017): 2553–2743.

Cheng, Gao, Tiona Zuzul, Geoffrey Jones, and Tarun
Khann. “Overcoming Institutional Voids: A Reputation-
Based View of Long-Run Survival.” Strategic
Management Journal 38, Issue 11 (November 2017):
2147–2167.

Crilly, Donal. “Time and Space in Strategy Discourse:
Implications for Intertemporal Choice.” Strategic
Management Journal 38, Issue 12 (December 2017):
2370–2389.

Detien, Jodi, and Sheila S. Webber. “Strategic Shifts that Build
Executive Leadership,” Business Horizons 60, Issue 3
(May 2017): 335–343.

Dorobantu, Sinziana, Aseem Kaul, and Bennet Zelner.
“Nonmarket Strategy Research Through the Lens of New
Institutional Economics: An Integrative Review and Future
Directions.” Strategic Management Journal 38, Issue 1
(January 2017): 114–140.

Durand, Rodolphe, Robert M. Grant, and Tammy L. Madsen.
“The Expanding Domain of Strategic Management
Research and the Quest for Integration.” Strategic
Management Journal 38, Issue 1 (January 2017): 4–16.

Flammer, Caroline, and Pratima Bansal. “Does a Long-Term
Orientation Create Value? Evidence from a Regression
Discontinuity.” Strategic Management Journal 38, Issue 9
(September 2017): 1827–1847.

Gans, Joshua, and Michael D. Ryall. “Value Capture Theory:
A Strategic Management Review.” Strategic Management
Journal 38, Issue 1 (January 2017): 17–41.

Han, T. J. Smit, and Lenos Trigeorgis. “Strategic NPV: Real
Options and Strategic Games Under Different Information
Structures.” Strategic Management Journal 39, Issue 1
(January 2018): 242–266.

https://www.mindtools.com/pages/article/newTMC_05.htm

https://www.google.com/search?q=swot+analysis&tbm=isch&tbo=u&source=univ&sa=X&ved=0ahUKEwjokNTanonWAhUIPiYKHdfeAOQQsAQIeQ&biw=1295&bih=743

https://www.google.com/search?q=strategic+management+models&client=safari&rls=en&tbm=isch&tbo=u&source=univ&sa=X&ved=0ahUKEwjh7ZfjoYnWAhVG7CYKHcNgBQcQsAQIgwE&biw=1295&bih=743https://www.google.com/search?q=strategic+management+models&client=safari&rls=en&tbm=isch&tbo=u&source=univ&sa=X&ved=0ahUKEwjh7ZfjoYnWAhVG7CYKHcNgBQcQsAQIgwE&biw=1295&bih=743

https://strategicmanagement.net/%E2%80%94publishes

http://www.mckinsey.com%E2%80%94perhaps

https://www.google.com/search?q=swot+analysis&tbm=isch&tbo=u&source=univ&sa=X&ved=0ahUKEwjokNTanonWAhUIPiYKHdfeAOQQsAQIeQ&biw=1295&bih=743

https://www.google.com/search?q=strategic+management+models&client=safari&rls=en&tbm=isch&tbo=u&source=univ&sa=X&ved=0ahUKEwjh7ZfjoYnWAhVG7CYKHcNgBQcQsAQIgwE&biw=1295&bih=743

http://www.strategyassociation.org/

CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 55

Mankins, Michael, Karen Harris, and David Harding. “Strategy
in the Age of Superabundant Capital.” Harvard Business
Review 95, Issue 2 (March/April 2017): 66–75.

McIntyre, David P., and Arati Srinivasan. “Networks,
Platforms, and Strategy: Emerging Views and Next Steps.”
Strategic Management Journal 38, Issue 1 (January 2017):
141–160.

Menon, Anoop. “Bringing Cognition into Strategic
Interactions: Strategic Mental Models and Open
Questions.” Strategic Management Journal 39, Issue 1
(January 2018): 168–192.

Miles, Sandra Jeanquart, and Mark Van Clieaf, “Strategic Fit: Key
to Growing Enterprise Value Through Organizational Capital.
Business Horizons 60, Issue 1 (January 2017): 55–65.

Ramirez, Rafael, Steve Churchhouse, Alejandra Palermo, and
Jonas Hoffmann. “Using Scenario Planning to Reshape

Strategy.” MIT Sloan Management Review 58, Issue 4
(Summer 2017): 31–37.

Ross, Jeanne W., Ina M. Sebastian, and Cynthia M. Beath,
“How to Develop a Great Digital Strategy.” Sloan
Management Review 58, Issue 2 (Winter 2017): 7–9.

Trigeorgis, Lenos and Jeffrey J. Reuer. “Real Options Theory
in Strategic Management.” Strategic Management Journal
38, Issue 1 (January 2017): 42–63.

Wolf, Carolina, and Steven W. Floyd. “Strategic Planning
Research: Toward a Theory-Driven Agenda.” Journal of
Management 43, Issue 6 (July 2017): 1754–1788.

Zhao, Eric Yanfei, Greg Fisher, Michael Lounsbury, and Danny
Miller. “Optimal Distinctiveness: Broadening the Interface
Between Institutional Theory and Strategic Management.”
Strategic Management Journal 38, Issue 1 (January 2017):
93–113.

Endnotes
1. Fred R. David, “How Companies Define Their Mission,”

Long Range Planning 22, no. 1 (February 1989): 91. See

also Anik Ratnaningsih, Nadjadji Anwar, Patdono Su-

wignjo, and Putu Artama Wiguna, “Balance Scorecard

of David’s Strategic Modeling at Industrial Business for

National Construction Contractor of Indonesia,” Journal of

Mathematics and Technology, no. 4 (October 2010): 20.

2. G. L. Schwenk and K. Schrader, “Effects of Formal Stra-

tegic Planning in Financial Performance in Small Firms: A

Meta-Analysis,” Entrepreneurship and Practice 3, no. 17

(1993): 53–64.

3. Peter Drucker, Management: Tasks, Responsibilities, and

Practices (New York: Harper & Row, 1974), 611.

4. Alfred Sloan, Jr., Adventures of the White Collar Man

(New York: Doubleday, 1941), 104.

5. Quoted in Eugene Raudsepp, “Can You Trust Your

Hunches?” Management Review 49, no. 4 (April 1960): 7.

6. Stephen Harper, “Intuition: What Separates Executives

from Managers,” Business Horizons 31, no. 5 (September–

October 1988): 16.

7. Ron Nelson, “How to Be a Manager,” Success (July–August

1985): 69.

8. Bruce Henderson, Henderson on Corporate Strategy (Boston:

Abt Books, 1979), 6.

9. Robert Waterman, Jr., The Renewal Factor: How the Best Get

and Keep the Competitive Edge (New York: Bantam, 1987).

See also BusinessWeek, September 14, 1987, 100; and Acad-

emy of Management Executive 3, no. 2 (May 1989): 115.

10. John Pearce, II, and Fred David, “The Bottom Line on

Corporate Mission Statements,” Academy of Management

Executive 1, no. 2 (May 1987): 109.

11. Heinz Weihrich, “The TOWS Matrix: A Tool for Situational

Analysis,” Long Range Planning 15, no. 2 (April 1982): 61.

Note: Although Dr. Weihrich first modified SWOT analysis

to form the TOWS matrix, the acronym SWOT is much

more widely used than TOWS in practice. See also Marilyn

Helms and Judy Nixon, “Exploring SWOT Analysis—

Where Are We Now?” Journal of Strategy and Manage-

ment 3, no. 3 (2010): 215–251.

12. Based on www.des.calstate.edu/limitations.html and

www.entarga.com/stratplan/purposes.html

13. Victoria Neufeldt, ed. Webster’s New World Dictionary,

4th ed. (Hoboken, NJ: Pearson, 1998). Pearson purchased

this dictionary from Simon & Schuster in 1998, but sold it

to IDG Books in 1999.

14. Frederick Gluck, “Taking the Mystique Out of Planning,”

Across the Board (July–August 1985), 59.

http://www.des.calstate.edu/limitations.html

http://www.entarga.com/stratplan/purposes.html

56 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT

THE COHESION CASE

Coca-Cola Company, 2018
BY FRED R. DAVID

www.coca-cola.com , KO

Headquartered in Atlanta, Georgia, Coca-Cola Company (Coke) is the world’s largest producer

and distributor of beverages, marketing over 500 nonalcoholic brands in more than 200 countries.

Coke has 21 billion-dollar brands, 19 of which are available in lower- and no-sugar options. Four

of the top five beverages sold globally are Coke products: 1) Coca-Cola, 2) Diet Coke, 3) Fanta,

and 4) Sprite. Other Coke products include Dasani waters, Fanta, Gold Peak teas and coffees,

Honest Tea, Powerade sports drinks, Simply juices, Glaceau Smartwater, Sprite, and Zico coconut

water. However, company’s revenues for 2017 declined 15 percent, so rumblings are spreading

within the firm.

Coke brands sold mostly outside the United States include Ayataka green tea in Japan, I LOHAS

water in Japan, Ice Dew water in China, FUZE TEA outside the United States, Minute Maid Pulpy in

Asia Pacific, Georgia coffee in Japan, and Del Valle in Latin America. Five large independent bottling

companies supply Coke with 39 percent of their bottling needs, led by Coca-Cola FEMSA that sup-

plies central Mexico and countries in Latin and South America.

Coke revenues have declined every year for nearly a decade, usually accompanied by net income

declines. Since 2005, sales of diet soda in general have dropped every year, a combined 34 percent.

Although Diet Coke is the weakest link in the company’s whole soda lineup, the brand is still the third

best-selling carbonated drink in the United States.

Environmentalists are complaining, saying Coke produces 110 million plastic bottles annually

that end up in landfills and oceans. To combat this complaint, the company launched in 2018 its

“World Without Waste” initiative. Coke needs a good strategic plan because its customer base is erod-

ing and its shareholders want sustained 5 percent annual growth in revenues and profits—and not

declines—every year.

History
Founded in 1886, Coke’s flagship product Coca-Cola was invented in 1886 by pharmacist John Pemberton

in Columbus, Georgia. Coke has operated a franchised distribution system since 1889, whereby the com-

pany only produces syrup concentrate, which is then sold to various bottlers throughout the world, who

hold exclusive territories.

Interestingly, the big, jolly man in the red suit with a white beard (Santa Claus), did not always

look that way. In 1931, Coke paid illustrator Haddon Sundblom to create advertising images depicting

a jolly, plump, red (like Coke cans) dressed, warm, friendly Santa Claus delivering toys to children.

To create the new Santa ads, Sundblom used Clement Clark Moore’s 1822 poem “A Visit from

St. Nicholas” (commonly called “’Twas the Night Before Christmas”).

Coke’s new Santa advertisements debuted in 1931 in magazines such as The Saturday Evening

Post, National Geographic, The New Yorker , and others. Before 1931, Santa was depicted as every-

thing from a tall gaunt man to a spooky-looking elf. He was often shown wearing a bishop’s robe

and a Norse huntsman’s animal skin. From 1931 to 1934, Coke ads featuring the new Santa Claus

changed the whole world’s view of Santa; these original images of Santa are valuable works of art

even today.

In 2010, Coke became the first brand to exceed 1 billion euros in annual United Kingdom

grocery sales. In January 2018, in the United States, Coke introduced its slimmer 12-ounce Diet

Coke can, updating the logo and offering the 35-year-old drink four new flavors: mango, cherry,

blood orange, and ginger lime. Diet Coke sales have declined as more people switch to other

low-calorie drinks, such as flavored fizzy water. The company said the new flavors and look—

with a different color vertical stripe for each flavor and red for plain—are aimed at appealing to

millennials (people ages 18 to 34). Coke tested more than 30 flavors before settling on the four

new ones.

http://www.coca-cola.com

CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 57

Core Values, Vision, and Mission
Provided on the corporate website, Coke’s core values center on seven words: leadership, collaboration,

integrity, accountability, passion, diversity, and quality. Coke’s vision statement has not changed in more

than a decade; provided on the corporate website, it reads (paraphrased):

People: To be a workplace where people are inspired to be the best they can be.

Portfolio: To offer quality beverage brands that anticipate/satisfy consumer desires/needs.

Partners: To nurture customers and suppliers working together to provide value.

Planet: To be a responsible citizen helping build and support sustainable communities.

Profit: To maximize long-term return to shareowners given our overall responsibilities.

Productivity: To be an effective, lean, and fast-moving company.

Coke’s mission statement too has not changed in more than a decade and is given on the corporate

website; it reads (paraphrased): “To refresh the planet; to create moments of optimism and happiness;

to provide value and make a difference.”

Business Ethics and Diversity

The Coke website says the company “directs zero advertising targeted to children under age 12.” Also,

in regards to business ethics, the company places substantial nutrition information, including calories,

on the front of most of their cans and packages. A wide range of packaging sizes are provided and

over 100 reduced, low, or no-calorie beverages.

Coke annually publishes an elaborate Sustainability Report that details the company’s water stew-

ardship, women’s economic empowerment, and philanthropic giving. In addition, the company’s year

2020 sustainability goals include the firm giving back 1 percent of the company’s operating income

annually, and recovering 75 percent of the recyclable bottles and cans introduced into developed mar-

kets. The report is available on the corporate website.

Financial Position
Coke’s fiscal year ends on December 31. As indicated in Exhibit 1, Coke posted revenues of $35.4 billion

in 2017, compared to $41.8 billion in 2016, a 15 percent decline. Net income was $1.28 billion compared

to $6.66 billion in 2016, an 81 percent decline. Declines in both of these numbers are alarming. Note all the

negative numbers in Exhibit 1, even though for most companies 2017 was a very properous year.

Coke’s balance sheets are provided in Exhibit 2. Note that Coke purchased $3.7 billion of its

own stock in 2017. In 2017, Coke paid $5 billion out to shareholders in dividends even though the

company’s net income was only $1.28 billion. Thus, basically the company borrowed money to pay

dividends; this event resulted in a negative retained earnings for the year 2017 and a large drop in re-

tained earnings on the 2017 balance sheet, as shown in Exhibit 2. Note in Exhibit 2 that Coke’s paid-

in-capital increased a whopping 89 percent in 2017 revealing high use of equity as a source of capital.

EXHIBIT 1 Coke’s Income Statements (in millions of dollars)

Income Statement 12/31/16 12/31/17 Percent Change

Revenues $41,863 $35,410 -15.41%

Cost of Goods Sold 16,465 13,256 -19.49%

Gross Profit 25,398 22,154 -12.77%

Operating Expenses 16,772 14,653 -12.63%

EBIT 8,626 7,501 -13.04%

Interest Expense 490 759 54.90%

EBT 8,136 6,742 -17.13%

Tax 1,586 5,560 250.57%

Non-Recurring Events (23) 66 NA

Net Income 6,527 1,248 -80.88%

Source: Based on information at www.coca-colacompany.com

58 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT

EXHIBIT 2 Coke’s Balance Sheets (in millions of dollars)

Balance Sheet 12/31/16 12/31/17 Percent Change

Assets

Cash and Short Term Investments $18,150 $15,358 -15%

Accounts Receivable 3,856 3,667 -5%

Inventory 2,675 2,655 -1%

Other Current Assets 9,329 14,865 59%

Total Current Assets 34,010 36,545 7%

Property Plant & Equipment 10,635 8,203 -23%

Goodwill 10,629 9,401 -12%

Intangibles 726 368 -49%

Other Long-Term Assets 31,270 33.379 7%

Total Assets 87,270 87,896 1%

Liabilities

Accounts Payable 9,490 8,748 -8%

Other Current Liabilities 17,042 18,446 8%

Total Current Liabilities 26,532 27,194 2%

Long-Term Debt 29,684 31,182 5%

Other Long-Term Liabilities 7,834 10,543 35%

Total Liabilities 64,050 68,919 8%

Equity

Common Stock 1,760 1,760 0%

Retained Earnings 65,502 60,430 -8%

Treasury Stock (47,988) (50,677) 6%

Paid in Capital & Other 3,946 7,464 89%

Total Equity 23,220 18,977 -18%

Total Liabilities and Equity 87,270 87,896 1%

Source: Based on information at www.coca-colacompany.com

Exhibit 3 reveals that Coke spends about $4 billion annually to advertise its beverages. Note also

in Exhibit 3 that the company is intent on increasing its dividends paid every year even if it has to bor-

row money to make this payment. The company’s long-term debt is creeping up every year.

Operating Segments
Regarding 2017 cases of beverages sold, the USA accounted for 19 percent of the company total; case

volume outside the USA accounted for 81 percent of sales. Of the 19 percent of cases sold in the USA, 62

percent were sparkling soft drinks.

The four countries outside the United States that Coke sells most to are Mexico, China, Brazil,

and Japan. These four countries accounted for 31 percent of Coke’s outside-USA sales in 2017, and

71 percent of these sales were of sparkling soft drinks. Coke’s revenues derived from the United

States compared to the rest of the world through 2016 are given in Exhibit 4; the company did not

provide this breakdown in 2017, perhaps because of significant declines. Note the decreases in 2016

on all three rows.

CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 59

Coke has five main operating segments: (1) Europe, Middle East, and Africa, (2) Latin America,

(3) North America, (4) Asia Pacific, and (5) Bottling Investments. Revenues and operating profits by

segment are provided in Exhibit 5 and Exhibit 6, respectively. Note that North America generates 29.9

percent of coke revenues and 34.4 percent of operating income. Note that only one segment, Latin

America, showed an increase in operating income in 2017.

Source: Based on information at www.coca-colacompany.com

EXHIBIT 5 Coke’s Revenues by Segment (in millions of dollars)

2017 2016

1. Europe, Middle East, and Africa $7,374 $7,278

2. Latin America $4,029 $3,819

3. North America $10,637 $10,210

4. Asia Pacific $5,176 $5,294

5. Bottling Investments $10,605 $19,885

6. Corporate $138 $132

7. Eliminations ($2,549) ($4,755)

Total $35,410 $41,863

EXHIBIT 3 Coke Financial Data Across Key Variables (in millions of dollars)

2017 2016 2015

Advertising expenditures $3,958 $4,004 $3,976

Selling and distribution expenses $3,257 $5,177 $6,025

Treasury stock purchased $3,682 $3,681 $3,564

Number of shares repurchased 82 86 86

Average price per share of stock 44.09 $43.62 $41.33

Dividends paid 6,320 $6,043 $5,741

Long-term debt $31,182 $29,684 $28,311

Source: Based on information at www.coca-colacompany.com

EXHIBIT 4 Coke’s Revenues from the United States Compared to Outside the
United States (in millions of dollars)

2016 2015

United States $19,899 $20,360

Outside United States $21,964 $23,934

Total $41,863 $44,294

Source: Based on information at www.coca-colacompany.com

EXHIBIT 6 Coke’s Total Operating Income by Segment (in millions of dollars)

2017 2016

1. Europe, Middle East, and Africa $3,646 $3,676

2. Latin America $2,214 $1,951

3. North America $2,578 $2,582

4. Asia Pacific $2,163 $2,224

5. Bottling Investments ($1,117) ($137)

6. Corporate ($1,983) ($1,670)

Total $7,501 $8,626

Source: Based on information at www.coca-colacompany.com

60 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT

EXHIBIT 7 Coke’s Number of Cases Sold in 2017 Compared with 2016

Product Category Percentage Change in 2017 from 2016

1. Sparkling soft drinks –1

2. Juice, dairy, and plant-based beverages 00

3. Water, enhanced water, and sports drinks +1

4. Tea and coffee +2

Source: Based on company information.

rather than its beverages. Danone competes to a lesser degree with Coke. The number-three soft-drink

producer, Dr Pepper Snapple, produces and markets nonalcoholic beverages in the United States, Canada,

Mexico, and the Caribbean. Exhibit 9 reveals the top 10 beverages sold in the United States. Note that

Coke, inclusive of Coke Zero, Diet Coke, and other brands, lead among the top 10, but PepsiCo has four

brands in the top 10. In the percentage-change column in Exhibit 9, notice that bottled water has the

largest growth.

Source: Based on information at www.coca-colacompany.com

1. Muhtar Kent, CEO and Chairman of the Board of Directors

2. Marcos de Quinto, EVP and Chief Marketing Officer

3. Ceree Eberly, SVP and Chief People Officer

4. Bernhard Goepelt, SVP and General Counsel

5. Julie Hamilton, SVP and Chief Customer and Commercial Leadership Officer

6. James Quincey, President and COO

7. Brent Hastie, SVP, Strategy and Planning

8. Ed Hayes, SVP and Chief Technical Officer

9. Barry Simpson, SVP and CIO

3 4 5 6 7 8 9 10 11

13 14 15 16

10. Clyde C. Tuggle, SVP and Chief Public Affairs and Communications Officer

11. Kathy Waller, EVP and CFO

12. John Murphy, President of the Asia Pacific Group

13. Irial Finan, EVP and President, Bottling Investments Group

14. J. Alexander M. Douglas, Jr., EVP and President of Coca-Cola North America

15. Alfredo Rivera, President of the Latin America Group

16. Brian Smith, President of the Europe, Middle East, and Africa Group

EXHIBIT 8 Coke’s Top Executive Officers and Organizational Chart

Regarding number of cases of various product lines sold in 2017, Exhibit 7 reveals that only two

of four categories increased: (1) Water, enhanced water, and sports drinks, up 1 percent, and (2) Tea

and coffee, up 2 percent.

Organizational Structure
Coke’s top executives and organizational structure are given in Exhibit 8. Note the segment top persons

(#12, 13, 14, 15, 16) report to the COO (# 6).

Competitors
PepsiCo, Inc. and Dr Pepper Snapple are Coke’s two primary competitors, but other rival firms include

Nestlé SA, Groupe Danone, Suntory Beverage & Food Limited (“Suntory”), and Monster Beverage

Corporation. Unlike Coke, PepsiCo derives most of its revenues and growth from its snack food business

CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 61

EXHIBIT 10 A Comparison of Coke to Two Big Rivals

COKE DR PEPPER PEPSICO

Market Capitalization $ 197B $ 17B $ 167B

# of Employees 100,300 20,000 264,000

Revenue $ 41.8B $ 6.6B $ 63.5B

Profit Margin 10.68% 11.73% 10.97%

EBITDA $ 10.9B $ 1.6B $ 12.6B

Operating Margin 24.14% 20.73% 16.4%

Net Income $ 6.5B $ 770M 47.0B

ROA 6.23% 9.09% 8.56%

EPS $ 0.95 $ 4.17 $ 4.84

As indicated in Exhibit 10, Coke is 11 times larger than Dr Pepper Snapple and is 18 percent

larger than PepsiCo based on market capitalization (stock price times number of shares outstanding).

However, PepsiCo is much larger than Coke on numerous other variables as given.

EXHIBIT 9 Coke and Rival Firms on Top Beverage Brands Sold (2016 and 2015)

Brand Firms
Millions of
Gallons 2015

Millions of
Gallons 2016

Percentage
Change

Share in
Total 2015

Share in
Total 2016

1. Coke (all types) Coca-Cola 3,994 3,933 (1.5) 12.6 12.0

2. Pepsi (all types) PepsiCo 1,946 1,859 (4.5) 6.1 5.6

3. Mountain Dew PepsiCo 1,343 1,333 (0.7) 4.2 4.1

4. Dr Pepper (all types) Dr Pepper

Snapple

1,160 1,168 0.7 3.6 3.5

5. Nestlé Pure Life Nestlé

NAmerica

1,075 1,085 1.0 3.4 3.3

6. Gatorade PepsiCo 1,042 1,082 3.8 3.3 3.3

7. Sprite Coca-Cola 866 897 3.6 2.7 2.7

8. Poland Spring Nestlé

NAmerica

758 836 10.3 2.4 2.5

9. Dasani Coca-Cola 707 743 5.0 2.2 2.3

10. Aquafina PepsiCo 546 605 10.9 1.7 1.8

TOP 10 13,437 13,541 0.8 42.2 41.2

Others 18,387 19,364 5.3 57.8 58.8

Total 31,824 32,904 3.4 100.0 100.0

Source: Based on information developed by Beverage Marketing Corporation.

PepsiCo, Inc. (PEP)

Headquartered in Purchase, New York, PepsiCo’s beverage products include Pepsi, Gatorade,

Mountain Dew, Diet Pepsi, Aquafina, Diet Mountain Dew, Tropicana Pure Premium, Mist Twist, and

Mug brands; and ready-to-drink tea and coffee, and juices. PepsiCo’s Frito-Lay segment offers Lays

and Ruffles potato chips; Doritos, Tostitos, and Santitas tortilla chips; and Cheetos cheese-flavored

snacks, branded dips, and Fritos corn chips. PepsiCo’s Quaker Foods segment provides Quaker oat-

meal, grits, rice cakes, granola, and oat squares; and Aunt Jemima mixes and syrups, Quaker Chewy

granola bars, Captain Crunch cereal, Life cereal, and Rice-A-Roni side dishes.

PepsiCo obtains about 60 percent of its revenues from food and snacks, not beverages. PepsiCo

and Coca-Cola are both investing in craft soda brands trying to reverse decreasing soda volume sales.

After acquiring two craft soda brands from Monster Beverages, Coca-Cola recently relaunched Blue

Sky and Hansen’s. A few days later, PepsiCo launched the 1893 Original Cola and Ginger Cola lines,

which are made with sparkling water, kola nut extract, and Fair Trade–certified sugar.

62 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT

PepsiCo is having trouble with its Gatorade energy drink brand whose sales in the United States

declined 0.5 percent to $5.9 billion in 2017. This was the brand’s first decline in annual sales since

2012. Gatorade accounts for about 20 percent of PepsiCo’s North American drink volume. The com-

pany released Gatorade Organic in August 2016 and made $20 million on that product through the

end of 2017. The sports-drink market is becoming highly competitive; even up-start BodyArmour, a

distant third in market share, is gaining rapidly on PepsiCo in sports drinks, such as Gatorade.

Dr Pepper Snapple Group, Inc. (DPS)

Headquartered in Plano, Texas, DPS manufactures nonalcoholic beverages in the United States,

Canada, Mexico, and the Caribbean. It also markets ready-to-drink teas, juices, juice drinks, water, and

mixers. The company offers brands such as: 7UP, A&W, Bai, Crush, Canada Dry, Schweppes, Sunkist

soda, Squirt, Hawaiian Punch, and RC Cola. DPS manufactures and sells Mott’s apple sauces. DPS’s

revenues increased slightly from $6.2 billion in 2014 to $6.3 billion in 2015, to $6.4 billion in 2016,

to $6.7 in 2017. DPS’s net income also has increased slightly every year, from $703 million in 2014

to $770 million in 2017. DPS recently acquired Bai Brands for about $1.7 billion. DPS currently has

about 8.5 percent of the U.S. nonalcoholic beverage market, according to Euromonitor International.

DPS owns seven of the top 10 noncola soft drinks on the market. Third-quarter (Q3) 2017 results

showed DPS’s carbonated soft drinks decreasing 1 percent, whereas its noncarbonated beverages in-

creased 6 percent. Q3 showed flat sales in the United States and Canada, but sales in Mexico and the

Caribbean increased 2 percent. Also for Q3, the DPS brand named Clamato grew 7 percent and Mott’s

sauce sales grew 5 percent, but Snapple sales declined 5 percent.

The big news in the beverage industry is that Keurig Green Mountain, the maker of Keurig K-Cup

coffee machines, acquired Dr Pepper Snapple in 2018. Keurig is privately owned by JAB Holdings,

one of Europe’s largest investment firms; JAB also owns Peeet’s Coffee, Panera Bread, and Krispy

Kreme doughnuts. JAB is a privately held fund that manages the money of the Reimann family, one

of Germany’s wealthiest families. This acquisition is aimed directly at both Coca-Cola and Starbucks

Corp. This acquisition puts Keurig in the global soda business and strengthens its coffee business.

Euromonitor reports that sales of ready-to-drink coffees increased more than 17 percent in 2017.

JAB’s partner in Keurig is Mondelez International that holds roughly 24 percent of the stock JAB, but

that percentage dropped to about 14 percent when the Dr Pepper acquisition was finalized. Keurig’s

revenue for 2017 was about $4.1 billion and its market share in the coffee-pod industry has declined

from 40 percent in 2013 to about 23 percent in 2017.

Groupe Danone

Headquartered in Paris, France, Groupe Danone is the number-one producer of yogurt in the world, the

number-two bottled water and baby nutrition manufacturer, number-one in manufacturing fresh dairy

products, and the European leader in medical nutrition. Danone’s primary brand in bottled water is Evian.

Danone sells flavored waters and focuses on health-conscious consumers. One brand is Levite, a big suc-

cess in Mexico. Danone continues to add new drinks in different markets, such as Taillefine Fiz in France,

which is a zero-calorie soda that has achieved a number-two ranking in the French low-calorie segment.

Danone is present in more than 130 markets and generated sales of €21.9 billion in 2016, with more than

half of that revenue coming from emerging countries. Fresh dairy products represent about 50 percent

of Danone’s total sales, early life nutrition 22 percent, water 21 percent, and medical nutrition 7 percent.

Monster Beverage Company (MNST)

Headquartered in Corona, California, Monster Beverage develops, markets, sells, and distributes

energy-drink beverages, sodas, or concentrates for energy-drink beverages, under brand names such as

Monster Energy, Monster Rehab, Monster Energy Extra Strength Nitrous Technology, Java Monster,

Muscle Monster, Mega Monster Energy, Punch Monster, Juice Monster, Ubermonster, BU, Mutant

Super Soda, Nalu, NOS, Burn, Mother, Ultra, Play and Power Play, Gladiator, Relentless, Samurai,

BPM, and Full Throttle.

Coca-Cola owns 16.7 percent of the Monster Beverage, which it purchased in 2015 for approx-

imately $2.15 billion. In addition to the equity stake, both companies’ strategic partnerships related

to business transfers and expanded global distribution. In October 2017, Coca-Cola transferred

ownership of all of its worldwide energy businesses including NOS, Full Throttle, and nine smaller

brands to Monster Beverage Company. At the same time, Monster transferred all of its nonenergy

drink businesses to Coca-Cola, including Hansen’s natural sodas, Peace Tea, Hubert’s Lemonade,

and Hansen’s juice products. As shown in Exhibit 10, energy drinks comprise 4.8 percent of all

nonalcoholic beverages sold.

CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 63

Monster Beverage’s sales for Q3 2017 that ended September 30, 2017, increased 11.5 percent to

$2.6 billion from $2.3 billion versus the prior year. Net income for Q3 was $619.4 million, compared

with $539.7 million the prior year. Net sales for Monster’s Strategic Brands segment, which includes

the various energy drink brands acquired from Coke, increased 6.2 percent to $76.6 million for that

Q3, up from $72.1 million the prior year. Monster’s sales to customers outside the United States in-

creased 36.3 percent to $260.1 million in that Q3, up from $190.8 million in the prior year period. Net

income for Q3 increased 14.1 percent to $218.7 million from $191.6 million in the prior year period.

The Nonalcoholic Beverage Industry
Exhibit 11 reveals the annual growth (or decline) in various categories of beverages. Notice declines in sales

of carbonated soft drinks and fruit drinks but rapid growth in sales of flavored and enhanced water and

ready-to-drink coffee.

Bottled Water

In 2016, bottled water surpassed carbonated soft drinks as the largest beverage category in the United

States by volume. Per-capita consumption of bottled water reached more than 39 gallons annually,

compared with around 38.5 gallons for carbonated soft drinks. Within the next decade, bottled water

consumption per capita is expected to surpass 50 gallons. The U.S. bottled water market showed

strong growth in terms of volume and revenues in the past 3 years. Bottled water sales are booming,

up 7.3, 7.9, and 8.6 percent in 2014, 2015, and 2016, respectively. By comparison, carbonated soft

drink volumes declined 2.1, 2.4, and 0.8 percent during those same years. According to BMC, in

2017, bottled water sales are projected to grow 8 to 9 percent, remaining the top nonalcoholic bever-

age for years to come, further confirmation of the shift in consumer preference toward healthier and

lower-calorie options.

Sparkling Water

Sparkling water is projected to outpace even bottled water in the next decade as consumers search

for tastier but healthier options. In fact, sparkling water sales surged more than 20 percent in 2017.

Flavored sparkling water sales grew by more than 15 percent in 2017 to $2.4 billion. To better reach

this flavored sparking water market, early in 2018 PepsiCo released its seltzer water brand called

Bubly. Other beverages also growing in sales are flavored and enhanced water, ready-to-drink

coffee, and energy drinks. Specifically, sales of flavored and enhanced water in the United States

increased 12.3 percent in 2016, followed by ready-to-drink coffee up 11 percent, and energy drinks

up 4.8 percent.

Given these positive trends, carbonated soft drinks still account for 83.5 percent of the bever-

ages industry’s market capitalization as of September 2017. In 2016, soda consumption in the United

States fell 0.8 percent, continuing the downward trend. Consequently, in Q2 2017, Coke reported

a 16 percent drop in net revenues to $9.7 billion. In that Q2, Coke reported increased volume for

juice, dairy, and plant-based beverages (with 3% growth), tea and coffee (2%), as well as water, en-

hanced water, and sports drinks (1%). Coke is shifting its portfolio toward smaller-sized packages and

healthier beverages. In August 2017, Coke replaced its Coke Zero products with the zero-sugar and

EXHIBIT 11 Annual Percentage Growth or Decline in Sales of Various Beverage
Categories 2016 and 2015 in the United States

Flavored & Enhanced Water +12.3

Ready-to-Drink Coffee +11.0

Bottled Water +8.6

Energy Drinks +4.8

Sports Drinks +3.9

Ready-to-Drink Tea +3.1

Carbonated Soft Drinks -0.8

Fruit Drinks -1.4

Total + 3.4

Source: Based on information developed by Beverage Marketing Corporation (BMC).

64 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT

zero-calorie brand Coke Zero Sugar. For PepsiCo, food and snacks volume increased 2 percent in the

first half of 2017, whereas beverages declined 1 percent.

R&D

To reverse revenue declines, beverage firms boosted R&D spending at an average annual rate of nearly

20 percent over the past 5 years. R&D spending is likely to remain high in 2017 and 2018 as beverage

companies strive to rejuvenate revenue growth. Developing flavored sparkling waters is an example.

Outside the United States

In 2016, international operations represented 62 percent of total nonbottling revenues at Coke and

42 percent at PepsiCo. Coke does business in countries using currencies other than the U.S. dollar,

including the euro, the Japanese yen, the Brazilian real, and the Mexican peso. Coke uses 72 curren-

cies in addition to the U.S. dollar. Unfavorable foreign currency exchange rates can have a significant

effect on reported revenue growth for global beverage manufacturers, especially because the U.S. dol-

lar’s value relative to foreign currencies is on average at a 3-year low.

There are uncertainties going forward in our major international markets, including the United

Kingdom’s impending withdrawal from the European Union, commonly referred to as “Brexit,” which

is due to be finalized as of December 2020 and unstable political conditions, including civil unrest

and governmental changes, in certain other international markets could undermine global consumer

confidence and reduce consumers’ purchasing power, thereby reducing demand for our products.

City, County, State, and Federal Taxes

Public health advocates are actively lobbying for tax referendums and legislation in more U.S. cities

to tax soda. Companies such as Coke and PepsiCo Soda spent nearly $70 million from 2009 to 2016

lobbying against soda taxes and warning label measures in U.S. cities and states, as well as an average

of about $15 million annually on federal lobbying, according to the consumer advocacy group Center

for Science in the Public Interest (CSPI). For example, beverage companies spent about $9.4 million

between January 2016 and June 2016 to oppose the Philadelphia City Council’s soda tax proposal, ac-

cording to CSPI’s estimates. Philadelphia eventually imposed a soda tax in June 2016, the first major

U.S. city (and the second city after Berkeley, California) to do so. In November 2016, three cities in

California (San Francisco, Albany, and Oakland) passed their own soda tax laws, as did Cook County,

Illinois (which includes Chicago) and Boulder, Colorado. In June 2017, Seattle implemented a tax of

1.75 cents per ounce on sugary drinks and soda. Chicago’s soda tax began in the Fall 2017.

Taxes on sugary beverages came into effect in Mexico on January 1, 2014, in an effort to combat obe-

sity in the country; higher product costs are likely to dampen demand, and tax revenue could help to fund

costs related to preventive actions and medical treatment. Mexico is the country with the biggest obesity

problem in the world, according to the Food and Agriculture Organization of the United Nations. This

will be a game changer for beverage companies exporting to Mexico (such as Coke). In 2015, soda sales

in Mexico plummeted 12 percent. Price-sensitive consumers are turning away from buying soda products.

Beverage Caloric Intake in the United States

The American Beverage Association reported in December 2017 that the average American drank

201.2 calories a day in 2016, up slightly from 2015. More than offsetting the decline in sales of

soda and juice in cans or bottles, sales of soda from fountains in restaurants are increasing. And

Americans are drinking more and more sweet tea at restaurants. In terms of liquid intake, the average

beverage calories consumed in the United States per capita per day in 2016 was sodas (126.7), juice

(42.5), teas (11.2), sports (10.6), and other (10.2) according to the Beverage Marketing Corporation.

Consumption of diet and low-calorie soda continues to fall, but consumption of sports and energy

drinks continues to rise at a faster rate.

Impulse Buying

PepsiCo is reinvesting some of the millions of dollars it is saving under the new tax laws in e-commerce,

which today accounts for roughly $1 billion in the company’s annual retail sales. PepsiCo is also in-

vesting savings in training for workers, cash returns for shareholders, and $100 million in employee

bonuses. The rise of online shopping is bad news for Coca-Cola and PepsiCo because impulse buy-

ing makes up roughly 30 percent of overall beverage sales. Without customers grabbing a Diet Pepsi

while checking out at Walmart or a two-liter bottle of Coke Zero at the grocery store, the beverage

companies would be in big trouble. Sales of soft drinks by volume have dropped for 12 consecutive

years in the United States, so companies like Coca-Cola and PepsiCo need impulse buying, which is

being eroded by more online shopping. Coca-Cola is currently investigating click-and-collect grocery

sales, bundled deals (such as meal kits), and new impulse “triggers” online.

The Future
Coke swung from net income of $550 million in Q4 2016 to a net loss of $2.75 billion in Q4 2017. This

decline was mostly due to a one-time charge of $3.6 billion blamed on the new federal tax law, which forced

Coke to pay taxes on certain past offshore earnings. However, Coke supports the tax changes because its

effective tax rate is expected to decline to 21 percent in 2018.

The steady decline in consumption of carbonated beverages necessitates Coke formulating and

implementing new strategies going forward. The company needs a full-blown, comprehensive stra-

tegic plan to determine specific actions needed under the following general categories of strategies:

1. Further global expansion to tap markets not yet saturated

2. Continued product development to introduce new healthy drinks

3. Acquisition of small rival firms to gain growth in revenues

4. Continued market penetration with extensive advertising and promotion to shift consumer

perception away from unhealthiness to treating yourself with a soda

5. Continued shift to smaller cans and package sizes

6. Perhaps diversification into snacks and foods as PepsiCo has successfully done

7. Push aggressively into bottled water to capitalize on rapid growth in that sector

8. Develop natural sweeteners to replace artificial sweeteners

9. Increase lobbying to curtail city, county, and state sugar taxes

CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 65

ASSURANCE-OF-LEARNING EXERCISES

SET 1: STRATEGIC PLANNING FOR COCA-COLA

EXERCISE 1A

Gather Strategy Information for Coca-Cola
Company

Purpose

The primary purpose of this exercise is to show students how to obtain vital information for doing case

analysis or preparing a strategic plan for any publicly held firm. The secondary purpose is to familiarize

you with (1) strategy terms introduced in this chapter and (2) key sources of information for doing strategic

planning. Generally in a strategic-management course, teams of students prepare a strategic plan (case anal-

ysis) for some assigned company, so this exercise can assist in learning how to get started in such a project.

Instructions

Step 1 Read the Coca-Cola Cohesion Case and list what you consider to be the firm’s strengths,

weaknesses, opportunities, and threats. Then, go to the corporate website at www.coca-

colacompany.com, scroll down to the bottom of the website, and click on Investors. Click

Annual Reports and then click 2017 Annual Report or Form 10K. Download this pdf file to

your desktop; peruse the information and add to your list of Coca-Cola’s strengths, weak-

nesses, opportunities, and threats.

Step 2 Go to your college library website and download to your desktop Standard & Poor’s Industry

Surveys PDF file for the beverage industry. Use this information to add to your list of Coca-

Cola’s strengths, weaknesses, opportunities, and threats.

Step 3 Go to the www.finance.yahoo.com website. Enter the stock symbol KO. Note the wealth

of information on Coca-Cola that may be obtained by clicking any item along the row

below the company name. Use this data to refine your lists of key external and internal

factors. Each factor listed for this exercise should include a percentage, number, dollar, or

ratio to reveal some quantified fact or trend. These factors provide the underlying basis for

a strategic plan because a firm strives to take advantage of strengths, improve weaknesses,

avoid threats, and capitalize on opportunities. Avoid vagueness in strategic planning.

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66 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT

Step 4 Through class discussion, compare your lists of external and internal factors to those devel-

oped by other students and modify your lists as needed. Save this information for use in later

exercises in the book.

Step 5 Whatever case company you work on this semester, update the information on your com-

pany by following the steps listed above.

EXERCISE 1B

Enter Coca-Cola Vitals into the Strategic Planning
Template

Purpose

The purpose of this exercise is to give you practice using resources at the author website (www.strategyclub

.com), especially the Excel strategic planning template. Thousands of students annually find the author website

resources to be immensely useful in preparing and delivering a strategic management case analysis.

Instructions

Step 1 Go to the www.strategyclub.com website. Review the following resources:

• Excel student template

• Example sample case analysis PowerPoint

• Live author videos

• Live case analysis presentation on Barnes and Noble

• Chapter and case updates

• Guidelines for presenting a strategic plan or case analysis

Step 2 Download the free Excel strategic-planning template. Read carefully instructions given with

the template.

Step 3 Using your Exercise 1A results, enter Coca-Cola’s strengths, weaknesses, opportunities, and

threats into the Excel template.

Step 4 Save this file for use in later exercises.

SET 2: STRATEGIC PLANNING FOR MY UNIVERSITY

EXERCISE 1C

Perform SWOT Analysis for My University

Purpose

The purpose of this exercise is to apply SWOT analysis to a nonprofit organization—namely your

college or university. SWOT analysis is the most widely used of all strategic planning tools and

techniques because it is conceptually simple and lends itself readily to discussion among manag-

ers. SWOT analysis formulates strategies by matching an organization’s internal strengths and

weaknesses with external opportunities and threats to generate feasible strategies to be considered.

For a university, external factors could include declining numbers of high school graduates;

population shifts; community relations; increased competitiveness among colleges and universi-

ties; rising numbers of adults returning to college; decreased support from local, state, and federal

agencies; increasing numbers of foreign students attending U.S. colleges; and a rising number of

Internet courses.

Internal factors of a college or university could be related to faculty, students, staff, alumni,

athletic programs, physical plant, grounds and maintenance, student housing, administration, fund-

raising, academic programs, food services, parking, placement, clubs, fraternities, sororities, and

public relations.

Instructions

Step 1 For your university, identify four External Opportunities, four External Threats, four Internal

Strengths, and four Internal Weaknesses.

Step 2 Match your external with internal factors to develop or generate two SO Strategies, two WO

Strategies, two ST Strategies, and two WT Strategies. For example, an SO Strategy to “Double

the number of online course offerings in three years” could be developed or generated based

CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 67

on a strength “world renown faculty” coupled with an opportunity “rising interest in online

courses.”

Step 3 Discuss your key factors and strategies as a class.

Step 4 What new things did you learn about your university from the class discussion? How could this

type of discussion benefit an organization? Save your answers and work for use in late exercises.

SET 3: STRATEGIC PLANNING TO ENHANCE MY EMPLOYABILITY

EXERCISE 1D

Perform SWOT Analysis on Myself

Purpose

This exercise can help you decide on the best career path for yourself. Individuals and organizations

are alike in many ways. Each has competitors and each should plan for the future. Every individual

(and organization) faces some external opportunities and threats, some internal strengths and weak-

nesses, and reaches pivotal forks in the road. These and other similarities make it possible for in-

dividuals to use many corporate strategic-management concepts and tools such as SWOT analysis.

Instructions

Introduced in this chapter, SWOT analysis a popular strategic planning tool that can help individuals

in career planning. Individuals can perform SWOT analysis by completing the following six steps:

1. Identify four external opportunities you face.

2. Identify four external threats you face.

3. Identify four of your personal strengths.

4. Identify four personal weaknesses.

5. Develop SO (strength-opportunity), WO (weakness-opportunity), ST (strength-threat), WT

(weakness-threat) strategies—two strategies of each type, thus eight strategies total.

6. Select three strategies to implement.

An external opportunity could be, for example, that your university offers a graduate program that

interests you, whereas an external threat could be that interest rates are rising precluding getting a

loan. A weakness could be a low grade-point average, whereas a personal strength may be three years

of work experience. Strategy is sometimes defined as “the match” a person (or firm) makes between

its internal resources and skills and the opportunities and risks created by its external factors. When a

person has major weaknesses, he or she should strive to overcome them and perhaps convert them into

strengths. When a person faces major threats, they should seek to avoid or mitigate the effects of them

to focus on opportunities. Even though SWOT analysis is explained considerably more in Chapter 6,

give it a try here to help in planning your next career move.

SET 4: INDIVIDUAL VERSUS GROUP STRATEGIC PLANNING

EXERCISE 1E

How Detrimental Are Various Pitfalls in
Strategic Planning?

Purpose

Whenever a firm engages in strategic planning, there are certain potholes or pitfalls that need to be

avoided. Being aware of potential pitfalls and being prepared to address them is essential to suc-

cess. A list of thirteen pitfalls that commonly plague firms and undermine strategic-planning efforts

follows. These can be ranked in terms of how potentially detrimental or severe they are in doing

strategic planning. This exercise reveals the authors’ ranking of the thirteen pitfalls in terms of how

potentially detrimental or severe they are in doing strategic planning.

68 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT

Pitfalls

1. Using strategic planning to gain control over decisions and resources

2. Doing strategic planning only to satisfy accreditation or regulatory requirements

3. Too hastily moving from mission development to strategy formulation

4. Failing to communicate the plan to employees, who continue working in the dark

5. Top managers making many intuitive decisions that conflict with the formal plan

6. Top managers not actively supporting the strategic-planning process

7. Failing to use plans as a standard for measuring performance

8. Delegating planning to a “planner” rather than involving all managers

9. Failing to involve key employees in all phases of planning

10. Failing to create a collaborative climate supportive of change

11. Viewing planning as unnecessary or unimportant

12. Becoming so engrossed in current problems that insufficient or no planning is done

13. Being so formal in planning that flexibility and creativity are stifled

The purpose of this exercise is to examine and discuss how potentially detrimental or severe the

various pitfalls are in doing strategic planning. In addition, the purpose of this exercise is to examine

whether individual decision making is better than group decision making. Academic research sug-

gests that groups make better decisions than individuals about 80 percent of the time.

Steps

1. Fill in Column 1 in Table 1-9 to reveal your individual ranking of how potentially detrimental

to strategic planning the pitfalls are, where 1 = most detrimental to 13 = least detrimental. For

example, if you feel Pitfall 1 is the fifth most detrimental, then enter a 5 in Table 1 in Column 1

beside Pitfall 1.

2. Fill in Column 2 in Table 1-9 to reveal your group’s ranking of the thirteen pitfalls.

3. Fill in Column 3 in Table 1-9 to reveal the expert’s ranking of the thirteen pitfalls. (To be provided by

your professor, the expert rankings are based on the authors’ experience and the end of the chapter.)

4. Fill in Column 4 in Table 1-9 to reveal the absolute difference between Column 1 and Column 3

to reveal how well you performed as an individual in this exercise. (Note: For absolute difference,

disregard negative numbers.)

TABLE 1-9 Pitfalls in Doing Strategic Planning: Comparing Individual versus
Group Decision Making

Pitfalls to Avoid In Column 1 Column 2 Column 3 Column 4 Column 5

Doing Strategic Planning

10.

11.

12.

13.

SUM

CHAPTER 1 • THE NATuRE OF STRATEGIC MANAGEMENT 69

5. Fill in Column 5 in Table 1-9 to reveal the absolute difference between Column 2 and Column 3

to reveal how well your group performed in this exercise.

6. Sum Column 4. Sum Column 5.

7. Compare the Column 4 sum with the Column 5 sum. If your Column 4 sum is less than your

Column 5 sum, then you performed better as an individual than as a group. Normally, group

decision making is superior to individual decision making, so if you did better than your group,

you did excellent.

8. The Individual Winner(s): The individual(s) with the lowest Column 4 sum is the WINNER.

9. The Group Winners(s): The group(s) with the lowest Column 5 score is the WINNER.

2
PART 2

STRATEGY FORMULATION

Strategy
Formulation

Feedback Loop

Strategy
Implementation

Strategy
Evaluation

Chapter 10: Business Ethics, Environmental Sustainability, and Social Responsibility

Chapter 11: Global and International Issues

Strategy
Evaluation

and
Governance
Chapter 9

Implementing
Strategies:

Finance and
Accounting

Issues
Chapter 8

Implementing
Strategies:

Management
and Marketing

Issues
Chapter 7

Strategies
in Action
Chapter 5

Strategy
Analysis and

Choice
Chapter 6

The
Internal

Assessment
Chapter 4

The External
Assessment
Chapter 3

Business
Vision and

Mission
Chapter 2

FIGURE 2- 1

The Comprehensive, Integrative Strategic-Management Model

LEARNING OBJECTIVES

After studying this chapter, you should be able to do the following:

2- 1. Explain the need for core values statements in strategic management.

2- 2. Describe the nature and role of vision statements in strategic management.

2- 3. Identify the characteristics of a vision statement.

2- 4. Describe the nature and role of mission statements in strategic management.

2- 5. Identify and discuss the characteristics of an effective mission statement.

2- 6. Identify and discuss the components of mission statements.

2- 7. Discuss the benefits for a firm of having clear vision and mission statements.

2- 8. Evaluate and write mission statements for different organizations.

ASSURANCE-OF-LEARNING EXERCISES

The following exercises are found at the end of this chapter:

SET 1 : Strategic Planning for Coca-Cola

EXERCISE 2A : Develop an Improved Coca-Cola Vision Statement

EXERCISE 2B : Develop an Improved Coca-Cola Mission Statement

EXERCISE 2C : Compare Coca-Cola’s Mission Statement to a Rival Firm’s

SET 2 : Strategic Planning for My University

EXERCISE 2D : Compare Your University’s Vision and Mission Statement to Those
of a Rival Institution

SET 3 : Strategic Planning for Myself

EXERCISE 2E : Develop a Vision and Mission Statement for Yourself

SET 4 : Individual versus Group Strategic Planning

EXERCISE 2F : What Is the Relative Importance of Each of the Nine Components
of a Mission Statement?

Business Vision
and Mission

MyLab Management

Improve Your Grade!

If your instructor is using MyLab Management, visit www.pearson.com/mylab/management

for videos, simulations, and writing exercises.

http://jobs.aol.com/articles/2015/07/06/linkedin-ceo-jeff-weiner-leadership-qualities/?SiteID=cbaolcompromotion_july_14.Also

72 PART 2 • STRATEGY FORMuLATION

C
hapter 2 focuses on the concepts and tools needed to evaluate and write core values,

vision, and mission statements. As illustrated with shading in Figure 2-1, carefully

prepared statements of vision and mission are widely recognized by both practitioners and

academicians as the first step in strategic management. Actual vision and mission statements from

large and small organizations and for-profit and nonprofit enterprises are presented and critiqued.

The exemplary strategist showcased is Frederick Smith, whose entrepreneurial vision four de-

cades ago led to the creation of FedEx, a firm on a mission today to lead the package-delivery industry.

We can perhaps best understand core values, vision, and mission by focusing on a business

when it is first started. In the beginning, a new business is simply a collection of ideas. Starting a new

business rests on a set of beliefs that the organization can offer some product or service to some cus-

tomers in some geographic area using some type of technology at a profitable price. A new business

owner typically believes his or her philosophy of the new enterprise will result in a favorable pub-

lic image, and the business concept can be effectively communicated to and adopted by important

constituencies. When the ideas and beliefs about a business at its inception are put into writing, the

resulting documents mirror the same basic ideas that underlie core values, vision, and mission state-

ments. As a business grows, owners or managers may revise the founding set of beliefs, but those

original ideas usually are still reflected in core values, vision, and mission statements.

Core values, vision, and mission statements often can be found in the front of annual reports

and commonly displayed throughout a firm’s premises and distributed with company informa-

tion sent to constituencies. These statements are part of numerous internal reports, such as loan

requests, supplier agreements, labor relations contracts, business plans, and customer service

agreements. However, too many companies and organizations today have no core values, vision,

or mission statement, thus missing out on an incredible opportunity to motivate and energize

customers, employees, and shareholders, and also jeopardizing their strategic-planning efforts.

Core Values Statements: What Is Our Foundation?
Core values provide the needed ethical foundation for creating an excellent vision and mission. A

core values statement specifies a firm’s commitment to integrity, fairness, discipline, equal employ-

ment opportunity, teamwork, accountability, continuous improvement, or other such exemplary attri-

butes. For example, LinkedIn’s core values (paraphrased) are (1) customers first, (2) relationships

matter, (3) be open and honest, (4) require excellence, (5) take intelligent risks, and (6) act like an

LO 2.1

EXEMPLARY STRATEGIST SHOWCASED

Frederick W. Smith, Founder and
CEO of FedEx Corporation
Headquartered in Memphis, Tennessee, and founded in 1973 by

Frederick W. Smith, FedEx is one of the few Fortune 500 companies

still led today by its founder. Forty-five years and counting as CEO of

any company is quite exemplary, and his company’s vision and mission

have changed little in 45 years. Smith’s vision to more quickly deliver

time-sensitive mail enabled his company to bypass the U.S. Postal

Service and thereby revolutionize the transportation industry. Back in

1973 and in the years that followed, Smith turned his vision of quick

delivery into a reality and motivated thousands of workers to adopt

the FedEx mission. FedEx was the first U.S. company ever to earn $1

billion in revenues within its first 10 years of business without merging

or acquiring other firms. FedEx has grown into a $60 billion global

transportation, business services, and logistics iconic U.S. firm.

Led by Smith, FedEx today includes FedEx Services, FedEx

Ground, FedEx Freight, and FedEx Express, the latter of which has

the world’s largest all-cargo air fleet. Smith says the key to his

success has been “having an effective strategy and everyone under-

standing what the strategy is.” With a mission to offer flexible and

innovative solutions for everyone from entrepreneurs to large corpo-

rations, FedEx’s strategy is based on innovation and a clear purpose.

Many postal services that we take for granted today, such as track-

ing mail and packages, were pioneered by an exemplary strategist,

Frederick W. Smith.

Source: Based on the FedEx corporate website and a variety of other sources.

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Our Mission Is Fast Delivery

CHAPTER 2 • BuSINESS VISION AND MISSION 73

Vision Statements: What Do We Want to Become?
It is especially important for managers and executives in any firm to agree on the basic vision

the organization strives to achieve in the long term. A vision statement should answer the basic

question, “What do we want to become?” A clear vision provides the foundation for developing a

comprehensive mission statement. Many organizations have both a vision and mission statement,

but the vision statement should be established first. Examples of vision statements are provided

in Table 2-1. The vision statement should be short, preferably one sentence, and as many manag-

ers as possible should have input into developing the statement. In the book of Proverbs in the

Bible, Chapter 29, Verse 18, says, “Where there is no vision, the people perish.”

LO 2.2

GLOBAL CAPSULE 2

LinkedIn: Clear Core Values, Vision, and Mission Lead to Global Prominence
The social-networking site, LinkedIn, has a

network of more than 500 million registered

users in two hundred countries. LinkedIn has

grown globally as fast as almost any other

firm. How? The answer is having a clear

vision. LinkedIn’s CEO Jeff Weiner is the key.

Weiner has been voted the best CEO in the

United States. Weiner’s outstanding leader-

ship style has earned him the trust and admi-

ration of all LinkedIn employees. Weiner says

“a manager is someone who tells others what

to do, whereas a leader inspires others to do

great things.” When Weiner spoke at the Wisdom 2.0 conference in

San Francisco, he identified and explained the three most important

ingredients for being a great leader. Weiner says the most impor-

tant ingredient for a great leader is for that person to be clear

about the organization’s vision. Fred Kofman is LinkedIn’s VP of

leadership and organizational development; Kofman says:

Most CEOs sit at the front of a boat and tell their employ-

ees where they need to row; Weiner grabs a surfboard and

catches a huge wave, inspiring everyone behind him to do

the same. The surfers are all riding the same wave, sharing

the same vision, but are putting much more of their heart and

personality into their work than the grunts in the rowboat.

According to Weiner, the second-most important ingre-

dient for a leader is to be brave. Weiner says (paraphrased):

If you have true vision and

you want to try something

that has not been done

before, there will be a lot of

doubters, skeptics, people

who feel threatened, and

people who get in your way.

Thus, you have to exude

confidence to be able to

overcome those challenges

and for people to want to

follow you. You have to

be authentic and have true conviction or no one will get

behind you.

According to Weiner, the third-most important ingre-

dient necessary to be a great leader is to be an effective

communicator.

He explains that whenever a leader has these three ingredi-

ents, led by core values, vision, and mission, the job at hand

becomes “a matter of what objective you’re trying to achieve

and then surrounding yourself with the best talent you can.”

Source: Based on http://jobs.aol.com/articles/2015/07/06/linkedin-ceo-jeff-

weiner-leadership-qualities/?SiteID=cbaolcompromotion_july_14.Also,

https://www.cnbc.com/2017/06/28/linkedin-ceo-jeff-weiner-heres-what-

separates-leaders-from-managers.html and https://www. consciousculturegroup

.com/linkedin-vision-values-insights/

Should You Join Our Network?

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owner. Great firms possess core values that remain fixed and almost never change. The core values

of any firm should transcend technological changes, fads, product life cycles, and globalization.

Because vision and mission statements do change over time, it is vital to know who you are

before you can discuss what you want to become, what business are you in, or how will you get there.

Generally, if core values are open for change in the future, they are not core values. Disney for exam-

ple has a core value “to make people happy;” a technology firm may have a core value “to connect the

world.” Tyson Foods’ core values statement that guides the firm’s operations follows (paraphrased):

We are engaged in the production of food, seeking to pursue truth and integrity, while creating

value for our shareholders, customers, employees, and communities. We strive to be an honor-

able, faith-friendly company composed of diverse people. We feed the world with trusted food

products while being excellent stewards of the animals, land, and environment entrusted to us.

The Global Capsule 2 reveals how LinkedIn’s core values led to a vision and mission that

catapulted the company to global prominence.

https://www.cnbc.com/2017/06/28/linkedin-ceo-jeff-weiner-heres-what-separates-leaders-from-managers.html

https://www.�consciousculturegroup.com/linkedin-vision-values-insights/

74 PART 2 • STRATEGY FORMuLATION

For many corporations, profit rather than vision or mission is the primary motivator, but

profit alone is not enough to motivate people. It is not uncommon that profit is perceived nega-

tively by many stakeholders of a firm. For example, employees could see profit as something

that they earn and management then uses and even gives away to shareholders. Although this

perception is undesired and disturbing to management, it clearly indicates that both profit and

vision are needed to motivate a workforce effectively. Reuben Mark, former CEO of Colgate,

maintains that a clear vision increasingly must make sense internationally. Mark’s thoughts on

vision follows:

When it comes to rallying everyone to the corporate banner, it’s essential to push one vision

globally rather than trying to drive home different messages in different cultures. The trick is to

keep the vision simple but elevated: “We make the world’s fastest computers” or “Telephone

service for everyone.” You’re never going to get anyone to charge the machine guns only

for financial objectives. It’s got to be something that makes people feel better, feel a part of

something.1

When employees and managers together shape or fashion a vision statement of a firm, the

resultant document can reflect the personal visions that managers and employees have in their

hearts and minds about their own futures. Shared vision creates a commonality of interests that

can lift workers out of the monotony of daily work and put them into a new world of opportu-

nity, challenge, and belongingness. The motivation, dedication, and commitment associated with

shared vision is an immense potential benefit for any firm or organization.

Characteristics of a Vision Statement
A vision statement should reveal the type of business the firm conducts. For example, a vision

that says, “to become the best retail firm in the United States,” is too broad because that firm

could be selling anything from apples (A) to zebras (Z). Although typically a single sentence,

vision statements need to do more than identify the product or service a firm offers; vision

statements should be written from a customer perspective. Ideally every organization wants

its employees and customers to align their actions with the firm’s vision. To fulfill this need,

an excellent vision statement describes a desired future state. Being futuristic enables vision

statements to be used to facilitate organizational change. The statement needs to be doable but

challenging.

In summary, effective vision statements exhibit the following five characteristics; these five

attributes can be used as guidelines for writing or evaluating vision statements. Any vision state-

ment that scores a 5 out of 5 on these characteristics is exemplary. Let’s call this vision assess-

ment technique “The 5-out-of-5 Test.”

1. Clear: reveals type of industry and what firm strives to become

2. Futuristic: reveals what the firm strives to become or accomplish within five years

3. Concise: one sentence in length

4. Unique: reveals the firm’s competitive advantage

5. Inspiring: motivates the readers to support the firm

LO 2.3

TABLE 2-1 Six Exemplary Vision Statements (paraphrased)

• Dr Pepper Snapple: to be the best beverage business globally; our brands are synonymous with

refreshment, fun, and flavor today and tomorrow.

• IBM: to be the world’s most successful information technology company focused on helping custom-

ers apply technology to solve their problems now and in the future.

• Hilton Worldwide: to fill the Earth with the light and warmth of hospitality by delivering exceptional

experiences—every hotel and guest for all time.

• Starbucks: to be the premier purveyor of the finest coffee in the world while maintaining uncompro-

mising principles as we steadily grow.

• Kellogg: to enrich and delight the world through foods and brands that matter today and tomorrow.

• Harley-Davidson: to fulfill dreams through the experiences of motorcycling for all time.

CHAPTER 2 • BuSINESS VISION AND MISSION 75

Vision Statement Analysis

There is no one best vision statement for a particular company in a given industry, but the 5-out-

of-5 test can be used to both develop and evaluate vision statements. Six exemplary vision

statements that meet the 5-out-of-5 test are provided in Table 2-1. Notice the Harley-Davidson

statement meets the 5 criteria in just 11 words.

Four vision statements that do not meet the 5-out-of-5 test are given in Table 2-2.

TABLE 2-2 Four Nonexemplary Vision Statements (paraphrased)

1. Avon Products, Inc.: to be the firm that best understands and satisfies the product and service

needs of women globally. Author Comment: Lacks Characteristics 1, 2, and 4.

2. Charles Schwab Corporation: to help investors help themselves. Author Comment: Lacks Char-

acteristics 2, 4, and 5.

3. Instagram: to capture and share the world’s moments. Author Comment: Lacks Characteristics

1, 2, 4, and 5.

4. Zappos.com: to deliver happiness to customers, employees, and vendors. Author Comment:

Lacks Characteristics 1, 2, 4, and 5.

Key: Vision Statement Characteristics

1. Clear: reveals type of industry and what firm strives to become

2. Futuristic: reveals what the firm strives to become or accomplish in five years

3. Concise: one sentence in length

4. Unique: reveals the firm’s competitive advantage

5. Inspiring: motivates the reader to support the firm

Mission Statements: What Is Our Business?
Current thought on mission statements is based largely on guidelines set forth in the mid-1970s

by Peter Drucker, who is often called “the father of modern management” for his pioneering

studies at General Motors and for his 22 books and hundreds of articles. Drucker believes that

asking the question “What is our business?” is synonymous with asking “What is our mission?”

An enduring statement of purpose that distinguishes one organization from other similar enter-

prises, the mission statement, is a declaration of an organization’s “reason for being.” It answers

the pivotal question “What is our business?” A clear mission statement is essential for effectively

establishing objectives and formulating strategies.

Sometimes called a creed statement, a statement of purpose, a statement of philosophy, a

statement of beliefs, a statement of business principles, or a statement “defining our business,” a

mission statement reveals what an organization wants to be and who it wants to serve. All orga-

nizations have a reason for being, even if strategists have not consciously transformed this reason

into writing. Drucker has the following to say about mission statements (paraphrased):

A mission statement is the foundation for priorities, strategies, plans, and work assign-

ments. It is the starting point for the design of jobs and organizational structures. Nothing

may seem simpler or more obvious than to know what a company’s business is. A lumber

mill makes lumber, an airline carries passengers and freight, and a bank lends money. But

“What is our business?” is almost always a difficult question and the right answer is usually

anything but obvious. The answer to this question is the first responsibility of strategists.2

Some strategists spend almost every moment of every day on administrative and tactical concerns;

those who rush quickly to establish objectives and implement strategies often overlook the development

of a vision and mission statement. This problem is so widespread that many corporations, organizations,

and small businesses in the United States have not yet developed a formal vision or mission statement.

Some companies develop mission statements simply because owners or top management

believe it is fashionable, rather than out of any real commitment. However, firms that develop

and systematically revisit their vision and mission statements, treat them as living documents,

and consider them to be an integral part of the firm’s culture realize great benefits. For example,

LO 2.4

76 PART 2 • STRATEGY FORMuLATION

managers at Johnson & Johnson (J&J) meet regularly with employees to review, reword, and

reaffirm the firm’s mission. The entire J&J workforce recognizes the value that top management

places on this exercise, and these employees respond accordingly.

Characteristics of a Mission Statement
A mission statement is a declaration of attitude and outlook. It usually is broad in scope for at least

two major reasons. First, a quality mission statement allows for the generation and consideration of

a range of feasible alternative objectives and strategies without unduly stifling management creativ-

ity. Excess specificity would limit the potential of creative growth for the organization. However,

an overly general statement that does not exclude any strategy alternatives could be dysfunctional.

Apple’s mission statement, for example, should not open the possibility for diversification into

pesticides—or Ford Motor Company’s into food processing.

Second, a mission statement needs to be broad to reconcile differences among and appeal

to an organization’s diverse stakeholders, the individuals and groups of individuals who have

a special stake or claim on the company. Thus, a mission statement should be reconciliatory.

Stakeholders include employees, managers, stockholders, boards of directors, customers, suppli-

ers, distributors, creditors, governments (local, state, federal, and foreign), unions, competitors,

environmental groups, and the general public. Stakeholders affect and are affected by an organi-

zation’s strategies, yet the claims and concerns of diverse constituencies vary and often conflict.

For example, the general public is especially interested in social responsibility, whereas stock-

holders are more interested in profitability. Stakeholder expectations leveled on any business

literally may number in the thousands, and they often include clean air, jobs, taxes, investment

opportunities, career opportunities, equal employment opportunities, employee benefits, salaries,

wages, clean water, and community services. All stakeholders’ expectations on an organization

cannot be pursued with equal emphasis. A quality mission statement reveals that the organization

will strive to meet the varied expectations of stakeholders.

The statement of mission should be sufficiently broad to allow judgments about the most

promising growth directions and those considered less promising. Numbers should not be

included in a mission statement. George Steiner offers the following insight on the need for a

mission statement to be broad in scope:

Mission statements are not designed to express concrete ends, but rather to provide

motivation, general direction, an image, a tone, and a philosophy to guide the enterprise.

An excess of detail could prove counterproductive since concrete specification could be

the base for rallying opposition; all in the firm need to be onboard with the firm’s mission.3

An effective mission statement should not be too lengthy; the recommended length is less

than one hundred words. An effective mission statement should arouse positive feelings and emo-

tions about an organization; it should be inspiring in the sense that it motivates readers to action.

A mission statement should be enduring, but never cast in stone, meaning that a statement may need

to be changed at any time depending on changes anywhere in the integrative model of strategic

management. This dynamic nature of both vision and mission statements is conveyed in Figure 2-1

through the feedback loop. An effective mission statement generates the impression that a firm is

successful, has direction, and is worthy of time, support, and investment from all stakeholders.

A business mission reflects judgments about future growth directions and strategies that are

based on forward-looking external and internal analyses. The statement should provide useful

criteria for selecting among alternative strategies. A clear mission statement provides a basis

for generating and screening strategic options. A mission statement should (1) define what the

organization is, (2) be limited enough to exclude some ventures and broad enough to allow for

creative growth, (3) distinguish a given organization from all others, (4) serve as a framework

for evaluating both current and prospective activities, and (5) be stated in terms sufficiently clear

to be widely understood throughout the organization.4 The mission statement should reflect the

anticipations of customers. Rather than developing a product and then trying to find a market, the

operating philosophy of organizations should be to identify customers’ needs and then provide a

product or service to fulfill those needs.

Table 2-3 summarizes 10 desired characteristics of an effective mission statement:

LO 2.5

CHAPTER 2 • BuSINESS VISION AND MISSION 77

Quality mission statements identify the utility (value) of a firm’s products to its customers.

This is why Verizon’s mission statement focuses on communication rather than on telephones; it

is why ExxonMobil’s mission statement focuses on energy rather than on oil and gas; it is why

Union Pacific’s mission statement focuses on transportation rather than on railroads; it is why

Universal Studios’ mission statement focuses on entertainment rather than on movies. A major

reason for developing a mission statement is to attract customers; all companies and organiza-

tions must continually attract customers.

The following utility statements are relevant in developing a mission statement:

Do not offer me things.

Do not offer me clothes. Offer me attractive looks.

Do not offer me shoes. Offer me comfort for my feet and the pleasure of walking.

Do not offer me a house. Offer me security, comfort, and a place that is clean and happy.

Do not offer me books. Offer me hours of pleasure and the benefit of knowledge.

Do not offer me CDs. Offer me leisure and the sound of music.

Do not offer me tools. Offer me the benefits and the pleasure that come from making

beautiful things.

Do not offer me furniture. Offer me comfort and the quietness of a cozy place.

Do not offer me things. Offer me ideas, emotions, ambience, feelings, and benefits.

Please, do not offer me things.

Managers often perceive customer satisfaction as a valuable intangible asset to a firm; re-

search suggests that customer satisfaction has a strong positive relationship with organizational

performance.5 When written from a customer perspective, mission statements can spur employ-

ees, salespersons, and managers to provide exemplary customer service, which arguably would

enhance customer loyalty and translate into customers being “on a mission” to seek out, use,

and promote the firm’s products and services.

Components of a Mission Statement
Most practitioners and academicians of strategic management agree there are nine mission state-

ment components to be included in an exemplary statement. Because a mission statement is often

the most visible and public part of the strategic-management process, it is important that it includes

both the ten characteristics summarized previously, and the following nine components:

1. Customers—Who are the firm’s present and potential customers?

2. Products or services—What are the firm’s major products or services?

3. Markets—Geographically, where does the firm compete?

LO 2.6

TABLE 2-3 Characteristics of a Mission Statement

1. Broad in scope; does not include monetary amounts, numbers, percentages, ratios, or objectives

2. Concise; fewer than one hundred words in length

3. Inspiring

4. Identifies the utility of a firm’s products

5. Reveals that the firm is socially responsible

6. Reveals that the firm is environmentally responsible

7. Includes nine components: customers, products or services, markets, technology, concern for

survival/growth/profits, philosophy, distinctive competence, concern for public image, concern

for employees

8. Reconciliatory; resolves divergent views among stakeholders

9. Enduring but never cast in stone

10. Attracts customers; is written from a customer perspective

78 PART 2 • STRATEGY FORMuLATION

4. Technology—Is the firm technologically current?

5. Concern for survival, growth, and profitability—Is the firm committed to growth and fi-

nancial soundness?

6. Philosophy—What are the basic beliefs, values, aspirations, and ethical priorities of the

firm?

7. Distinctive competence—What is the firm’s major competitive advantage?

8. Concern for public image—Is the firm responsive to social, community, and environmen-

tal concerns?

9. Concern for employees—Are employees a valuable asset of the firm?6

To exemplify how mission statements should be written to include all nine components, a

component-by-component example for a charter boat fishing company is provided in Table 2-

4. Note the charter company’s customers are “outdoor enthusiasts.” “Customers” is an impor-

tant component to include in a mission statement, so merely including the word customer is

not sufficient or adequate because that word alone will not “attract customers.” The statement

needs to identify more precisely the target groups of customers. In fact, all nine components

should be written from a customer perspective, as given in the Table 2-4 example. For example,

regarding the “product/service” component, the charter fishing company provides “memories

for a lifetime”—thus revealing the “utility” of the service offered and appealing to people who

may not like to “just fish.” Regarding the “distinctive competence” component, whereby the

firm reveals the major competitive advantage its products/services provide, the statement says:

“for customer enjoyment and safety, we provide the most experienced staff in the industry.” A

concise, inspiring, exemplary mission statement that could be derived from the component-by-

component example shown in Table 2-4 follows.

Our fleet of fast, clean deep sea fishing boats (products) offers outdoor enthusiasts

(customers) an exciting fishing adventure off the coast of North Carolina (markets). Using

the latest safety and fishing finding equipment (technology), as well as emission-friendly

engines (public image), our friendly captain and first mate are the most experienced in

the industry (distinctive competence). Ensuring that customers “catch rather than just

fish,” our staff of experienced captains and first mates (employees) follows the Golden

Rule (philosophy) and creates lifelong memories for customers, all while charging the

lowest possible prices and fostering repeat customers (survival, growth, profitability).

(85 words)

TABLE 2-4 Mission Statement Components Written from a Customer
Perspective

1. Customers: Our customers are outdoor enthusiasts seeking fishing excitement and adventure.

2. Products or services: We provide fast, clean boats, all the bait and tackle needed, and friendly

first mates to create memories for a lifetime.

3. Markets: Our fleet of fast, clean vessels operate all along the North Carolina Coast.

4. Technology: Our vessels are equipped with the very latest safety and fish finding equipment to

ensure that customers comfortably are “catching rather than just fishing.”

5. Survival, growth, and profitability: Our prices are as low as possible to garner repeat customers

and a reasonable return for our owners.

6. Philosophy: We assure customers the utmost courtesy and care as our motto on every vessel is

to follow the Golden Rule.

7. Distinctive competence: For customer enjoyment and safety, we provide the most experienced

staff in the industry.

8. Public image: Our vessels use emission-friendly engines; we strive to bring repeat tourists to all

communities where we operate.

9. Employees: Our captains and first mates are “on a mission” to help customers have a great time.

Source: Based on Meredith E. David, Forest R. David, & Fred R. David, “Mission Statement Theory
and Practice: A Content Analysis and New Direction,” International Journal of Business, Marketing, and
Decision Sciences 7, no. 1 (Summer 2014): 95–109.

CHAPTER 2 • BuSINESS VISION AND MISSION 79

Regarding the “survival, growth, and profitability” component, for publicly held firms, share-

holders often expect at least a 4 percent annual growth in revenues because otherwise individuals

could redirect their money to achieve this rate of growth (usually) in the stock market. Regarding

the “philosophy” component, CEO Mark Zuckerberg of Facebook recently condensed his com-

pany’s mission statement to focus only on the “philosophy” component, as revealed in Ethics

Capsule 2. Note: The authors feel that component 7 (distinctive competence) is the most impor-

tant among the nine, followed by “customers” and then “philosophy,” but all nine components

are important and need including.

ETHICS CAPSULE 2

Facebook: Changing Our Mission to Enhance Our Ethics and Integrity

Facebook(ing) With Friends

It is 2018 and Facebook CEO Mark Zuckerberg is on a mission “to

fix Facebook’s ethical problems.” Zuckerberg says his company “has

made too many errors preventing misuse of our tools,” and “my

personal challenge for 2018 is to focus on fixing Facebook’s ethical

issues.” More than 2 million people now log onto Facebook every

month. The company allegedly allows objectionable content and

fake news and increasingly is also criticized as being an invasion of

personal privacy.

In June 2017, Facebook officially changed its mission from

“making the world more open and connected,” to “give people

the power to build community and bring the world closer to-

gether.” In announcing the new company mission, Zuckerberg,

the fifth-richest person on the planet, said “giving people a voice

and helping them connect is not sufficient to make the world a

better place.” With this change in mission, Facebook is taking

down thousands of “revenge porn” photos and inappropriate vid-

eos and other content. The company is tripling its expenditures on

security to screen bad people, even as more than 60 million new

active users monthly join the site; Facebook is on course to have

more than 3 billion users by the end of 2018. The world’s larg-

est social network site, Facebook is facing growing criticism from

lawmakers for not monitoring shady content, bad users, misinfor-

mation, propaganda, and violent videos. The company’s change in

mission has led the firm to double the number of its employees

and contractors who handle safety and security issues from ten to

twenty thousand by the end of 2018. As part of the firm’s new

mission, Zuckerberg has publicly pledged to give a way 99 percent

of his personal wealth. Zuckerberg stated at the 2017 Facebook

Communities Summit: “we have to build a world where we care

about a person in India, China, Nigeria, or Mexico as much as a

person in America.” Facebook’s new mission focuses on building

a global social network where friends take care of friends.

Source: Deepa Seetharaman, “Zuckerberg Vows to Work on Fixing

Facebook,” Wall Street Journal, (January 5, 2018): B1 & B2. Also, Deepa

Seetharaman, “Facebook Vows to Sacrifice Growth for Secure Operations,”

Wall Street Journal, (November 2, 2017): B3. Also, Valentina Zarya,

“Facebook’s Secret Weapon,” Fortune, (August 1, 2017): 26–28.

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The Importance (Benefits) of Vision and Mission
Statements
A meta-analysis of 20 years of empirical research on mission statements concluded there is a

positive relationship between mission statements and measures of financial performance.7 In

actual practice, wide variations exist in the nature, composition, and use of both vision and mis-

sion statements. King and Cleland recommend that organizations carefully develop a written

mission statement to reap the following benefits:

1. To make sure all employees/managers understand the firm’s purpose or reason for being.

2. To provide a basis for prioritization of key internal and external factors utilized to formu-

late feasible strategies.

3. To provide a basis for the allocation of resources.

4. To provide a basis for organizing work, departments, activities, and segments around a

common purpose.8

Another benefit of developing a comprehensive mission statement is that divergent views

among managers can be uncovered and resolved through the process. The question “What is

our business?” can create controversy. Raising the question often reveals differences among

LO 2.7

80 PART 2 • STRATEGY FORMuLATION

strategists in the organization. Individuals who have worked together for a long time and who

think they know each other suddenly may realize that they are in fundamental disagreement.

For example, in a college or university, divergent views among faculty regarding the relative

importance of teaching, research, and service often are expressed during the development of

the mission statement. Negotiation, compromise, and eventual agreement on important issues

are needed before people in any organization or company can focus on more specific strategy-

formulation activities.

Considerable disagreement among an organization’s strategists over vision and mission

statements can cause trouble if not resolved. For example, unresolved disagreement over the

business mission was one of the reasons for W. T. Grant’s bankruptcy and eventual liquidation.

Top executives of the firm, including Ed Staley and Lou Lustenberger, were firmly entrenched

in opposing positions that W. T. Grant should be like Kmart or J. C. Penney, respectively. W. T.

Grant decided to adopt attributes of both Kmart and J. C. Penney; this compromise was a huge

strategic mistake. In other words, top executives of W. T. Grant never resolved their vision or

mission issue, which ultimately led to the firm’s disappearance.9

Too often, strategists develop vision and mission statements only when the organization is in

trouble. Of course, the documents are needed then. Developing and communicating these state-

ments during troubled times indeed may have spectacular results and may even reverse decline.

However, to wait until an organization is in trouble to develop a vision and mission statement is

a gamble that characterizes irresponsible management. According to Drucker, as indicated, the

most important time to ask seriously, “What do we want to become?” and “What is our busi-

ness?” is when a company has been successful:

Success always obsoletes the very behavior that achieved it, always creates new realities,

and always creates new and different problems. Only the fairy tale story ends, “They lived

happily ever after.” It is never popular to argue with success or to rock the boat. It will not

be long before success will turn into failure. Sooner or later, even the most successful an-

swer to the question “What is our business?” becomes obsolete.10

In multidivisional organizations, strategists should ensure that divisional units perform

strategic-management tasks (sometimes referred to as business-level strategy), including the

development of a statement of vision and mission for their unique division. Each division should

involve its own managers and employees in developing vision and mission statements that are

consistent with and supportive of the corporate mission. The benefits of having a clear vision and

mission are summarized in Table 2-5.

An organization that fails to develop an effective vision and mission statement loses the

opportunity to present itself favorably to existing and potential stakeholders. All organizations

need customers, employees, and managers, and most firms need creditors, suppliers, and dis-

tributors. Vision and mission statements are effective vehicles for communicating with important

TABLE 2-5 10 Benefits of Having a Clear Vision and Mission

1. Achieve clarity of purpose among all managers and employees.

2. Provide a basis for all other strategic planning activities, including internal and external

assessment, establishing objectives, developing strategies, choosing among alternative strategies,

devising policies, establishing organizational structure, allocating resources, and evaluating

performance.

3. Provide direction.

4. Provide a focal point for all stakeholders of the firm.

5. Resolve divergent views among managers.

6. Promote a sense of shared expectations among all managers and employees.

7. Project a sense of worth and intent to all stakeholders.

8. Project an organized, motivated organization worthy of support.

9. Achieve higher organizational performance.

10. Achieve synergy among all managers and employees.

CHAPTER 2 • BuSINESS VISION AND MISSION 81

internal and external stakeholders. The principal benefit of these statements as tools of strategic

management is derived from their specification of the ultimate aims of a firm. Vision and mission

statements reveal the firm’s shared expectations internally among all employees and managers,

and for external constituencies, reveal the firm’s long-term commitment to responsible, ethical

action in providing a needed product or service to customers.

The Process of Developing Vision and Mission Statements

As many managers as possible should be involved in the process of developing these statements

because, through involvement, people become committed to an organization. A widely used

approach to developing vision and mission statements is first to select several articles (such as

those listed as Current Readings at the end of this chapter) and ask all managers to read them as

background information. Then, managers are asked to individually prepare vision and mission

statements for the organization. A facilitator or committee of top managers should then merge

these statements into a single document and distribute the draft statements to all managers.

A request for modifications, additions, and deletions is needed next, along with a meeting to

revise the document. To the extent that all managers have input into and support the final docu-

ments, organizations can more easily obtain managers’ support for other strategy formulation,

implementation, and evaluation activities. Thus, the process of developing vision and mission

statements represents a great opportunity for strategists to obtain needed support from all manag-

ers in the firm.

Some organizations use discussion groups of managers to develop and modify existing

statements. Other organizations hire an outside consultant or facilitator to manage the process

and help draft the language. At times an outside person with expertise in developing such state-

ments, who has unbiased views, can manage the process more effectively than an internal group

or committee of managers.

When an effective process is followed, developing a mission statement can create an “emo-

tional bond” and “sense of mission” among employees and customers. Commitment to a com-

pany’s strategy and intellectual agreement on the strategies to be pursued do not necessarily

translate into an emotional bond; hence, strategies that have been formulated may not be imple-

mented. An emotional bond comes when an individual personally identifies with the underlying

values and behavior of a firm, thus turning intellectual agreement and commitment to strategy

into a sense of mission. Involving marketers and sales representatives in the development of the

mission statement and writing statements from a customer perspective could enable firms to cre-

ate an emotional bond with customers and enhance the likelihood that salespersons would be “on

a mission” to provide excellent customer service.

Evaluating and Writing Mission Statements
A mission statement should provide more than mere inclusion of a single word such as products

or employees regarding a respective component. Why? Because the statement should motivate

stakeholders to action, as well as be customer-oriented, informative, inspiring, and enduring.

Perhaps the best way to develop a skill for writing and evaluating mission statements is to

study actual company missions. Thus, Table 2-6 provides a component-by-component critique

of an actual mission statement from Hershey. The Hershey statement is too brief, being only

14 words total, is too vague, and is missing six of the nine components.

As additional guidance for practitioners (and students), mission statements are written from

a customer perspective and proposed for four companies as presented in Table 2-7. The state-

ments include the 10 characteristics and 9 components presented previously. The statements are

written to enhance customer satisfaction, especially if communicated to customers by market-

ers, and backed by company commitment to and implementation of the mission message. The

proposed statement for the footwear company Crocs, Inc., for example, talks about “dependable

and lasting comfort all day,” whereas the UPS proposed statement talks about “the most timely,

dependable, and accurate delivery times in the world.”

LO 2.8

82 PART 2 • STRATEGY FORMuLATION

TABLE 2-6 Two Mission Statements Critiqued

Hershey’s Actual Mission Statement (paraphrased) (12 words)

We bring sweet moments (2) of Hershey happiness (6) to the world (3) every day.

(Author Comment: Statement lacks six components: Customers (1), Technology (4), Survival/Growth/

Profits (5), Distinctive Competence (7), Public Image (8), and Employees (9).

A Proposed Mission Statement for Hershey (73 words)

We aim to serve consumers of all ages and lifestyles (1) by providing high-quality chocolate, candy, and

snack products (2) globally (3). We intend to grow and expand our product offerings (5) using robotics

and business analytics (4). We are dedicated to supporting all communities where we operate (8), espe-

cially to the boys and girls in the Milton Hershey School (6). Through our friendly and well-trained em-

ployees (9), we provide consumers the best chocolate anywhere and wrapped in Hershey Happiness (7).

Key: Mission Statement Components

1. Customers

2. Products or services

3. Markets

4. Technology

5. Concern for survival, growth, and profitability

6. Philosophy

7. Distinctive competence

8. Concern for public image

9. Concern for employees

Source: Based on information at the various corporate websites.

TABLE 2-7 Four Mission Statements Revised

The numbers in parentheses correspond to the nine mission statement components.

Rite Aid

We are on a mission to offer the best possible drugstore experience for people of all ages (1) around

the United States (3). We have a state-of-the-art information system (4) that provides our pharmacists

(9) with warnings of any possible drug interactions to help better ensure customer safety (8). We are

determined to improve our customers’ overall health through our wellness programs (5). We offer an ex-

tensive line of other beauty, food, drink, cosmetic, and vitamin products through our alliance with GNC

(2). We believe in treating our customers like family (6) and strive to maintain our reputation as the most

personable drugstore (7). (88 words total)

Best Buy

We are committed to providing individuals and businesses (1) the latest high-tech products (2) at the

lowest prices of any retail store (7). Serving North America, China, and other markets (3), all Best Buy

employees (9) are exceptionally knowledgeable about the products we offer. We believe good ethics is

good business (6) and use business analytics (4) to better understand customer trends. We strive to make

a profit for our shareholders (5) and be a good community citizen everywhere we operate (8). (72 words)

United Parcel Service (UPS)

We strive to be the most timely and dependable parcel and freight forwarding delivery service (2) in the

world (3). By implementing the latest tracking technology (4), we are able to profitably grow (5) by offer-

ing individuals and businesses (1) dependable and accurate delivery times (7). We promote from within to

improve morale among all employees (9). Our philosophy (6) is to responsibly balance the needs of our

customers, employees, shareholders, and communities (8) in an exemplary manner. (68 words)

Crocs, Inc.

Crocs is committed to providing profound comfort, fun and innovation in all the shoe models (2) we produce.

Through our Croslite technology (4) (7), we are able to provide men, women, and children (1) dependable and

lasting comfort all day. We strive to expand our brand throughout the world (3) and are able to save on costs

(5), while protecting the environment (8) with our package-less shoes. We adhere to the belief that good ethics

is good business (6) in all that we do as we strive to take care of our employees and shareholders. (85 words)

Source: Reprinted with permission from Fred. R. David, “Mission Statement Theory and Practice:
A Content Analysis and New Direction,” International Journal of Business, Marketing, and Decision
Sciences 7, no. 1 (Summer 2014): 95–109.

CHAPTER 2 • BuSINESS VISION AND MISSION 83

IMPLICATIONS FOR STRATEGISTS

Figure 2-2 reveals that establishing and nurturing an effective vision

and mission is a vital first step in gaining and maintaining competitive

advantages. Businesses succeed by attracting and keeping customers,

and they do this by providing value for customers through unique

experiences, products, and/or services. Firms nurture their unique-

ness as evidenced in the “distinctive competence” component in

mission statements. Marketers continually assess customers’ chang-

ing needs and wants and make appropriate adjustments in the

design and delivery of products and services to sustain competitive

advantage. Developing and communicating a clear business vision

and mission is essential because without effective vision and mission

statements, a firm’s short-term actions may be counterproductive to

long-term interests. A clear vision and mission provides direction for

all subsequent activities that endeavor to see customers, employ-

ees, and shareholders concurrently “on a mission” to see the firm

succeed.

Vision and mission statements are not just words that look nice

when framed or engraved; they provide a basis for strategy and ac-

tion; they reveal the reason a business opens its doors every day, the

reason salespersons sell, the reason customers buy, and the reason

employees work. The statements ideally are the passion behind the

company, the foundation for employee morale, and the basis for

customer loyalty. Written from a customer perspective and included

in both oral and written communication with customers, the state-

ments could be used to attract and keep customers. Vision and mis-

sion statements do matter. Marketers pursue projects and managers

make daily decisions mindful of the firm’s basic vision, mission, and

resources. Managers work hard every day to motivate employees.

Executives are on a mission to present the firm favorably to many

stakeholders. A clear vision and mission enables strategists to lead

the way as a firm strives to gain, sustain, and grow its customer base

and competitive advantages.

Establish A Clear
Vision & Mission

Evaluate & Monitor
Results:

Take Corrective
Actions; Adapt

To Change

Gain & Sustain
Competitive
Advantages

Formulate Strategies:
Collect, Analyze, &

Prioritize Data Using
Matrices; Establish A
Clear Strategic Plan

Implement Strategies:
Establish Structure;
Allocate Resources;
Motivate & Reward;
Attract Customers;
Manage Finances

FIGURE 2-2

How to Gain and Sustain Competitive Advantages

84 PART 2 • STRATEGY FORMuLATION

Chapter Summary
Every organization has a unique purpose and reason for being. This uniqueness should be re-

flected in vision and mission statements. The nature of a business’ core values, vision, and mis-

sion can represent either a competitive advantage or disadvantage for the firm. An organization

achieves a heightened sense of purpose when strategists, managers, and employees develop and

communicate clear core values, vision, and mission. Drucker says that developing a clear busi-

ness vision and mission is the “first responsibility of strategists.”

A quality mission statement reveals an organization’s customers; products or services; mar-

kets; technology; concern for survival, growth, and profitability; philosophy; distinctive com-

petence; concern for public image; and concern for employees. These nine basic components

serve as a practical framework for evaluating and writing mission statements. As the first step

in strategic management, the vision and mission statements provide direction for all planning

activities. As indicated next in the mini-case, even Under Armour’s vision and mission state-

ments can be improved.

Well-designed vision and mission statements are essential for formulating, implementing,

and evaluating strategy. Developing and communicating a clear business vision and mission

are the most commonly overlooked tasks in strategic management. Without clear statements

of vision and mission, a firm’s short-term actions can be counterproductive to long-term in-

terests. Vision and mission statements always should be subject to revision, but, if carefully

prepared, they will require infrequent major changes. Vision and mission statements should

serve as guidance and be reviewed often when divergent views arise among managers on vari-

ous strategies to implement. Organizations usually reexamine their vision and mission state-

ments annually. Effective vision and mission statements stand the test of time.

Core values, vision, and mission statements are essential tools for strategists—a fact illus-

trated in a short story told by Porsche’s former CEO Peter Schultz (paraphrased):

Three guys were at work building a large church. All were doing the same job, but when

each was asked what his job was, the answers varied: “Pouring cement,” the first re-

plied; “Earning a paycheck,” responded the second; “Helping to build a cathedral,” said

the third. Few of us can build cathedrals. But to the extent we can see the cathedral in

whatever cause we are following, the job seems more worthwhile. Good strategists and

a clear mission help us find those cathedrals in what otherwise could be dismal issues

and empty causes.11

IMPLICATIONS FOR STUDENTS

Because gaining and sustaining competitive advantage is the es-

sence of strategic management, when presenting your vision and

mission statements as part of a case analysis, be sure to address

the “distinctive competence” component. Compare your rec-

ommended vision and mission statements with the firm’s exist-

ing statements and with rival firms’ statements to clearly reveal

how your recommendations or strategic plan enables the firm to

gain and sustain competitive advantage. Your proposed mission

statement should certainly include the 10 characteristics and 9

components, but in your discussion about the vision or mission,

focus on competitive advantage. In other words, be prescriptive,

forward-looking, and insightful—couching your vision or mission

overview in terms of how you believe the firm can best gain and

sustain competitive advantage. Do not be content with merely

showing a 9-component comparison of your proposed statement

with rival firms’ statements, although that would be nice to in-

clude in your analysis.

CHAPTER 2 • BuSINESS VISION AND MISSION 85

Key Terms and Concepts
concern for employees (p. 78)

concern for public image (p. 78)

concern for survival, growth,

and profitability (p. 78)

core values statement (p. 72)

creed statement (p. 75)

customers (p. 77)

distinctive competence (p. 78)

markets (p. 77)

mission statement (p. 75)

mission statement

components (p. 77)

philosophy (p. 78)

products or services (p. 77)

reconciliatory (p. 76)

stakeholders (p. 76)

technology (p. 78)

vision statement (p. 73)

Issues for Review and Discussion

2-1. This chapter’s exemplary strategist is CEO and founder

of FedEx, Frederick W. Smith. How closely aligned do

you think Smith’s personal vision statement would be

or should be with his corporate vision statement?

2-2. This chapter’s ethics capsule is about Facebook chang-

ing its mission to become more ethical. How closely

aligned do you think Facebook Chairman Mark Zuck-

erberg’s personal mission statement would be or should

be with his corporate mission statement?

2-3. Regarding the “survival, growth, and profitability com-

ponent, for publicly held firms, shareholders oftentimes

expect at least a 4 percent annual growth in revenues.”

Explain why is this statement true.

2-4. Explain the 5-out-of-5 test associated with vision statements.

2-5. At the website http://www.themarketingblender.com/

vision-mission-statements/ it defines vision as “the

dreaming piece” and defines mission as “the doing

piece.” How effective is this distinction?

2-6. Discuss the relative importance of vision and mission

documents for managers compared with employees,

customers, and shareholders.

2-7. Define reconciliatory, and give an example of how this

“characteristic” can be met in a mission statement.

2-8. Which mission statement component most closely reveals

the firm’s competitive advantage? Give an example.

2-9. Critique the following vision statement by Stokes Eye

Clinic: “Our vision is to take care of your vision.”

2-10. For a university, students are the customer. Write a

single sentence that could be included in your universi-

ty’s mission statement to reveal the institution’s market

components written from a customer perspective.

2-11. Some excellent nine-component mission statements

consist of just two sentences. Write a two-sentence mis-

sion statement for a company of your choice.

2-12. How do you think an organization can best align com-

pany mission with employee mission?

2-13. What are some different names for “mission statement,”

and where will you likely find a firm’s mission statement?

2-14. If your company does not have a vision or mission

statement, describe a good process for developing these

documents.

2-15. Explain how developing a mission statement can help

resolve divergent views among managers in a firm.

2-16. Drucker says the most important time to seriously

reexamine the firm’s vision or mission is when the firm

is successful. Why is this?

2-17. Explain why a mission statement should not include

monetary amounts, numbers, percentages, ratios, goals,

or objectives.

2-18. Discuss the meaning of the following statement: “Good

mission statements identify the utility of a firm’s prod-

ucts to its customers.”

2-19. Distinguish between the “distinctive competence” and

the “philosophy” components in a mission statement.

Give an example of each for your university.

2-20. When someone or some company is “on a mission” to

achieve something, many times the person or company

cannot be stopped. List three things in prioritized order

that you are on a mission to achieve in life.

2-21. Compare and contrast vision statements with mission

statements in terms of composition and importance.

2-22. Do local service stations need to have written vision

and mission statements? Why or why not?

2-23. Why do you think organizations that have a comprehen-

sive mission tend to be high performers? Does having a

comprehensive mission cause high performance?

2-24. What is your college or university’s distinctive compe-

tence? How would you state that in a mission statement?

2-25. Explain the principal value of a vision and a mission

statement.

2-26. Why is it important for a mission statement to be recon-

ciliatory?

http://www.themarketingblender.com/vision-mission-statements/

86 PART 2 • STRATEGY FORMuLATION

2-27. In your opinion, what are the three most important com-

ponents that should be included when writing a mission

statement? Why?

2-28. How would the mission statements of a for-profit and a

nonprofit organization differ?

2-29. Write a vision and mission statement for an organiza-

tion of your choice.

2-30. Who are the major stakeholders of the bank that you

do business with locally? What are the major claims of

those stakeholders?

2-31. List eight benefits of having a clear mission statement.

2-32. How often do you think a firm’s vision and mission

statement should be changed?

2-33. What four characteristics can be used to evaluate the

quality of a vision statement?

2-34. Explain the importance of core values in establishing

vision and mission statements.

2-35. According to the authors, what are the three most

important mission statement components in rank

order?

ASSURANCE-OF-LEARNING EXERCISES

SET 1: STRATEGIC PLANNING FOR COCA-COLA

EXERCISE 2A

Develop an Improved Coca-Cola Vision Statement

Purpose

Coca-Cola’s vision statement is given on the Coca-Cola website at http://www.coca-colacompany.com/our-

company/mission-vision-values. The purpose of this exercise is to evaluate Coca-Cola’s vision statement

and to develop a new and improved statement for the company.

Instructions

Step 1 Refer to the Cohesion Case (p. 57 on vision/mission). Go to the Coca-Cola website. Click on

Our Company. Then click on Mission, Vision, and Values. Then find the company’s vision

statement and copy and paste this document to a word-processing file on your desktop.

Step 2 Write a new and improved vision statement for Coca-Cola following the guidelines

presented in this chapter.

Step 3 Explain in a paragraph how or why your proposed vision statement is better than the existing

document.

Step 4 E-mail your work to your professor for evaluation.

EXERCISE 2B

Develop an Improved Coca-Cola Mission
Statement

Purpose

Coca-Cola’s mission statement is given on the corporate website at http://www.coca-colacompany.com/

our-company/mission-vision-values. The purpose of this exercise is to evaluate Coca-Cola’s mission state-

ment and to develop a new and improved statement for the company.

Instructions

Step 1 Refer to the Cohesion Case (p. 57 on vision/mission). Go to the Coca-Cola website. Click

on Our Company. Then click on Mission, Vision, and Values. Find the company’s mission

statement and copy and paste this document to a word-processing file on your desktop.

Step 2 Write a new and improved vision statement for Coca-Cola following the guidelines

presented in this chapter.

Step 3 Explain in a paragraph how or why your proposed vision statement is better than the existing

document.

Step 4 E-mail your work to your professor for evaluation.

http://www.coca-colacompany.com/our-company/mission-vision-values

CHAPTER 2 • BuSINESS VISION AND MISSION 87

EXERCISE 2C

Compare Coca-Cola’s Mission Statement
to a Rival Firm’s

Purpose

A mission statement is an integral part of strategic management because it provides direction for formu-

lating, implementing, and evaluating strategies. This exercise will give you practice evaluating mission

statements—a prerequisite skill for writing a good mission statement. Coca-Cola’s mission statement is

given on the Coca-Cola website at http://www.coca-colacompany.com/our-company/mission-vision-values.

Instructions

Step 1 In a word-processing document, prepare a 9 * 2 matrix. Place the nine mission statement

components down the left column. Across the top of the file have two columns, one being

Coca-Cola and the other being PepsiCo or Dr Pepper Snapple.

Step 2 Write Included or Not Included in each cell of your matrix to indicate whether you feel each

particular mission statement includes the respective mission statement component written

from a customer perspective. Justify your opinion.

Step 3 E-mail your work to your professor for assessment.

SET 2: STRATEGIC PLANNING FOR MY UNIVERSITY

EXERCISE 2D

Compare Your University’s Vision and Mission Statements
to Those of a Rival Institution

Purpose

Most colleges and universities have vision and mission statements. The purpose of this exercise is to give

you practice comparing the effectiveness of vision and mission statements. For your university (or school of

business), compare your college or school with a rival institution.

Instructions

Step 1 Determine whether your institution has a vision or mission statement. Look online or in the

front of your college handbook. Analyze your college’s vision and mission statements in

light of the concepts presented in this chapter.

Step 2 Compare the vision statement and the mission statement of your college or university to

those of a leading rival institution.

Step 3 Write a one-page summary of your analysis of the statements as per the needed 10 character-

istics and 9 components presented in this chapter.

SET 3: STRATEGIC PLANNING FOR MYSELF

EXERCISE 2E

Develop a Vision and Mission Statement for Yourself

Purpose

A personal vision and mission statement can be helpful to an individual in job-related decisions and career

paths. This exercise will give you practice developing and writing vision and mission statements from a per-

sonal perspective. For most college students nearing graduation, it is nearly inevitable to be faced with em-

ployability decisions. Developing vision and mission statements compels an individual to think about the

nature and scope of their skills and abilities and to assess the potential attractiveness of future job opportunities

and activities. These statements broadly chart the future direction of a person’s life and serve as a motivating

force and constant reminder of why the individual continuously gets up in the morning and works hard.

http://www.coca-colacompany.com/our-company/mission-vision-values

88 PART 2 • STRATEGY FORMuLATION

Instructions

Step 1 Develop a professional vision statement for yourself. Your statement should answer

the question “What and where do I want to be professionally and personally in 3 to 5

years?”

Step 2 Develop a professional mission statement for yourself. Your statement should answer the

question “What do I want to accomplish professionally and personally in the next 1 to 3

years?”

SET 4: INDIVIDUAL VERSUS GROUP STRATEGIC PLANNING

EXERCISE 2F

What Is the Relative Importance of Each
of the Nine Components of a Mission Statement?

Purpose

Research reveals that a mission statement should include all nine components to be most effective. For

some companies or organizations, some components may be more important to include than others. Based

on their experience, this exercise reveals the authors’ ranking of the relative importance of nine mission

recommended components for inclusion in an exemplary statement.

The purpose of this exercise is to examine how well students understand the components of a

mission statement. In addition, the purpose of this exercise is to examine whether individual decision

making is better than group decision making. Academic research suggests that groups make better

decisions than individuals about 80 percent of the time.

Instructions

Rank the nine mission statement components as to their relative importance (1 = most important, 9 = least

important). First, rank the components as an individual. Then, rank the components as part of a group of

three. Thus, determine what person(s) and what group(s) here today can come closest to the expert ranking.

This exercise enables examination of the relative effectiveness of individual versus group decision making

in strategic planning.

Steps

1. Fill in Column 1 in Table 2-8 to reveal your individual ranking of the relative importance of the nine

components (1 = most important, to 9 = least important, etc.). For example, if you feel the Customer

component is the fifth-most important, then enter a 5 in Table 1 in Column 1 beside Customers.

2. Fill in Column 2 in Table 2-8 to reveal your group’s ranking of the relative importance of the

nine components (1 = most important, to 9 = least important, etc.).

3. Fill in Column 3 in Table 2-8 to reveal the expert’s ranking of the nine components.

TABLE 2-8 Mission Statement Analysis: Comparing Individual versus Group
Decision Making

Components Column 1 Column 2 Column 3 Column 4 Column 5

1. Customers

2. Products

3. Markets

4. Technology

5. Survival/Growth

6. Philosophy

7. Distinctive

Competence

8. Public Image

9. Employee

Sums

CHAPTER 2 • BuSINESS VISION AND MISSION 89

MINI-CASE ON FORD MOTOR COMPANY (F)

EVALUATE FORD’S VISION FOR THE FUTURE
AND MISSION FOR THE PRESENT
Headquartered in Dearborn, Michigan, Ford is the second-largest U.S. automobile maker, behind

General Motors, and the fifth-largest automobile maker globally. Ford is considering changing its

vision and mission because of electric vehicles gaining such rapid prominence worldwide. The

company foresees a day soon across the United States where you pull up at any gas station and

either gas up or plug in to get charged up. Ford is behind nearly all automakers in electric product

offerings and is losing ground. This gas up or plug in scenario already exists in some parts of the

world. Ford’s survival going forward may hinge on an assessment of the company’s vision and

mission statements.

Current Vision Statement
People working together as a lean, global enterprise to make lives better through automotive and mo-

bility leadership.

Proposed Vision Statement
To be the global automotive industry leader through innovations in automotive transportation and

service to customers, employees, and the environment.

Key: Vision Statement Characteristics

1. Clear: reveals type of industry

2. Futuristic: reveals what the firm strives to become

3. Concise: one sentence in length

4. Unique: reveals the firm’s competitive advantage

5. Inspiring: motivates the readers to support the firm

Proposed Mission Statement
Ford Motor Company strives to become the global automotive industry (3) leader delivering quality

innovations to transportation (2) that meet the needs of our customers (1). We are dedicated to adapt-

ing the latest technology (4, 7), including electric batteries, to facilitate change and social connectivity

through transportation (6). Our highly-trained professionals (9) support our efforts for continued growth

and profitability (5) while keeping our promise of environmental responsibility and sustainability in our

communities (6, 8).

4. Fill in Column 4 in Table 2- 8 to reveal the absolute difference between Column 1 and Column

3 to reveal how well you performed as an individual in this exercise. (Note: Absolute difference

disregards negative numbers.)

5. Fill in Column 5 in Table 2- 8 to reveal the absolute difference between Column 2 and Column 3

to reveal how well your group performed in this exercise.

6. Sum Column 4. Sum Column 5.

7. Compare the Column 4 sum with the Column 5 sum. If your Column 4 sum is less than your

Column 5 sum, then you performed better as an individual than as a group. Normally, group

decision making is superior to individual decision making, so if you did better than your group,

you did excellent.

8. The Individual Winner(s): The individual(s) with the lowest Column 4 sum is the WINNER.

9. The Group Winners(s): The group(s) with the lowest Column 5 score is the WINNER.

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90 PART 2 • STRATEGY FORMuLATION

Web Resources
1. Example vision statements

This website provides more than 50 example vision statements.

Home

vision-mission-statements/

2. Example vision statements
This website provides about one hundred example vision
statements.
https://www.executestrategy.net/wp-content/
uploads/2016/06/100-of-the-worlds-best-vision-
statements.pdf

3. Example mission statements
This website provides more than one hundred example
mission statements from Fortune 500 companies.
https://www.missionstatements.com/fortune_500_
mission_statements.html

4. Example mission statements
This website provides 51 example mission statements from
some of the world’s leading companies.
http://www.alessiobresciani.com/foresight-strategy/51-mission
-statement-examples-from-the-worlds-best-companies/

Current Readings
Daspit, Joshua J., James J. Chrisman, Pramodita Sharma,

Allison W. Pearson, and Rebecca G. Long. “A Strategic

Management Perspective of the Family Firm: Past Trends,

New Insights, and Future Directions.” Journal of Manage-

rial Issues 29, no. 1 (Spring 2017): 6–29.
David, Fred R., Forest R. David, and Meredith E. David.

“Benefits, Characteristics, Components, and Examples of
Customer-Oriented Mission Statements.” International
Journal of Business, Marketing, and Decision Sciences
(IJBMDS) 9, no. 1 (Fall 2016): 1–14.

David, Meredith E., Forest R. David, and Fred R. David.
“Mission Statement Theory and Practice: A Content
Analysis and New Direction.” International Journal of
Business, Marketing, and Decision Sciences (IJBMDS) 7,
no. 1 (Summer 2014): 95–109.

Eshima, Yoshihiro, and Brian S. Anderson. “Firm Growth,
Adaptive Capability, and Entrepreneurial Orientation.”
Strategic Management Journal 38, no. 3 (March 2017):
770–779.

Levine, Sheen, Mark Bernard, and Rosemarie Nagel. “Strategic
Intelligence: The Cognitive Capability to Anticipate
Competitor Behavior.” Strategic Management Journal 38,
no. 12 (December 2017): 2390–2423.

Rodríguez, Omar, and Sundar Bharadwaj. “Competing on
Social Purpose: Brands That Win By Tying Mission to
Growth.” Harvard Business Review 95, no. 5 (September–
October 2017): 94–101.

Saarikko, Ted, Ulrika H. Westergren, and Tomas Blomquist.
“The Internet of Things: Are You Ready for What’s
Coming?” Business Horizons 60, no. 5 (September 2017):
667–676.

Key: Mission Statement Components

Questions

1. In what three ways is Ford’s proposed vision statement better than the firm’s actual vision

statement? Does the current or proposed statement meet the 5-out-of-5 test? If not, prepare a new

statement.

2. Evaluate the extent that the proposed mission statement for Ford meets the 10 characteristics

and includes the 9 components presented in the chapter.

Source: Based on information at http://corporate.ford.com/company.html?gnav=footer-aboutford, coupled with a

variety of other sources.

1. Customers

2. Product or services

3. Markets

4. Technology

5. Survival, growth, and profitability

6. Philosophy

7. Distinctive Competence

8. Public image

9. Employees

http://corporate.ford.com/company.html?gnav=footer-aboutford

http://www.themarketingblender.com/vision-mission-statements/

https://www.executestrategy.net/wp-content/uploads/2016/06/100-of-the-worlds-best-vision-statements.pdf

https://www.missionstatements.com/fortune_500_mission_statements.html

http://www.alessiobresciani.com/foresight-strategy/51-mission-statement-examples-from-the-worlds-best-companies/

http://www.themarketingblender.com/vision-mission-statements/

https://www.executestrategy.net/wp-content/uploads/2016/06/100-of-the-worlds-best-vision-statements.pdf

https://www.missionstatements.com/fortune_500_mission_statements.html

http://www.alessiobresciani.com/foresight-strategy/51-mission-statement-examples-from-the-worlds-best-companies/

CHAPTER 2 • BuSINESS VISION AND MISSION 91

Endnotes
1. Brian Dumaine, “What the Leaders of Tomorrow See,”

Fortune (July 3, 1989): 50.

2. Peter Drucker, Management: Tasks, Responsibilities, and

Practices (New York: Harper & Row, 1974), 61.

3. John Pearce II, “The Company Mission as a Strategic Tool,”

Sloan Management Review 23, no. 3 (Spring 1982): 74.

4. George Steiner, Strategic Planning: What Every Manager

Must Know (New York: The Free Press, 1979): 160.

5. Raj Devasagayam, Nicholas R. Stark, and Laura Spitz Val-

estin, “Examining the Linearity of Customer Satisfaction:

Return on Satisfaction as an Alternative,” Business Perspec-

tives and Research 1, no. 2 (January 2013): 1. Xueming

Luo, Jan Wieseke, and Christian Homburg, “Incentivizing

CEOs to Build Customer- and Employee-Firm Relations

for Higher Customer Satisfaction and Firm Value,” Journal

of the Academy of Marketing Science 40, no. 6 (2012): 745.

6. Meredith E. David, Forest R. David, and Fred R. David,

“Mission Statement Theory and Practice: A Content

Analysis and New Direction,” International Journal of

Business, Marketing, and Decision Sciences 7, no. 1 (Sum-

mer 2014): 95–109.

7. Sebastian Desmidt, Anita Prinzie, and Adelien Decramer,

A. “Looking for the Value of Mission Statements: A Meta-

Analysis of 20 Years of Research,” Management Decision

49, no. 3 (2011): 468.

8. W. R. King and D. I. Cleland, Strategic Planning and

Policy (New York: Van Nostrand Reinhold, 1979): 124.

9. “How W. T. Grant Lost $175 Million Last Year,” Busi-

ness Week (February 25, 1975): 75. Drucker, Manage-

ment, 88.

10. Drucker, Management: Tasks, Responsibilities, and

Practices, 88.

11. http://ezinearticles.com/?Elements-of-a-Mission-

Statement&id=3846671

http://ezinearticles.com/?Elements-of-a-Mission-Statement&id=3846671

92 PART 2 • STRATEGY FORMuLATION

Strategy
Formulation

Feedback Loop

Strategy
Implementation

Strategy
Evaluation

Chapter 10: Business Ethics, Environmental Sustainability, and Social Responsibility

Chapter 11: Global and International Issues

Strategy
Evaluation

and
Governance
Chapter 9

Implementing
Strategies:

Finance and
Accounting

Issues
Chapter 8

Implementing
Strategies:

Management
and Marketing

Issues
Chapter 7

Business
Vision and

Mission
Chapter 2

Strategies
in Action
Chapter 5

Strategy
Analysis and

Choice
Chapter 6

The
Internal

Assessment
Chapter 4

The External
Assessment
Chapter 3

FIGURE 3- 1

The Comprehensive, Integrative Strategic-Management Model

PART 2 • STRATEGY FORMuLATION

LEARNING OBJECTIVES

After studying this chapter, you should be able to do the following:

3- 1. Describe the nature and purpose of an external assessment in formulating strategies.

3- 2. Identify and discuss 10 external forces that impact organizations.

3- 3. Explain Porter’s Five-Forces Model and its relevance in formulating strategies.

3- 4. Describe key sources of information for identifying opportunities and threats.

3- 5. Discuss forecasting tools and techniques.

3- 6. Explain how to develop and use an External Factor Evaluation (EFE) Matrix.

3- 7. Explain how to develop and use a Competitive Profile Matrix (CPM).

The External Assessment

ASSURANCE-OF-LEARNING EXERCISES

The following exercises are found at the end of this chapter:

SET 1 : Strategic Planning for Coca-Cola

EXERCISE 3A : Develop an EFE Matrix for Coca-Cola

EXERCISE 3B : Develop a Competitive Profile Matrix for Coca-Cola

SET 2 : Strategic Planning for My University

EXERCISE 3C : Develop an EFE Matrix for Your College or University

EXERCISE 3D : Develop a Competitive Profile Matrix for Your College or University

SET 3 : Strategic Planning to Enhance My Employability

EXERCISE 3E : How Competitive Is Your State among All States for Finding a Job?

EXERCISE 3F : Compare and Contrast CareerBuilder, Glassdoor, Monster Jobs, and
ZipRecruiter

EXERCISE 3G : A Template Competency Test

SET 4 : Individual versus Group Strategic Planning

EXERCISE 3H : What External Forces Are Most Important in Strategic Planning?

MyLab Management

Improve Your Grade!

If your instructor is using MyLab Management, visit www.pearson.com/mylab/management

for videos, simulations, and writing exercises.

http://www.�pinterest.com

94 PART 2 • STRATEGY FORMuLATION

C
ompanies and organizations continually deal with external uncertainties and must

quickly adapt to change to survive, as indicated in the following story:

Once there were two company presidents who competed in the same industry.

These two presidents decided to go on a camping trip to discuss a possible

merger. They hiked deep into the woods. Suddenly, they came upon a grizzly

bear that rose up on its hind legs and snarled. Instantly, the first president took off

his knapsack and got out a pair of jogging shoes. The second president said, “Hey,

you can’t outrun that bear.” The first president responded, “Maybe I can’t outrun

that bear, but I surely can outrun you!”

As illustrated in Figure 3-1, this chapter focuses on the concepts and tools needed to manage

external uncertainties by conducting an external audit (sometimes called industry analysis).

An external audit focuses on identifying and evaluating trends and events beyond the control

of a single firm, such as increased foreign competition, population shifts to coastal areas,

an aging society, and a social-media revolution. An external audit reveals key opportunities

and threats confronting an organization; an external audit guides managers in formulating

strategies that take advantage of the opportunities and avoid or reduce the impact of threats.

This chapter presents a practical framework for gathering, assimilating, analyzing,

and prioritizing external information that provides a foundation for formulating strate-

gies effectively. Specifically, the first two-thirds of this chapter address external oppor-

tunity/threat areas in terms of what, where, how, and why to obtain this information;

the latter one-third of this chapter explains how to develop and use an External Factor

Evaluation (EFE) Matrix and Competitive Profile Matrix (CPM) to assimilate all the op-

portunity/threat factors/information.

The exemplary strategist showcased in this chapter is Ben Silbermann, CEO and co-

founder of Pinterest, the popular social-media company. Silbermann is outstanding at rec-

ognizing external opportunities and threats and formulating effective strategies accordingly.

EXEMPLARY STRATEGIST SHOWCASED

Ben Silbermann, CEO and
Cofounder of Pinterest
It is 2018 and Pinterest has grown to a valuation of more than $13

billion and a customer base of about 200 million users who have

“pinned” more than 110 billion ideas on Pinterest boards. Led by

CEO and strategist Ben Silbermann, Pinterest is one of the fastest-

growing companies in the world. The Pinterest website (www. pinterest

.com) is free to use and available in nearly 30 foreign languages.

Headquartered in San Francisco, Pinterest has about 900 employees.

Hundreds of companies advertise on Pinterest with display ads and

“pin” their products and services on boards. The Pinterest website is a

visual discovery, collection, and storage tool used by customers in the

United States (60 percent) and abroad (40 percent). Thousands of busi-

nesses and marketers use Pinterest to access data collected on Pinterest

customers, who interestingly are about 80 percent women, typically age

35 to 44. Silbermann has turned Pinterest into a global gold mine of

data for advertisers and retailers. He says Pinterest is “only beginning to

understand” how social media impacts consumers’ lives, and he is blaz-

ing a new trail with an innovative, entrepreneurial company. Pinterest

takes no commission or cut on transactions it processes and has no

plans to go public to raise capital. A key advantage of staying private is

to keep the ins and outs of business including the finance and market-

ing operations of the company, secret from rival companies, who may

want to imitate and replicate Pinterest strategies and offerings.

Source: Erin Griffith, “Ben Silbermann,” Fortune, (September 1–17, 2017): 69.

Also, http://fortune.com/2015/07/13/pinterest-ceo-ben-silbermann/

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CHAPTER 3 • THE ExTERNAL ASSESSMENT 95

The External Assessment Phase of Strategy Formulation
The purpose of an external audit is to develop a finite list of both opportunities that could benefit a

firm and threats that should be avoided or mitigated. As the term finite suggests, the external audit

is not aimed at developing an exhaustive list of every possible factor that could influence the busi-

ness; rather, it is aimed at identifying key variables that offer actionable responses. Firms should

be able to respond either offensively or defensively to the factors by formulating strategies that

capitalize on external opportunities or that minimize the impact of potential threats. Figure 3-1

illustrates with white shading how the external audit fits into the strategic-management process.

Key External Forces

There are 10 external forces that can be divided into 5 broad categories: (1) economic forces;

(2) social, cultural, demographic, and environment (SCDE) forces; (3) political, governmen-

tal, and legal forces; (4) technological forces; and (5) competitive forces. Relationships among

these forces and an organization are depicted in Figure 3-2. External trends and events, such

as increasing security concerns surrounding big data, changing consumer demand surrounding

authenticity and personalization, and people in developing countries learning about online ser-

vices, significantly affect products, services, markets, and organizations worldwide.

The Actionable-Quantitative-Comparative-Divisional (AQCD) Test

When identifying and prioritizing key external factors in strategic planning, make sure the fac-

tors selected meet the following four criteria to the extent possible:

1. Actionable (i.e., meaningful and helpful in ultimately deciding what actions or strategies a

firm should consider pursuing);

2. Quantitative (i.e., include percentages, ratios, dollars, and numbers to the extent possible);

3. Comparative (i.e., reveals changes over time), and

4. Divisional (relates to the firm’s products and/or regions (rather than consolidated) so infer-

ences can be drawn regarding what products and regions are doing well or not).

Factors that meet the four criteria described above pass what can be called the “Actionable-

Quantitative-Comparative-Divisional (AQCD) Test,” which is a measure of the quality of an external

factor. In addition to passing the AQCD Test, make sure that external factors are indeed external (not

internal), and make sure that external factors, particularly opportunities, are stated as external trends,

events, or facts, rather than being stated as strategies the firm could pursue. Also, make sure the external

LO 3.1

Competitors
Suppliers

Distributors
Creditors
Customers
Employees

Communities
Managers

Stockholders
Labor unions
Governments

Trade associations
Special interest groups

Products
Services
Markets

Natural environment

AN ORGANIZATION’S
OPPORTUNITIES AND

THREATS

Economic forces

Social, cultural, demographic, and
natural environment forces

Political, legal, and governmental forces

Technological forces

Competitive forces

FIGURE 3-2

Relationships Between Key External Forces and an Organization

96 PART 2 • STRATEGY FORMuLATION

factors relate closely to the firm achieving its mission (opportunities) or hindering its mission (threats).

Factors selected for inclusion in an external assessment should be mission-driven.

Regarding the AQCD criteria, strive to include all high quality factors in an external assess-

ment for a firm. A high quality factor will meet three or four of the AQCD criteria; a low quality

factor will meet two or fewer of the AQCD criteria. When performing an external assessment,

engage in an engineering hunt for facts to make sure as many factors as possible pass the AQCD

Test. It is important to state external factors to the extent possible in actionable, quantitative,

comparative, and divisional terms.

High quality and low quality external factors for Walmart are given below to further exem-

plify this important concept:

ASK YOuRSELF IS THE FACTOR

Actionable Quantitative Comparative Divisional

A High Quality
External Factor

Online retail
grocery shopping
grew from 12% to
16% in 2018.

yes yes yes yes

A Low Quality
External Factor

Consumers’
average disposable
income increased
greatly in 2018.

no no no no

Changes in external forces translate into changes in demand for both industrial and con-

sumer goods and services. External forces affect the types of products developed, the nature of

market segmentation and positioning strategies, the range of services offered, and the choice of

businesses to acquire or sell. External forces have a direct impact on both suppliers and distribu-

tors. Identifying and evaluating external opportunities and threats enables organizations to revise

their vision and mission if needed, to design strategies to achieve long-term objectives, and to

develop policies to achieve annual objectives.

10 External Forces that Impact Organizations
Economic Forces

Economic factors have a direct impact on the potential attractiveness of various strategies. An

example of an economic variable is “value of the dollar,” which can have a significant effect on

financial results of companies with global operations. Domestic firms with significant overseas

sales, such as McDonald’s, are hurt by a strong dollar. If the dollar appreciates 10 percent relative

to the local currency of a particular country in which a U.S. company has $100 million in revenues,

that company’s revenues would decrease by $10 million as they are translated into U.S. dollars. For

foreign firms with relatively large U.S. sales, however, a strong dollar provides a boost. A strong

dollar enables U.S. firms to purchase raw materials more cheaply from other countries. However, in

early 2018, the value of the dollar was near a 3-year low versus foreign currencies.

Favorable economic conditions recently bode well for many firms because economic growth

typically reduces unemployment, boosts consumer confidence, and increases disposable income.

The World Economic Outlook report, published by the International Monetary Fund, predicts a

broad-based global acceleration in the world economy; small, but wide-spanning growth (around

3.6 percent) is expected among most major economies in 2018–2021.1

A few categories of economic variables that often yield AQCD opportunities and threats for

organizations are provided in Table 3-1. In doing strategic planning or case analysis, economic

factors must be stated in AQCD terms to the extent possible to be useful in strategic planning.

LO 3.2

CHAPTER 3 • THE ExTERNAL ASSESSMENT 97

Social, Cultural, Demographic, and Environment (SCDE) Forces

SCDE forces impact strategic decisions on virtually all products, services, markets, and custom-

ers. Small, large, for-profit, and nonprofit organizations in all industries are being staggered

and challenged by the opportunities and threats arising from changes in SCDE variables. These

forces are shaping the way people live, work, produce, and consume. New trends are creating a

shift in consumer demands and, consequently, a need for different products, new services, and

updated strategies. For example, consumers in the United States now desire automobiles with

greater space and utility, in lieu of sedans. In response to this external trend, Ford Motor recently

invested $7 billion in higher-margin trucks and SUVs and announced plans to reintroduce the

Ranger Trust and the Bronco SUV in North America.2

In the U.S. food industry, demand for processed packaged foods is declining because con-

sumers are showing increased preferences for freshly prepared food options. Packaged food

companies such as Kellogg are trying to quickly adapt to mitigate this external threat; Kellogg

recently hired a new CEO, Steven Cahillane, who comes with extensive experience leading the

health and wellness company, Nature’s Bounty.

Consumer tastes and trends constantly change; people wander through stores less, opt-

ing increasingly to use their mobile phones and computers to research prices and cherry-pick

promotions. Brick-and-mortar retail department stores consequently are struggling as consum-

ers increasingly turn to online retailers and smaller specialty stores. These external trends have

prompted many retail chains to slow or cease store openings.3

The United States (and the world) is also becoming older. Individuals age 65 and older in the

United States, as a percentage of the population, will rise to 19 percent by 2030. The trend toward

an older society is good news for restaurants, hotels, airlines, cruise lines, tours, travel services,

pharmaceutical firms, automakers, and funeral homes. Older people are especially interested in

health care, financial services, travel, crime prevention, and leisure. The aging population affects

the strategic orientation of nearly all organizations.

Example categories of SCDE variables that often yield AQCD opportunities and threats for

organizations are given in Table 3-2. In performing strategic planning and case analysis, rele-

vant SCDE factors must be stated in AQCD terms to the extent possible to be useful in strategic

planning.

Political, Governmental, and Legal Forces

Politics, governments, and legislators can and often do impact strategic decisions. Federal, state,

local, and foreign governments are major regulators, deregulators, subsidizers, employers, and

customers of organizations. Political, governmental, and legal factors, therefore, can represent

major opportunities or threats for both small and large organizations. For industries and firms

that depend heavily on government contracts or subsidies, political forecasts can be the most

important part of an external audit. State and local income taxes and property taxes, for example,

TABLE 3-1 Example Economic Categories To Be Monitored

Shift to a service economy Demand shifts for different goods and services

Availability of credit Income differences by region and consumer groups

Level of disposable income Price fluctuations

Propensity of people to spend Foreign countries’ economic conditions

Interest rates Monetary and fiscal policies

Inflation rates Stock market trends

Gross domestic product (GDP) trends Tax rate variation by country and state

Consumption patterns European Economic Community (EEC) policies

Unemployment trends

Value of the dollar in world markets

Import/export factors

Organization of Petroleum Exporting Countries

(OPEC) policies

98 PART 2 • STRATEGY FORMuLATION

impact where companies locate facilities and where people desire to live. Nine U.S. states, for

example, have zero state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington,

Wyoming, New Hampshire, and Tennessee.

Governmental legislation can significantly impact where businesses sell their products. For

example, rapidly developing shifts in legislation surrounding the legality of marijuana are open-

ing new markets for investors. Nearly a decade ago, Colorado passed the world’s first legislation

that would treat marijuana like alcohol, taxing and regulating its sales. U.S. consumers spent

$6.7 billion on legal marijuana in 2016; this number is expected to reach $208 billion in 2021.

Example categories of political, governmental, and legal variables that often yield AQCD

opportunities and threats to organizations are provided in Table 3-3. Political, governmental,

and legal factors must be stated in AQCD terms to the extent possible to be useful in strate-

gic planning. Local, state, and federal laws, as well as regulatory agencies and special-interest

groups, can have a major impact on the strategies of small, large, for-profit, and nonprofit orga-

nizations. Many companies have altered or abandoned strategies in the past because of politi-

cal or governmental actions. As indicated in Ethics Capsule 3, new pending federal legislation

regarding Alaska oil drilling could create business opportunities and threats and present ethical

dilemma issues.

TABLE 3-2 Key SCDE Variables

Population changes by race, age, and geographic area Attitudes toward retirement

Regional changes in tastes and preferences Energy conservation

Number of marriages Attitudes toward product quality

Number of divorces Attitudes toward customer service

Number of births Pollution control

Number of deaths Attitudes toward foreign peoples

Immigration and emigration rates Energy conservation

Social Security programs Social programs

Life expectancy rates Number of places of worship

Per-capita income Number of religious members

Social-media pervasiveness Social responsibility issues

ETHICS CAPSULE 3

Preserve Alaska Wildlife or Boost Alaska Economy?

Alaska is home to the largest wildlife refuge in the United States,

the Arctic National Wildlife Refuge, which spans more than 19

million acres. The refuge serves an important role in the migra-

tion of wildlife including birds, caribou, and polar bears, and it is

also believed to hold significant oil reserves. In December 2017,

Congress voted to authorize drilling in Alaska’s Arctic National

Wildlife Refuge to boost the nation’s energy independence and

help the Alaskan economy. However, from an ethical perspective,

the arctic program director for the Wilderness Society, Lois Epstein,

states that, “Opening the Arctic refuge coastal plain to oil leas-

ing, exploration, and production unacceptably threatens the Arctic

refuge’s globally significant wilderness and wildlife values.” In per-

forming an external strategic-management analysis, tradeoffs such

as this abound and judgments must be made; decisions regarding

tradeoffs are evidenced in the choice of factors, weights, and rat-

ings assigned in an EFE Matrix presented in this chapter. Do you

think the benefits from the potential drilling in the Refuge would

offset the potential harm to Arctic wildlife? Government and envi-

ronmental officials are weighing in on the issue as Congress dis-

cusses proposed legislation. What assurances would have to be

made, if any, for you to approve of your company drilling in the

Refuge?

Source: Based on Jim Carlton, “Interior Official Urges Arctic Drilling,” Wall

Street Journal, (November 3, 2017): A3.

Where Are We Going Mom?

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CHAPTER 3 • THE ExTERNAL ASSESSMENT 99

Technological Forces

A variety of new technologies such as the Internet of Things, three-dimensional (3D) printing,

predictive analytics, quantum computing, robotics, and artificial intelligence are fueling innova-

tion in many industries and impacting strategic-planning decisions. Businesses are using mobile

technologies and applications to better determine customer trends and are employing advanced

analytics to make enhanced strategy decisions. The vast increase in the amount of data coming

from mobile devices and social-media sites is astonishing. A primary reason that Cisco Systems

recently entered the data analytics business is that sales of hardware, software, and services con-

nected to the Internet of Things is expected to increase to $7.1 billion by 2020 from approximately

$2.0 billion in 2015. A recent report by Cognizant Technology Solutions Corp., an IT services and

consulting firm, predicts that more than 20 new job categories are soon to emerge from techno-

logical advances.

Online retail is crushing traditional retail. Credit Suisse reports that more U.S. brick-and-

mortar retail stores closed in 2017 than in the 2008 economic recession. U.S. online retail sales

increased a whopping 24 percent in 2017, as consumers prefer having boxes delivered to their door.

This technological trend is so pervasive that Walmart Stores, Inc. in 2018 changed their name to

Walmart, Inc.—removing the word stores. In fact, in terms of online selling of groceries, Walmart

is the leader in China, even though there are more than four hundred Walmart stores in China.

Advances in technology impact the manufacturing labor market. Ben Pring, Director of

Cogniant’s Center for the Future of Work estimates that nearly 19 million jobs in the United

States will become obsolete or be replaced by automation in the next 15 years.4 In a dramatic

shift from employing people with low wages outside of the United States, Adidas is shifting

to produce footwear in developed countries using fully robotic plants called “speed-factories.”

Adidas’s speed- factories are now located across the world, including in Germany, the United

States, France, China, and Japan. This shift from cheap manpower to complete automation is a

technological revolution occurring in the footwear industry. Before new speed-factories, Adidas

owned no factories, instead using more than one thousand suppliers that employ millions of

people to assemble shoes at low-wage facilities globally. Adidas’ new strategy aims to eventually

surpass its major rival Nike.

No company or industry today is insulated against emerging technological developments. In high-

tech industries, identification and evaluation of key technological opportunities and threats can be the

most important part of the external strategic-management audit. In performing an external assessment,

technology-related factors must be stated in AQCD terms to the extent possible to be useful in strategic

planning. Technological advancements impact firms in countless ways, such as the following:

1. They can dramatically affect organizations’ products, services, markets, suppliers, distribu-

tors, competitors, customers, manufacturing processes, marketing practices, and competi-

tive position.

2. They can create new markets, result in a proliferation of new and improved products,

change the relative competitive cost positions in an industry, and render existing products

and services obsolete.

3. They can reduce or eliminate cost barriers between businesses, create shorter production

runs, create shortages in technical skills, and result in changing values and expectations of

employees, managers, and customers.

4. They can create new competitive advantages that are more powerful than existing

advantages.

TABLE 3-3 Example Political, Governmental, and Legal Categories To Be Monitored

Natural environmental regulations United States versus other country relationships

Protectionist actions by countries Political conditions in countries

Changes in patent laws Global price of oil changes

Equal employment opportunity laws Local, state, and federal laws

Level of defense expenditures Import–export regulations

Unionization trends Tariffs, particularly on steel and aluminum

Antitrust legislation Local, state, and national elections

100 PART 2 • STRATEGY FORMuLATION

A chief information officer (CIO) and chief technology officer (CTO) are common

positions in firms today, reflecting the growing importance of information technology (IT)

in strategic management. A CIO and CTO work together to ensure that information needed to

formulate, implement, and evaluate strategies is available on demand. The CIO is primarily a

manager, managing the firm’s relationship with stakeholders; the CTO is primarily a technician,

focusing on technical issues such as data acquisition, data processing, decision-support systems,

and software and hardware acquisition.

Monitoring online reviews for businesses, large or small, has become a burdensome but

essential task, especially given social-media channels, such as Twitter, that empowers opinionated

customers. Benign neglect of a company’s online reputation can quickly hurt sales, especially

given the new normal behavior of customers consulting their smartphones for even the smallest

of purchases.

Competitive Forces

Arguably the most important part of an external audit is identifying rival firms and deter-

mining their strengths, weaknesses, capabilities, objectives, and strategies. George Salk

stated, “If you’re not faster than your competitor, you’re in a tenuous position, and if you’re

only half as fast, you’re terminal.” As indicated in Global Capsule 3, Netflix is faster than

its rival firms but staying ahead requires constant monitoring of what those firms are doing

and why. Go to www.owler.com for information about competitors.

Competition in virtually all industries is intense—and sometimes cutthroat. Within the

smartphone and personal tech industry, for example, GoPro Inc. is struggling to maintain market

share. To differentiate its offerings from the latest smartphone camera technologies offered by

Apple and Samsung, GoPro developed a new product called Fusion that features a 360-degree

spherical camera with a unique Over-Capture capability, enabling users to capture pictures from

every angle simultaneously.

Addressing questions about competitors, such as those presented in Table 3-4, is essential in

performing an external audit. Competitive intelligence (CI), as formally defined by the Society

of Competitive Intelligence Professionals (SCIP), is a systematic and ethical process for gather-

ing and analyzing information about the competition’s activities and general business trends to

further a business’s own goals (SCIP website). Quality competitive intelligence in business, as in

the military, is one of the keys to success. Major competitors’ weaknesses can represent external

opportunities; major competitors’ strengths may represent key threats.

Various legal and ethical ways to obtain competitive intelligence include the following:

• Reverse-engineer rival firms’ products.
• Use surveys and interviews of customers, suppliers, and distributors of rival firms.
• Analyze rival firm’s Form 10-K.
• Conduct fly-over and drive-by visits to rival firm operations.
• Search online databases and websites such as www.owler.com.
• Contact government agencies for public information about rival firms.

TABLE 3-4 Key Questions about Competitors

1. What are the strengths and weaknesses of our major competitors?

2. What products and services do we offer that are unique in the industry?

3. What are the objectives and strategies of our major competitors?

4. How will our major competitors most likely respond to current economic, SCDE, political, govern-

mental, legal, technological, and competitive trends affecting our industry?

5. How vulnerable are our major competitors to our new strategies, products, and services?

6. How vulnerable is our firm to successful counterattack by our major competitors?

7. How does our firm compare to rivals in mastering the social-media conversation in this industry?

8. To what extent are new firms entering and old firms leaving this industry?

9. What key factors have resulted in our present competitive position in this industry?

10. How are supplier and distributor relationships changing in this industry?

http://www.owler.com

CHAPTER 3 • THE ExTERNAL ASSESSMENT 101

GLOBAL CAPSULE 3

What Company Is Growing Fastest Globally?
The answer to the question posed may be Netflix,

a firm that pursues global expansion with a ven-

geance. Netflix added 4.45 million new inter-

national subscribers in the third quarter (Q3) of

2017 alone, with Q3 revenue increasing 30 per-

cent. Netflix is taking advantage of the opportu-

nity associated with the population of the world

approaching 7.5 billion; the United States has

slightly more than 320 million people. That leaves

billions of people outside the United States who

may be interested in the products and services

produced through domestic firms. Remaining

solely domestic is an increasingly risky strategy,

especially as the world population continues to

grow to an estimated 8.6 billion in 2030, 9.8 bil-

lion in 2050, and 11.2 billion in 2100.
Netflix is also mitigating an external threat in that some content

owners such as Walt Disney Company are planning to offer their own

movie- and video-streaming services instead of

working with Netflix. Apple also expects to spend

more than $1 billion in 2018 to produce its own

original content. To combat this threat, Netflix is

spending over $8 billion on content annually, sub-

stantially more than its rivals Hulu, Amazon.com,

and HBO. Netflix is focused on signing creative tal-

ent and acquiring its own production and intellec-

tual property. For example, the company recently

made it first acquisition, taking onboard the comic-

book publisher Millarworld. In addition to contin-

ued global expansion, Netflix’s long-term strategy

is to continue international expansion, rely less on

licensing programs from content suppliers, and

focus increasingly on acquiring original content.

Source: Based on Austen Hufford, “Netflix Subscriber Growth Surges,” Wall Street

Journal, (October 17, 2017): B2.

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• Monitor relevant trade publications, magazines, and newspapers.
• Purchase social-media data about customers of all firms in the industry.
• Hire top executives from rival firms.

Information gathering from employees, managers, suppliers, distributors, customers, creditors,

and consultants can make the difference between having superior or just average intelligence and

overall competitiveness. All members of an organization—from the CEO to custodians—are valuable

intelligence agents for the firm. Special characteristics of a successful CI program include flexibility,

usefulness, timeliness, and cross-functional cooperation. CI is not corporate espionage. Unethical tac-

tics such as bribery, wiretapping, and computer hacking should never be used to obtain information.

Due to cybersecurity threats, CI must assure however that persons in a firm cannot access data and

information unrelated to their job description because hackers exploit this avenue in firms.

In performing an external assessment, competitor-related factors must be stated in AQCD

terms to the extent possible to be useful in strategic planning.

Porter’s Five-Forces Model
Harvard Business School Professor, Michael Porter, suggests that firms should strive to compete

in attractive industries, avoid weak or faltering industries, and gain a full understanding of key

external factors within that attractive industry. Given that competitive positioning within an indus-

try is a key determinant of competitive advantage, Porter established the Five-Forces Model.

One of the major contributions of Porter’s work is he shifted focus away from viewing com-

petition directed toward a few rival firms to a broader analysis that includes forces from current

competitors, new competitors, substitute products, suppliers, and buyers. Competitive advantage

can be created in each area of the five forces by offering value to the consumer that exceeds cost.

Rather than focusing solely on a top competitor, it is important that firms examine how suppliers

and others listed in the five forces are trying to siphon off as much value as possible in all busi-

ness transactions.

Porter’s Model is also used to determine which industries to enter because generally the

stronger the five forces are, the less profitable the industry. Porter is an advocate of external vari-

ables rather than internal ones being a larger driver of competitive advantage, similar to a rising

or falling tide; it is difficult to overcome a rising tide no matter your internal capabilities. Porter’s

Model also prompts managers to focus on the medium- and longer-term factors that determine

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102 PART 2 • STRATEGY FORMuLATION

competitiveness, rather than short-term factors such as stock market movements, who won the

election, or even something as trivial as inclement weather, which is often an excuse proposed by

pundits on TV to explain slow Christmas sales. It is not that short-term factors are not important

or have no impact, but they simply do not affect competition to the degree that long-term factors

do, as revealed in the Five-Forces Model.

As illustrated in Figure 3-3, the Porter’s Five-Forces Model offers guidance to strategists in

formulating strategies to keep rival firms at bay. According to Porter, the nature of competitive-

ness in a given industry can be viewed as a composite of five forces:

1. Rivalry among competing firms

2. Potential entry of new competitors

3. Potential development of substitute products

4. Bargaining power of suppliers

5. Bargaining power of consumers

Rivalry among Competing Firms

Rivalry among competing firms is usually the most powerful of the five competitive forces

and the most traditional factor analyzed by managers. It is also the only factor most affected

by changes in the other four factors. Strategies pursued by one firm can be successful only

to the extent that they provide competitive advantage over the strategies pursued by rival

firms. Intense rivalry among competitors in an industry can decrease overall industry profits

because firms often lower prices or spend extra on advertising to maintain market share, often

transferring profits directly to consumers and other players in the Five-Forces Model. Rivalry

among competing firms increases for numerous reasons as given in Table 3-5, including an

increase in the number of competitors and a shift towards competitors becoming more equal

in size and capability.

As rivalry among competing firms intensifies, industry profits decline, in some cases to

the point where an industry becomes inherently unattractive. Changes in strategy by one firm

may be met with retaliatory countermoves, such as lowering prices, enhancing quality, adding

features, providing services, extending warranties, and increasing advertising—especially

when a firm senses weakness from another. Although avoiding high-rivalry industries would

be ideal, that is often easier said than done. At times it may be best to look for an industry

with more favorable five forces and reduced rivalry, but firms can also compete within a

similar or sub-industry by offering products targeting different customer groups with dif-

ferentiated products. Offering differentiation helps all firms in the industry by moving away

from competing on cost, where unique customers can be better served while maintaining

profits for firms.

Potential development of substitute products

Bargaining power of consumersBargaining power of suppliers

Potential entry of new competitors

Rivalry among competing
firms

FIGURE 3-3

The Five-Forces Model of Competition

CHAPTER 3 • THE ExTERNAL ASSESSMENT 103

Potential Entry of New Competitors

Whenever new firms can easily enter a particular industry, existing firms are likely to face threats

of reduced market share. In such industries, a firm’s strategies should deter new firms from enter-

ing the market to avoid further saturation of the market. Example barriers to entry can include

economies of scale, specialized know-how, strong brand reputation, established customer loyalty,

high capital requirements, absolute cost advantages, highly efficient supply chains, specialized

distribution channels, access to key raw materials, and possession of patents. The automotive

oil-change industry, for example, has relatively low barriers to entry; whereas the smartphone

industry has much higher barriers to entry.

Despite numerous barriers to entry, new firms sometimes enter industries with higher-quality

products, lower prices, and substantial marketing resources. When the threat of new firms enter-

ing the market is strong, incumbent firms generally fortify their positions and take swift actions

to deter new entrants, such as lowering prices, extending warranties, adding features, or offer-

ing financing specials. Even the threat of new entrants can increase rivalry and thus reduce

profitability.

Potential Development of Substitute Products

In many industries, firms are in close competition with producers of substitute products in other

industries. Examples are beer, wine, and liquor; public transportation and car, bike, and taxi/

Uber; natural gas, electricity, and solar power; glass bottles, paperboard containers, and alumi-

num cans. A high threat of substitutes exists when consumer needs can easily be filled by one

or more substitute products outside of the firm’s industry. Competitive pressures arising from

substitute products increase as the relative price of substitute products decline and as consumers’

costs of switching decrease.

The presence of substitute products puts a ceiling on the price that can be charged before

consumers will switch to the substitute product. Price ceilings equate to profit ceilings and more

intense competition among rivals. Producers of eyeglasses and contact lenses, for example, face

increasing competitive pressures from laser eye surgery. Producers of sugar face similar pres-

sures from artificial sweeteners. Newspapers and magazines face substitute-product competitive

pressures from the Internet and 24-hour cable television. Substitute products can also come from

places not normally expected. For example, a diamond producer may not consider a honeymoon

package as a substitute for a less expensive ring. The bottom line with this “force” is that strate-

gists must manage the potential threat of substitute products.

Bargaining Power of Suppliers

The bargaining power of suppliers refers to the ability of suppliers to raise the price of any inputs

into the industry. This “force” affects the intensity of competitiveness in an industry, especially

when there are few substitutes available for the product offered by suppliers, when the cost of

switching to an alternative product offered by a different supplier is high, when the industry is

not a key source of the supplier’s revenues, or when there are few suppliers.

TABLE 3-5 Conditions that Cause High Rivalry among Competing Firms

1. When the number of competing firms is high

2. When competing firms are of similar size

3. When competing firms have similar capabilities

4. When demand for the industry’s products is changing rapidly

5. When price cuts are common in the industry

6. When consumers can switch brands easily

7. When barriers to leaving the market are high

8. When barriers to entering the market are low

9. When fixed costs are high among competing firms

10. When products are perishable or have short product life cycles

104 PART 2 • STRATEGY FORMuLATION

In some cases, firms pursue a backward-integration strategy to compete with suppliers. This

strategy is especially effective when suppliers are unreliable, too costly, not capable of meeting

a firm’s needs on a consistent basis, or simply have too much bargaining power and are able to

charge absorbent prices. Boeing and Airbus, the two largest jetliner manufacturers, are beginning

to make a portion of the parts that go into planes because both firms determined too high of a

proportion industry profitability was going to suppliers. A key lesson for suppliers is that if your

customer has the means to backward-integrate, it may be best to renegotiate prices.

Overall, firms are in a better position when numerous suppliers exist. It is often in the best

interest of both suppliers and producers to assist each other with reasonable prices, improved

quality, development of new services, just-in-time deliveries, and reduced inventory costs, thus

enhancing long-term profitability for all concerned. In more and more industries, sellers are forg-

ing strategic partnerships with select suppliers in an effort to (1) reduce inventory and logistics

costs, (2) accelerate the availability of next-generation components, (3) reduce defect rates, and

(4) squeeze out important cost savings for both themselves and their suppliers.5

Bargaining Power of Consumers

Bargaining power of buyers refers to the ability of buyers to drive down prices for products

offered by companies in a given industry. This force is strong when firms operate in industries

that contain a limited number of buyers or that are made up of buyers that have multiple choices

of where to buy from; this force is also strong when buyers purchase in volume or have low

switching costs. Consumers (buyers) gain bargaining power under the following circumstances:

1. If they can inexpensively switch to competing brands or substitutes

2. If they are particularly important to the seller

3. If sellers are struggling in the face of falling consumer demand

4. If they are informed about sellers’ products, prices, and costs

5. If they have discretion in whether and when they purchase the product6

The impact of this “force” on industry competitiveness is higher when the products being

purchased are standard or undifferentiated, enabling consumers to negotiate selling price, war-

ranty coverage, and accessory packages to a greater extent. Rival firms may offer extended war-

ranties or special services to gain customer loyalty whenever the bargaining power of consumers

is substantial. New car buyers, for example, often compare prices of their desired car across

several dealerships, often negotiating lower prices and additional services from dealerships in

exchange for their business.

As a result of Porter’s Five Forces, the intensity of competition among firms varies

widely across industries. Table 3-6 reveals the average operating profit for firms in different

industries. Note substantial variation among industries, with the lowest being for bookstores.

The collective impact of competitive forces is so brutal in some industries that the market is

TABLE 3-6 Competitiveness Across a Few Industries (2018 data)

Industry Operating Profit (%)

Banking 30.8

Hotels 18.4

Pharmaceutical 8.7

Oil and Gas Extraction 7.5

Fragrances/Cosmetics 7.1

Telecommunications 6.1

Food Manufacturing 5.4

Machinery/Construction 4.9

Paper Manufacturing 4.9

Bookstores 2.9

CHAPTER 3 • THE ExTERNAL ASSESSMENT 105

clearly “unattractive” from a profit-making standpoint. Strategists must continually monitor

the five forces to identify new opportunities and threats facing the firm, and alter strategies

accordingly.

Eliminating competition is a possibility and common strategy employed by firms in an indus-

try with high rivalry. Firms use mergers and acquisitions and purchase suppliers or buyers (dis-

tributors) all as a means to eliminate rivalry, but there are problems associated with this level of

thinking. Acquiring the competition often is associated with paying a premium and dealing with

different organizational cultures; although there may be no competitors currently, new competitors

may enter with different products and ultimately better serve many current customers. Purchasing

suppliers or distributors takes a firm away from the business they do best, possibly allowing com-

petitors to better develop and improve their products without being bogged down with supply chain

issues they know little about.

Several pitfalls firms should avoid when using the Five Forces Analysis, include (1) placing

equal weight on all five forces instead of identifying the most pressing forces for their industry,

(2) defining the industry too broad or too narrow, and (3) using the five forces to pin labels such as

attractive or unattractive on an industry rather than using the model to more efficiently formulate

strategies. When using Porter’s Five Forces Model as an external assessment tool in doing strategic

planning, strive to identify AQCD opportunities and threats most important for success in a given

industry, and most relevant to the firm’s vision and mission.

Key Sources of Information for an External Audit
A wealth of strategic information is available to organizations from both published and unpub-

lished sources. Unpublished sources include customer surveys, market research, speeches at pro-

fessional and shareholders’ meetings, television programs, interviews, and conversations with

stakeholders. Published sources of strategic information include periodicals, journals, reports,

government documents, abstracts, books, directories, newspapers, and manuals. A company

website is usually an excellent place to start to find information about a firm, particularly on the

Investor Relations web pages.

There are many excellent websites for gathering strategic information, but six outstanding

ones that the authors use routinely in performing an external audit are:

1. http://finance.yahoo.com

2. www.hoovers.com

3. www.morningstar.com

4. www,mergentonline.com

5. http://globaledge.msu.edu/industries/

6. Corporate website of companies

The fifth website listed is operated by Michigan State University and provides industry pro-

files that are an excellent source for information, news, events, and statistical data for any industry.

Most college libraries subscribe to excellent online business databases that can then be used free

by students to gather information to perform a strategic-management case analysis. Simply ask

your reference librarian. Some outstanding library database sources of external audit information

are described in Table 3-7; the authors use all of these sources, especially S&P Net Advantage’s

Industry Surveys and IBISWorld, to obtain AQCD external factors for inclusion in an external

assessment. Note also in Table 3-7 the PrivCo source is helpful for obtaining information about

privately held firms; use www.owler.com for information about rival firms.

Forecasting and Making Assumptions
Forecasts are educated assumptions about future trends and events. Forecasting is a complex

activity because of factors such as technological innovation, cultural changes, new products,

improved services, stronger competitors, shifts in government priorities, changing social values,

unstable economic conditions, and unforeseen events. Managers often must rely on published

forecasts to effectively identify key external opportunities and threats.

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106 PART 2 • STRATEGY FORMuLATION

A sense of the future permeates all action and underlies every decision a person makes.

People eat expecting to be satisfied and nourished in the future. People sleep assuming that

in the future they will feel rested. They invest energy, money, and time because they believe

their efforts will be rewarded in the future. They build highways assuming that automobiles

and trucks will need them in the future. Parents educate children on the basis of forecasts

that they will need certain skills, attitudes, and knowledge when they grow up. The truth

is we all make implicit forecasts throughout our daily lives. The question, therefore, is not

whether we should forecast but rather how we can best forecast to enable us to move beyond

our ordinarily unarticulated assumptions about the future. Can we obtain information and

use it to make educated assumptions (forecasts) that better guide our current decisions and

foster a more desirable future state of affairs? Assumptions must be made based on facts,

figures, trends, and research. Strive for the firm’s assumptions to be more accurate than rival

firms’ assumptions.

No forecast is perfect; some are even wildly inaccurate. This fact accents the need for strate-

gists to devote sufficient time and effort to study the underlying bases for published forecasts and

to develop internal forecasts of their own. Key external opportunities and threats can be effec-

tively identified only through good forecasts.

Making Assumptions

Planning would be impossible without assumptions. McConkey defines assumptions as the

“best present estimates of the impact of major external factors, over which managers have

little if any control, but which may exert a significant impact on performance or the ability to

achieve desired results.”7 Strategists are faced with countless variables and imponderables that

TABLE 3-7 Excellent Online Sources to Obtain EFE Matrix Factor Information

• IBISWorld—Provides online USA Industry Reports (NAICS), U.S. Industry iExpert Summaries,

and U.S. Business Environment Profiles. A global version of IBIS is also available.

• Lexis-Nexis Academic—Provides online access to newspaper articles (including New York Times and

Washington Post) and business information (including SEC filings).

• Lexis-Nexis Company Dossier—Provides online access to extensive, current data on 13 million

companies. It collects and compiles information into excellent documents.

• Mergent Online—Provides online access to Mergent’s Manuals, which include trend, descriptive,

and statistical information on hundreds of public companies and industries. Unconsolidated company

income statements and balance sheets are provided.

• PrivCo—Provides information on privately held companies, including private financials and rev-

enues; private M&A deals and deal multiples, private firm valuations, VC funding, private equity deal

history. (Go to www.owler.com for information about competitors.)

• Regional Business News—Provides comprehensive full-text coverage for regional business publica-

tions; incorporates coverage of more than 80 regional business publications covering all metropolitan

and rural areas within the United States.

• Standard & Poor’s NetAdvantage—Provides online access to Standard & Poor’s (S&P) Industry

Surveys, stock reports, corporation records, The Outlook, mutual fund reports, and more. Locate the

“Company” tab at the top of the page or the “Simple Search” option located on the right side of the

page. Use the “Company Profile” option.

• Value Line Investment Survey—Provides excellent online information and advice on approximately

1,700 stocks, more than 90 industries, the stock market, and the economy. Company income state-

ments and balance sheets are provided.

• U.S. Securities and Exchange Commission—Provides the Form 10K for publicly held companies in

the United States. Use the search box at the top of the page or look under the “Filings” tab along the

top of the page.

• Company Annual Reports On-Line (CAROL)—Provides direct links to publicly held companies’

financial statements in both Europe and the United States.

Source: Based on information at www.fmarion.edu/library.

http://www.owler.com

http://www.fmarion.edu/library

CHAPTER 3 • THE ExTERNAL ASSESSMENT 107

can be neither controlled nor predicted with 100 percent accuracy. Wild guesses should never

be made in formulating strategies, but reasonable assumptions based on available information

must always be made.

By identifying future occurrences that could have a major effect on the firm and by making

reasonable assumptions about those factors, strategists can carry the strategic-management process

forward. Assumptions are needed only for future trends and events that are most likely to have a

significant effect on the company’s business. Based on the best information at the time, assumptions

serve as checkpoints on the validity of strategies. If future occurrences deviate significantly from

assumptions, strategists know that corrective actions may be needed. Firms that compile the best

information generally make the most accurate assumptions, which can lead to major competitive

advantages.

The External Factor Evaluation Matrix
An External Factor Evaluation (EFE) Matrix allows strategists to summarize and evaluate

economic, social, cultural, demographic, environmental, political, governmental, legal, techno-

logical, and competitive information. The EFE Matrix provides an empirical assessment of how

well a firm is handling external factors overall, including the firm’s effectiveness at capitalizing

on opportunities and minimizing threats.

Steps to Develop an EFE Matrix

An EFE Matrix can be developed in five steps:

Step 1: Develop a Full and Narrow List of Key External Factors

Conduct research about the focal company using the resources listed in Table 3.7. Compile and

organize information into two data sets, opportunities and threats, developing a full list of per-

haps 50 to 100 opportunity and threat factors relevant to the 10 external areas described previ-

ously. Include factors most important to your firm’s industry, vision, mission, and strategies,

considering the five forces just discussed. Then, narrow your data sets down to 20 key external

factors that include specifically 10 opportunities and 10 threats. (Note: We use 10 and 10 because

organizations commonly use this breakdown and the template at www.strategyclub.com uses 10

and 10). List opportunities first and then threats. Also, do not include strategies as opportunities,

so for example, “to build two new manufacturing plants in Europe” is a strategy, not an oppor-

tunity; there may be an underlying opportunity that could make that strategy reasonable, such as

“eight European countries have repealed restrictions on the sale of generic drugs.”

Firms determine the most important 20 factors among a full list usually by rating the factors

according to importance (1 = least important to 10 = most important) and consolidating the rat-

ing data or by ranking the factors (1 = most important to 50 = least important) and consolidating

the ranking data. Both methods will yield the 20 most important factors to include. The impor-

tant point here is that companies (and students) never should include just the first 20 factors that

come to mind. For example, someone recently included as a threat in his EFE Matrix that “a

hurricane can come.” Ninety-nine percent of the time that factor should not be included in the

matrix; instead, conduct research to identify external factors that relate to the firm’s vision, mis-

sion, strategies, and competitive advantages.

When determining particular factors to include in an EFE Matrix, and when assigning

weights and ratings (Step 2) focus on a narrow industry perspective. For example, for Spirit

Airlines, the industry is discount airlines, rather than all airlines, and for Lamborghini, the

industry is high-end sports cars, not simply automobiles. This narrow industry perspective is

important to facilitate external factors being stated in terms that meet the AQCD Test discussed

earlier.

In developing a list of key external factors, be mindful of the AQCD Test because vagueness

in stating factors must be avoided; vagueness gives analysts no guidance in assigning weights

or ratings in developing an EFE Matrix. Recall that Edward Deming said, “In God we trust.

Everyone else bring data.” Include “actionable” factors as defined previously in this chapter.

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108 PART 2 • STRATEGY FORMuLATION

Step 2: Assign Weights to Key External Factors

In developing an EFE Matrix, assign a weight that ranges from 0.01 (not important) to 1.0 (all-

important) for each factor. The weight assigned to a given factor indicates the relative importance

of the factor for being successful in the firm’s industry relative to other factors included in the

EFE. For example, a factor receiving a weight of 0.06 is 200 percent more important than a factor

receiving a weight of 0.02 for success in the industry. Regardless of whether a key factor for a

particular firm is an opportunity or threat, factors considered to have the greatest affect on orga-

nizational performance of all firms in a specific industry should be assigned the highest weights.

The sum of all weights must equal 1.0. Do not try to even weights out to total 0.50 for opportuni-

ties and 0.50 for threats. In fact, if rivalry is high in a given industry, as discussed in the Porter’s

Five Forces section, then the sum of weights assigned to threats could be higher than the sum for

opportunities. Weights are industry-based, not company-based. List opportunities from highest

weight to lowest weight; do the same for threats.

Step 3: Assign Ratings to Key External Factors

In developing an EFE Matrix, assign a rating between 1 and 4 to each key external factor to

indicate how effectively (or ineffectively) the firm’s strategies are responding to the opportunity

or threat, where 4 = the response is superior, 3 = the response is above average, 2 = the response

is average, and 1 = the response is poor. Both opportunities and threats can receive a rating of 1,

2, 3, or 4 at any time. Ratings are based on the effectiveness of a firm’s strategies in capitalizing

on opportunities or avoiding/mitigating threats. Ratings are company-based, not industry-based.

Assignment of numerical values down the rating column in an EFE Matrix should be with

consideration that companies carve out niches in industries that enable them to gain and sus-

tain competitive advantages through effective strategies. These niches are most often based on

capitalizing on some opportunities more effectively than rivals. This is not to say that threats

are not important, they are; some threats can wipe a firm out. However, if a firm faces many

opportunities, this is likely the result of effective strategies positioning the firm well, so higher

ratings are often warranted for opportunities; higher ratings increase the total weighted score in

an EFE Matrix.

As an example, the luxury car maker Ferrari could receive a high rating on a price com-

petitiveness external factor, even though their sports cars are expensive because price competi-

tiveness is not a deciding factor (low weight) for customers in the luxury sports car industry.

Thus, in assigning ratings, as with weights, consider a subset of the industry in make effective

judgments.

Step 4: Obtain Weighted Scores

Along each row in an EFE Matrix, multiply the factor’s weight by its rating to determine a

weighted score for each factor.

Step 5: Obtain Total Weighted Score

Sum the weighted scores to determine the total weighted score for the organization. Regardless

of how many factors are included in an EFE Matrix, the total weighted score can range from a

low of 1.0 to a high of 4.0, with the average score being 2.5. Total weighted scores well below

2.5 characterize organizations that are weak at responding to external factors, implying that new

strategies are likely needed and perhaps a new direction, new vision or mission. Total weighted

scores well above 2.5 indicate a strong external position, whereby a continuation of current strat-

egies may be prudent, being ever mindful that there is always room for improvement. A total

weighted score of 3.5 for example indicates that an organization is responding in an outstand-

ing way to existing opportunities and threats in its industry. In other words, the firm’s strat-

egies effectively take advantage of existing opportunities and minimize the potential adverse

effects of external threats. A total weighted score of 1.5 indicates that the firm’s strategies are not

capitalizing on opportunities or avoiding external threats. Making “small” decisions regarding

weights and ratings in matrices is essential for making effective big strategy decisions later in the

strategic-planning process; for example, a billion dollars may be at stake in choosing a particular

strategy over another to implement, and the EFE Matrix with its factors, weights, and ratings is

helpful in making that type of choice.

CHAPTER 3 • THE ExTERNAL ASSESSMENT 109

TABLE 3-8 EFE Matrix for a Local 10-Theater Cinema Complex

Key External Factors Weight Rating Weighted Score

Opportunities

1. Two new neighborhoods developing within 3 miles 0.09 1 0.09

2. TDB University is expanding 6% annually 0.08 4 0.32

3. Major competitor across town recently closed 0.08 3 0.24

4. Demand for going to cinemas growing 10% 0.07 2 0.14

5. Disposable income among citizens up 5% in prior year 0.06 3 0.18

6. Rowan County is growing 8% annually in population 0.05 3 0.15

7. Unemployment rate in county declined to 3.1% 0.03 2 0.06

Threats

1. Trend toward healthy eating eroding concession sales 0.12 4 0.48

2. County and city property taxes increasing 25% 0.08 2 0.16

3. Movies rented at local Redboxes up 12% 0.08 2 0.16

4. Demand for online movies growing 10% 0.06 2 0.12

5. Commercial property adjacent to cinemas for sale 0.06 3 0.18

6. Movies rented last quarter from Time Warner up 15% 0.06 1 0.06

7. Local religious groups object to R-rated movies 0.04 3 0.12

8. TDB University installing an on-campus movie theater 0.04 3 0.12

Total 1.00 2.58

An Example EFE Matrix

An example EFE Matrix is provided in Table 3-8 for a local 10-theater cinema complex. Observe

in the table that the most important factor to being successful in this industry is “Trend toward

healthy eating eroding concession sales,” as indicated by the 0.12 weight. Also note that the local

cinema is doing excellent (received a rating of 4) in regard to its handling of two external factors,

“TDB University is expanding 6 percent annually” and “Trend toward healthy eating eroding

concession sales.” Perhaps the cinema is placing flyers on campus and also adding yogurt and

healthy drinks to its concession menu.

Overall, the total weighted score of 2.58 is above the average (midpoint) of 2.5, so this cin-

ema business is doing slightly above average taking advantage of the external opportunities and

minimizing external threats facing the firm. There is definitely room for improvement, though,

because the highest total weighted score would be 4.0. As indicated by ratings of 1, the business

needs to capitalize more on the “Two new neighborhoods developing within 3 miles” opportu-

nity and work to avoid the “movies rented from . . . Time Warner” threat.

An actual EFE Matrix for one of the largest U.S. grocery retailers, Kroger, is given in

Table 3-9 on page 110. As shown, the most important external factor facing Kroger, as indicated

by a weight of 0.10, deals with Amazon acquiring Whole Foods Market. Kroger’s key factors

are listed in order from the most important (highest weight) to the least important. Notice how

the factors largely meet the AQCD test. Recall that mathematically, 0.04 is 33 percent more

important than 0.03, and a rating of 3 is 50 percent higher than a rating of 2. Small judgments

regarding assignment of weights and ratings in matrices are vital for making effective larger

decisions related to deployment of resources and money across regions and products.

Overall, the total weighted score of 3.03 is above the average (midpoint) of 2.5, indicat-

ing that Kroger is doing pretty well at taking advantage of the external opportunities and

minimizing the threats facing the firm. There is definitely room for improvement, though,

because the highest total weighted score would be 4.0. The rating of 1 for “The National

Retail Federation estimates an 8–12% U.S. e-commerce growth in the next year,” for exam-

ple, suggests that Kroger should better capitalize on this opportunity, perhaps by expanding

its online offerings.

110 PART 2 • STRATEGY FORMuLATION

The Competitive Profile Matrix
The Competitive Profile Matrix (CPM) reveals how a focal firm compares to major competitors

across a range of key factors. This comparative analysis provides important strategic information

regarding a firm’s competitive advantages or disadvantages in a given industry. In determining

what factors to include in a CPM, tailor the factors to the particular industry. For example, in the

airline industry, such factors as on-time arrival, leg room in planes, and routes served are far better

factors to include than merely including “quality of service” or “financial condition” as factors.

Similar to an EFE, a CPM uses weights and total weighted scores, which quantify the

importance of a given factor to the industry, as well as total weighted scores, which quantify

how well a given firm is doing relative to the other two firms evaluated in the CPM. The key

difference between a CPM and EFE is that a CPM compares firms and an EFE Matrix analyzes

how a firm internally is responding to key external issues. Critical success factors include points

LO 3.7

TABLE 3-9 An Actual EFE Matrix for Kroger Co.

Opportunities Weight Rating
Weighted

Score

1. Organic & natural food sales in the United States totaled $47 billion, an increase of

nearly $3.7 billion from the previous year.

0.09 4 0.36

2. Online grocery spending is forecasted to grow from 4.3% of the total U.S. food and

beverage sales to 20% by 2025.

0.07 3 0.21

3. Sales growth in the grocery industry is 3.8% annually. 0.07 4 0.28

4. Organic food sales increased 8.8% to $55 billion. 0.05 2 0.1

5. Convenience store lunch and dinner services contribute 21.7% of in-store sales. 0.05 2 0.1

6. The National Retail Federation estimates an 8% to 12% U.S. e-commerce growth in

2019.

0.05 1 0.05

7. Global food retail sales are about $4 trillion annually, led by supermarkets/

hypermarkets.

0.04 2 0.08

8. GDP of United States increased from 2.2% to 3.1%. 0.04 2 0.08

9. The Private Label Manufacturer’s Association notes that private label products are 25%

to 50% cheaper than national brands, appealing to customers who value affordability.

0.03 1 0.03

10. Studies show that 51.2% of Internet users make online purchases using mobile apps. 0.01 3 0.03

Threats Weight Rating
Weighted

Score

1. Amazon spent $13.7 billion to acquire 460 brick-and-mortar Whole Foods Market

stores.

0.10 2 0.2

2. Target is investing $7 billion to update and downsize its stores and develop new exclu-

sive brands between 2018 and 2020.

0.08 1 0.08

3. Walmart’s fiscal 2017 revenue was $485.8 billion, up $9.4 billion, or 0.78%. Kroger’s

total revenue is $115.3 billion.

0.07 3 0.21

4. Fast-food revenue exceeds $600 billion annually; it is rising 15% annually. 0.05 2 0.1

5. E-commerce sales as percentage of total retail sales is nearly 10%, and rising 3%

annually.

0.05 1 0.05

6. Walmart groceries cost about 4% less than Kroger’s. 0.04 2 0.8

7. Walmart.com now offers more than 67 million products, a 30% increase this year. 0.03 1 0.03

8. Walmart created its own “designer” cantaloupe that “tastes as sweet in winter as it does

in summer,” and a more flavorful tomato is in the works.

0.03 2 0.06

9. Publix Supermarket is growing 12% a year. 0.03 4 0.12

10. Aldi’s U.S. grocery market is growing 15% a year. 0.02 3 0.06

Total 1.00 3.03

CHAPTER 3 • THE ExTERNAL ASSESSMENT 111

TABLE 3-10 An Example Competitive Profile Matrix

Company 1 Company 2 Company 3

Critical Success Factors Weight Rating Score Rating Score Rating Score

Advertising 0.20 1 0.20 4 0.80 3 0.60

Global Expansion 0.20 4 0.80 1 0.20 2 0.40

Financial Position 0.15 4 0.60 2 0.30 3 0.45

Management 0.10 4 0.40 3 0.20 1 0.10

Product Quality 0.10 4 0.40 3 0.30 2 0.20

Customer Loyalty 0.10 4 0.40 3 0.30 2 0.20

Price Competitiveness 0.10 3 0.30 2 0.20 1 0.10

Market Share 0.05 1 0.05 4 0.20 3 0.15

Total 1.00 3.15 2.50 2.20

Note: The ratings values are as follows: 1 = response is poor, 2 = response is average, 3 = response is
above average, 4 = response is superior. As indicated by the total weighted score of 2.20, Company 3
is performing worst. Only 8 critical success factors are included for simplicity; in actuality, however,
this is too few. The template asks that 12 factors be included and to tailor factors to a given industry.

of competitive advantage within an industry, as well as other factors that are crucial for a firm

to succeed within a given industry; critical success factors in a CPM can include both internal

and external issues. List critical success factors from highest weight to lowest weight in a CPM.

Weights in a CPM are industry-based and sum to 1.0. Ratings in a CPM are assigned to

quantify how well a firm and its key competitors are performing on each critical success factor;

ratings reveal the degree of effectiveness of the firm’s strategies. Assign a rating between 1 and

4 to each key factor to indicate how effectively the firm’s current strategies respond to the fac-

tor, where 4 = the response is superior, 3 = the response is above average, 2 = the response is

average, and 1 = the response is poor. Ratings are company-based; weights are industry-based.

A sample CPM is provided in Table 3-10. In this example, the two most important factors

to being successful in the industry are “advertising” and “global expansion,” as indicated by

weights of 0.20. If there were no weight column in this analysis, note that each factor then would

be equally important. Thus, including a weight column yields a more robust analysis because it

enables the analyst to capture perceived or actual levels of importance. Note in Table 3-10 that

Company 1’s strategies are responding in a superior fashion to “product quality,” as indicated

by a rating of 4, whereas Company 2’s strategies are superior regarding “advertising.” Overall,

Company 1’s strategies are responding best, as indicated by the total weighted score of 3.15 and

Company 3 is responding worst. Never duplicate ratings in a row in a CPM; go ahead and make

judgments or decisions as to appropriate ratings based on your research and knowledge of the

focal firm and rival companies. (Note: The point of this example is to illustrate the mechanics of

developing a CPM rather than having industry-specific factors.)

Other than the critical success factors listed in the sample CPM, factors often included in

this analysis include breadth of product line, effectiveness of sales distribution, proprietary or

patent advantages, location of facilities, production capacity and efficiency, experience, union

relations, technological advantages, and e-commerce expertise. In generating the list of critical

success factors, strive to include factors that differentiate firms within the industry (i.e., factors

that determine competitive advantages).

Just because one firm receives a 3.20 overall total weighted score and another receives a 2.80

in a CPM, it does not necessarily follow that the first firm is precisely 14.3 percent better than

the second, but it does suggest that the first firm is performing better on the variables included in

the CPM. Regarding weights in a CPM or EFE Matrix, be mindful that 0.08 is mathematically

33 percent higher than 0.06, so even small differences can reveal important perceptions regarding

the relative importance of various factors. The aim with numbers is to assimilate and evaluate

information in a meaningful way that aids in decision making.

112 PART 2 • STRATEGY FORMuLATION

TABLE 3-11 An Actual CPM for Kroger Company

Kroger Company Walmart Inc. Amazom.com Inc.

Critical Success Factors Weight Rating Score Rating Score Rating Score

Price Competitiveness 0.17 3 0.51 4 0.68 2 0.34

Product Quality 0.13 2 0.26 3 0.39 1 0.13

Multiple Formats 0.10 4 0.40 3 0.30 1 0.10

Market Penetration 0.09 4 0.36 3 0.27 2 0.18

Customer Loyalty 0.08 2 0.16 4 0.32 3 0.24

Name Recognition 0.08 1 0.08 4 0.32 3 0.24

Store Locations 0.07 2 0.14 4 0.28 1 0.07

Customer Service 0.07 2 0.14 3 0.21 4 0.28

Market Share 0.06 2 0.12 4 0.24 1 0.06

Financial Profit 0.05 2 0.10 4 0.20 3 0.15

Distribution System 0.05 2 0.10 3 0.15 4 0.20

Advertising 0.05 1 0.05 4 0.20 2 0.10

Total 1.00 2.42 3.56 2.09

IMPLICATIONS FOR STRATEGISTS

Figure 3-4 reveals that to gain and sustain competitive advantages,

strategists must collect, analyze, and prioritize information regard-

ing the firm’s competitors, as well as identify and consider relevant

social, demographic, economic, and technology trends and events

impacting the firm and its industry. It is not uncommon for there

to be substantial discussing, perhaps even some cussing, in delib-

erating what external factors should be included in an EFE Matrix,

because factors included ultimately impact the firm’s strategies and

direction. An engineering hunt for external facts is essential because

resultant strategies can be expensive and sometimes irreversible.

Survival of the firm can hinge on an effective, thorough external as-

sessment being performed.

This chapter reveals that actionable, quantitative, comparative,

divisional (AQCD) information is a key ingredient for making strategic

decisions. The EFE Matrix and Competitive Profile Matrix presented in

this chapter are excellent strategic-planning tools for assimilating and

prioritizing information to enhance decision-making.

The Process of Performing an External Audit

In performing an external audit, involve as many managers and em-

ployees as possible because involvement leads to understanding and

commitment; individuals appreciate having the opportunity to con-

tribute ideas and to gain a better understanding of their firm’s indus-

try, competitors, markets, and strategies. An effective way to gather

competitive intelligence and information across the 10 forces dis-

cussed in this chapter is to ask various managers to monitor particu-

lar sources of information, such as key magazines, trade journals,

newspapers, and online sources. These persons can submit periodic

scanning reports to the person(s) who coordinate the external audit.

This approach provides a continuous stream of timely strategic infor-

mation and involves many individuals in the external-audit process.

Suppliers, distributors, salespersons, customers, and competitors

represent other sources of vital information.

After external-audit information is gathered, it should be assimi-

lated into an EFE Matrix and CPM as described herein. To accomplish

this task, some firms conduct a meeting or series of meetings to

collectively determine the most important opportunities and threats

facing the firm. A prioritized list of these factors can be obtained

by requesting all managers to individually rank the factors identi-

fied, from 1 (for the most important opportunity/threat) to 20 (for

the least important opportunity/threat). Then, by summing the rank-

ings, a prioritized list of factors is revealed. Prioritization is absolutely

essential in strategic planning because no organization can do ev-

erything that would benefit the firm; tough choices among good

options have to be made; in both an EFE Matrix and CPM factors

are listed from most important (highest weight) to least important.

Even a full list of more than 50 factors can be distilled to the 20 most

important in the manner described.

An actual CPM is provided in Table 3-11, again for Kroger Company. Note that the two rival

firms, Walmart and Amazon, receive higher ratings than Kroger on several critical success fac-

tors, including distribution system, advertising, and customer service, for example. Also note the

factors are listed beginning with the most important (highest weight). Note there is no duplica-

tion of ratings across a row and that Kroger is responding worse than Walmart and Amazon on

“name recognition” and “advertising.”

CHAPTER 3 • THE ExTERNAL ASSESSMENT 113

Establish A Clear
Vision & Mission

Evaluate & Monitor
Results:

Take Corrective
Actions; Adapt

To Change

Gain & Sustain
Competitive
Advantages

Formulate Strategies:
Collect, Analyze, &

Prioritize Data Using
Matrices; Establish A
Clear Strategic Plan

Implement Strategies:
Establish Structure;
Allocate Resources;
Motivate & Reward;
Attract Customers;
Manage Finances

FIGURE 3-4

How to Gain and Sustain Competitive Advantages

IMPLICATIONS FOR STUDENTS

In developing and presenting the external assessment for your firm,

be mindful that gaining and sustaining competitive advantage is the

overriding purpose of developing the EFE Matrix and CPM. During

this “external” section of your written or oral project, emphasize

how and why particular factors can yield competitive advantage for

the firm. In other words, instead of robotically going through the

weights and ratings (which, by the way, are critically important),

highlight various factors in light of where you are leading the firm.

Make it abundantly clear in your discussion how your firm, with

your recommendations, can subdue rival firms or at least profitably

compete with them. Showcase during this part of your project the

key underlying reasons how and why your firm can prosper among

rivals. Remember to be prescriptive, rather than descriptive, in the

manner that you present your entire project. If presenting your proj-

ect orally, be self-confident and passionate rather than timid and

uninterested. Definitely “bring the data” throughout your project

because “vagueness” is the most common downfall of students in

doing case analysis. To obtain the most recent information about

your case company, read the firm’s most recent quarterly report; the

narrative that accompanies quarterly reports is excellent.

It is necessary for students in developing an EFE Matrix to in-

clude specific (AQCD) factors related to direct competitors, trends

in the economy, legal or tax issues, consumer attitudes, consumer

demographics, and other similar facts, trends, and events. In ad-

dition, there are factors associated with Porter’s Five Forces that

may need including. For example, you may want to include factors

such as the following:

1. China recently established four free-trade zones allowing for-

eign companies to establish operations in the country without

having a Chinese partner; this may be an external threat because

rival firms can enter the market more easily, such as in the au-

tomobile industry.

2. Potential substitute products may be a threat. For example, con-

sumption of bottled water rising 8 percent annually is a threat

for Dr Pepper Snapple.

3. Suppliers in any industry can potentially siphon away profits as

easily as a direct competitor; suppliers raising prices by 10 percent

may be an external threat.

114 PART 2 • STRATEGY FORMuLATION

Chapter Summary
Increasing turbulence in markets and industries around the world means the external audit has

become an explicit and vital part of the strategic-management process. This chapter provided a

framework for collecting and evaluating economic, social, cultural, demographic, environmen-

tal, political, governmental, legal, technological, and competitive information. The AQCD Test

was explained to assure that opportunities and threast as stated in an EFE Matrix are actionable,

qualitative, comparative, and divisional to the extent possible.

Firms that do not mobilize and empower their managers and employees to identify, moni-

tor, forecast, and evaluate key external forces may fail to anticipate emerging opportunities and

threats and, consequently, may pursue ineffective strategies, miss opportunities, and invite orga-

nizational demise. Firms not taking advantage of e-commerce and social-media networks are

technologically falling behind.

A major responsibility of strategists is to ensure development of an effective external-audit

system. This includes using information technology to devise a competitive intelligence system

that works. The EFE Matrix, CPM, and Porter’s Five-Forces Model can help strategists evalu-

ate their market and industry, but these tools must be accompanied by good intuitive judgment.

Multinational firms especially need a systematic and effective external-audit system because

external forces among foreign countries vary so greatly.

Key Terms and Concepts

actionable responses (p. 95)

chief information officer (CIO) (p. 100)

chief technology officer (CTO) (p. 100)

competitive intelligence (CI) (p. 100)

Competitive Profile Matrix (CPM) (p. 110)

external audit (p. 94)

External Factor Evaluation (EFE) Matrix (p. 107)

external forces (p. 95)

industry analysis (p. 94)

information technology (IT) (p. 100)

just-in-time (p. 104)

Porter’s Five-Forces Model (p. 102)

Issues for Review and Discussion
3-1. Explain why it is important to develop both a full and

narrow list of key external factors in developing an EFE

Matrix.

3-2. Explain the significance of an EFE Matrix total

weighted score of 3.67 versus a 1.59.

3-3. What does a CPM total weighted score of 1.88 imply

for a company?

3-4. In an EFE Matrix, should the weights for opportunities

be designed to roughly equal the weights for threats?

Why?

3-5. List the 10 external forces discussed in this chapter. When and

why would some forces be more important than others?

3-6. How have external factors resulted in a major overhaul

to the traditional retail industry as we once knew it?

3-7. Provide a synopsis of IBISWorld, Mergent Online, and

PrivCo.

3-8. Compare and contrast the EFE Matrix with a CPM in

terms of value provided for a strategist in performing an

external assessment.

3-9. Mathematically, how much more important is a rating

of 4 compared to a rating of 3? Why is this concept

important in developing strategic-planning matrices?

3-10. Describe how political elections can be an important ex-

ternal factor for companies to consider. Select an industry

and reveal some key political factors impacting firms.

3-11. List some legal or ethical ways to gather competitive

intelligence. List some illegal or unethical ways.

3-12. As the value of the dollar rises, U.S. firms doing busi-

ness abroad see their profits fall, so some firms raise

prices of their products to offset the decrease in profits.

What are some risks of raising prices?

3-13. Does McDonald’s Corp. benefit from a low or high

value of the dollar? Explain why.

3-14. Explain how Facebook, Twitter, and Instagram can

represent a major threat or opportunity for a company.

3-15. If your CPM has three firms and they all end up with

the same total weighted score, would the analysis still

be useful? Why?

3-16. What external factors impact the ability of state to attract

business? Visit the website: https://www.cnbc.com/2017/06/12/

heres-how-your-state-can-become-a-cnbc-top-state-for-

business.html and summarize how the selection criteria used

to determine the best states for business compares to the

information presented in this chapter.

CHAPTER 3 • THE ExTERNAL ASSESSMENT 115

3-17. Governments sometimes use “protectionism” to cope

with economic problems, imposing tariffs and subsi-

dies on foreign goods as well as placing restrictions

and incentives on their own firms to keep jobs at home.

What are the strategic implications of protectionism for

international commerce?

3-18. Rank order the relative importance of Porter’s five forces

in the business of operating a college or university.

3-19. Let’s say you work for McDonald’s and you applied

Porter’s Five-Forces Model to study the fast-food

industry. Rank the five forces as to relative importance

for strategic planning at McDonald’s.

3-20. Explain why it is appropriate for ratings in an EFE

Matrix to be 1, 2, 3, or 4 for any opportunity or threat.

3-21. Why is inclusion of about 20 factors recommended in

the EFE Matrix rather than about 10 factors or about 40

factors?

3-22. In developing an EFE Matrix, explain why is it advan-

tageous to arrange your opportunities according to the

highest weight, and your threats likewise?

3-23. In developing an EFE Matrix, would it be best to have

10 opportunities and 10 threats or would 17 opportuni-

ties (or threats) be fine with 3 of the other to achieve a

total of 20 factors as desired?

3-24. Could or should critical success factors in a CPM in-

clude external factors? Explain.

3-25. Explain how to conduct an external strategic-

management audit in a business versus as a student

performing case analysis.

3-26. Identify a recent economic, social, political, or

technological trend that significantly affects the local

Pizza Hut.

3-27. Discuss the following statement: Major opportunities

and threats usually result from an interaction among key

environmental trends rather than from a single external

event or factor.

3-28. Use Porter’s Five-Forces Model to evaluate competi-

tiveness within the U.S. banking industry.

3-29. How does the external audit affect other components of

the strategic-management process?

3-30. Construct an EFE Matrix for an organization of your choice.

3-31. Let’s say your boss develops an EFE Matrix that in-

cludes 62 factors. How would you suggest reducing the

number of factors to 20?

3-32. Discuss the ethics of gathering competitive intelligence.

3-33. Discuss the ethics of cooperating with rival firms.

3-34. Do you agree with Porter’s view that competitive

positioning within an industry is a key determinant of

competitive advantage(s)?

3-35. Define, compare, and contrast the weights versus rat-

ings in an EFE Matrix.

3-36. What is the different between factors listed in an EFE

Matrix versus critical success factors listed in a CPM?

In which matrix is it particularly important to include

specific, actionable factors? Why?

3-37. List the 10 external forces that give rise to opportunities

and threats.

3-38. Why do annual reports often state external risk informa-

tion in really vague terms; why should strategists avoid

including such vagueness in developing an EFE Matrix?

3-39. Explain the AQCD Test for determining the quality

of an external factor. Why should the AQCD Test be

met to the extent possible in performing an external

assessment?

ASSURANCE-OF-LEARNING EXERCISES

SET 1: STRATEGIC PLANNING FOR COCA-COLA

EXERCISE 3A

Develop an EFE Matrix for Coca-Cola

Purpose

This exercise will give you practice in developing an EFE Matrix. An EFE Matrix summarizes the

results of an external audit. This is an important strategic-planning tool widely used by strategists.

Instructions

Step 1 Join with two other students in class, and jointly prepare an EFE Matrix for Coca-Cola.

Refer to the Cohesion Case (p. 56) and to Exercise 1A (p. 65), if necessary, to identify exter-

nal opportunities and threats. Make sure the factors you include are actionable, quantitative,

comparative, and specific. Use the online sources listed in Table 3-7. Be sure not to include

strategies as opportunities; but do include as many monetary amounts, percentages, num-

bers, and ratios as possible.

Step 2 All three-person teams participating in this exercise should record their EFE total weighted

scores on the board. Put your initials after your score to identify it as your team’s score.

Step 3 Compare the total weighted scores. Which team’s score came closest to the instructor’s an-

swer? Discuss reasons for variation in the scores reported on the board.

116 PART 2 • STRATEGY FORMuLATION

EXERCISE 3B

Develop a Competitive Profile Matrix
for Coca-Cola

Purpose

Monitoring competitors’ performance and strategies is a key aspect of an external audit. This exercise

is designed to give you practice in evaluating the competitive position of organizations in a given in-

dustry and assimilating that information in a CPM.

Instructions

Step 1 Turn back to the Cohesion Case and review the section on competitors (p. 56). Also view

online resources that compare Coca-Cola with Pepsi. Use the sources listed in Table 3-7.

Step 2 Prepare a CPM that includes Coca-Cola, Pepsi, and Dr Pepper.

Step 3 Turn in your CPM for a classwork grade.

SET 2: STRATEGIC PLANNING FOR MY UNIVERSITY

EXERCISE 3C

Develop an EFE Matrix for Your College or University

Purpose

Most colleges and universities do strategic planning. Institutions are consciously and systematically

identifying and evaluating external opportunities and threats facing higher education in your state, the

nation, and the world.

Instructions

Step 1 Join with two other individuals in class and jointly prepare an EFE Matrix for your

institution.

Step 2 Go to the board and record your total weighted score in a column that includes the scores of

all three-person teams participating. Put your initials after your score to identify it as your

team’s score.

Step 3 Which team viewed your college’s strategies most positively? Which team viewed your col-

lege’s strategies most negatively? Discuss the nature of the differences.

EXERCISE 3D

Develop a Competitive Profile Matrix for Your College
or University

Purpose

Your college or university competes with all other educational institutions in the world, especially

those in your own state. State funds, students, faculty, staff, endowments, gifts, and federal funds are

areas of competitiveness. Other areas include athletic programs, dorm life, academic reputation, loca-

tion, and career services. The purpose of this exercise is to give you practice in thinking competitively

about the business of education in your state.

Instructions

Step 1 Identify two colleges or universities in your state that compete directly with your institu-

tion for students. Interview several persons, perhaps classmates, who are aware of particular

strengths and weaknesses of those universities. Record information about the two competing

universities.

Step 2 Prepare a CPM that includes your institution and the two competing institutions. Include the

following 10 factors in your analysis:

1. Tuition costs

2. Quality of faculty

3. Academic reputation

4. Average class size

5. Campus landscaping

CHAPTER 3 • THE ExTERNAL ASSESSMENT 117

6. Athletic programs

7. Quality of students

8. Graduate programs

9. Location of campus

10. Campus culture

Step 3 Submit your CPM to your instructor for evaluation.

SET 3: STRATEGIC PLANNING TO ENHANCE MY EMPLOYABILITY

EXERCISE 3E

How Competitive Is Your State among All States
for Finding a Job?

Purpose

Just like companies, states compete against each other across numerous variables. For more than a

decade, CNBC has been conducting annual research to determine where each U.S. state ranks (out

of the 50 states) in terms of their quality of life, job prospects, business attractiveness, and education,

among many other things. Each year, data is collected on more than 60 measures of competitiveness

and all 50 states are scored on each measure, ranging from economic policies and taxes, to the cost of

food, to the quality of their workforces.

The purpose of this exercise is to determine how your state ranks in terms of its job outlook and

prospects. This information can enhance your job search as you near completion of a business admin-

istration degree.

Instructions

Step 1 Go to the following website https://www.cnbc.com/2017/07/11/top-states-to-find-a-job-in-

america-in-2017.html and take a while to explore the types of reports offered, as well as the

source of data collected and used to create such reports.

Step 2 Review where your state ranks on the list of top states for business, top states to get an

education, and top states to find a job. Determine the three best competitive aspects of your

state.

Step 3 Are there similarities between your state’s ranking on each of these three reports? Do you

think job outlooks, education, and business attractiveness are inherently related? Develop a

report explaining your answer. Use information from the reports to support your arguments.

What actions could your state take to improve its competitiveness overall?

EXERCISE 3F

Compare and Contrast CareerBuilder, Glassdoor, Monster
Jobs, and ZipRecruiter

Purpose

Job hunting websites compete against each other for your business. Both job seekers and companies

with job openings use job hunting websites, especially CareerBuider, Glassdoor, Monster Jobs, and

ZipRecruiter. The purpose of this exercise is to familiarize you with the operation, strengths, and

weaknesses of these four websites.

Instructions

Step 1 Review the four named websites taking note of what you especially like and dislike.

Step 2 Prepare a CPM for CareerBuilder. Include the three rival websites in your analysis.

EXERCISE 3G

A Template Competency Test

Purpose

The free Excel strategic planning template at www.strategyclub.com is widely used for strategic

planning by students and small businesses; this exercise aims to enhance your familiarity with the

https://www.cnbc.com/2017/07/11/top-states-to-find-a-job-in-america-in-2017.html

http://www.morningstar.com

118 PART 2 • STRATEGY FORMuLATION

template. Developing competence with the template will enable you to place this skill appropriately

on your resume, in addition to facilitating your development of a comprehensive strategic plan for an

assigned case company.

Instructions

Answer the following six questions about the template. Discuss your answers with classmates to de-

termine any issues or concerns.

Questions

1. How many factors does the template include in an EFE Matrix; in a CPM?

2. What happens using the template if you enter an inappropriate rating or weight such as a weak-

ness rating of 4 or a weight of 1.2?

3. In using the template, why are changes to a matrix done on Part I or Part II rather than on a

matrix itself?

4. Why is it best to transform a firm’s income statement and balance sheet into the template finan-

cial statement format early in developing a strategic plan for a case company?

5. What are key differences between Part I and Part II in the template?

6. Does the template address vision and/or mission statements?

SET 4: INDIVIDUAL VERSUS GROUP STRATEGIC PLANNING

EXERCISE 3H

What External Forces Are Most Important in Strategic
Planning?

Purpose

A prioritized list of external factors is needed for effective strategic planning. Oftentimes the process

entails all managers individually ranking the factors identified, from 1 (most important) to 20 (least

important). Prioritization is absolutely essential in strategic planning because no organization can do

everything that would benefit the firm; tough choices among good choices have to be made.

External forces can be divided into five broad categories: (1) economic forces; (2) social, cultural,

demographic, and natural environment forces; (3) political, governmental, and legal forces; (4) tech-

nological forces; and (5) competitive forces. For some companies or organizations at various times,

some forces may be more important to include than others. This exercise reveals the authors’ ranking

of the relative importance of five external forces for inclusion in an external assessment.

The purpose of this exercise is to examine more closely the external areas of a business. In ad-

dition, the purpose of this exercise is to examine whether individual decision-making is better than

group decision-making. Academic research suggests that groups make better decisions than individu-

als about eighty percent of the time.

Instructions

Rank the five external forces as to their relative importance (1 = most important, 5 = least important).

First, rank the forces as an individual. Then, rank the forces as part a group of three. Thus, determine

what person(s) and what group(s) here today can come closest to the expert ranking. This exercise

enables examination of the relative effectiveness of individual versus group decision-making in stra-

tegic planning.

Steps

1. Fill in Column 1 in Table 3-12 to reveal your individual ranking of the relative importance of

the five forces (1 = most important, 2 = next most important, etc.). For example, if you feel

Economic factors are the 4th most important external force, then enter a 4 in Table 3-12 in

Column 1 beside Economic.

2. Fill in Column 2 in Table 3-12 to reveal your group’s ranking of the relative importance of the

five forces (1 = most important, 2 = next most important, etc.).

3. Fill in Column 3 in Table 3-12 to reveal the expert’s ranking of the five forces.

CHAPTER 3 • THE ExTERNAL ASSESSMENT 119

4. Fill in Column 4 in Table 3- 12 to reveal the absolute difference between Column 1 and Column

3 to reveal how well you performed as an individual in this exercise. (Note: Absolute difference

disregard negative numbers)

5. Fill in Column 5 in Table 3- 12 to reveal the absolute difference between Column 2 and Column

3 to reveal how well your group performed in this exercise.

6. Sum Column 4. Sum Column 5.

7. Compare the Column 4 sum with the Column 5 sum. If your Column 4 sum is less than your

Column 5 sum, then you performed better as an individual than as a group. Normally, group

decision-making is superior to individual decision-making, so if you did better than your group,

you did excellent.

8. The Individual Winner(s): The individual(s) with the lowest Column 4 sum is the WINNER.

9. The Group Winners(s): The group(s) with the lowest Column 5 score is the WINNER.

TABLE 3- 12 External Force Analysis: Comparing Individual versus Group

Decision-Making

External Forces Column 1 Column 2 Column 3 Column 4 Column 5

1. Economic

2. Social/Cultural/

Demographic/

Environment

3. Political/

Governmental/Legal

4. Technological

5. Competitive

Sums

MINI-CASE ON SAM’S CLUB

SAM’S CLUB IS BOOMING IN CHINA
Sam’s Club in the United States has struggled to attract affluent shoppers. However, in China, Sam’s

Club targets high-income consumers, and specifically affluent mothers with young children. Sam’s

Club does a great job at positioning itself for the wealthy Chinese target market. Advertised as a

trusted place with imported goods and high-quality foods, Sam’s Club stores are located in China’s

most affluent cities. Its success thus far in China can be attributed largely to its effective market seg-

mentation, targeting, and positioning.

Many large firms have trouble doing business in China despite the country’s high GDP, rising

levels of disposable income, shift to becoming a high-tech nation, and growing middle class. But

Walmart’s Sam’s Clubs are booming in China. Three of the top five Sam’s Clubs by sales are located

in China. Rather than positioning itself as a place for bulk items and closeouts, Sam’s Clubs in China

are positioned as a place for high-quality products and foods. For example, eggs are guaranteed to be

less than 12 days old and all have a serial number that customers can enter into their smartphone and

see the production date and origin.

Sam’s in China benefits from not having to “do battle” with Costco Wholesale; Costco does no

business in China. Sam’s has roughly 2 million members in China, many whom are affluent moms age

35 to 40, a primary target group. The number of Sam’s stores in China is expected to increase from 20

at the start of 2018 to 40 by 2020. Sam’s in China recently provided “two-kid seat” carts in all stores

to take advantage of China recently relaxing its “one-child policy.”

Another feature of Sam’s stores in China is extra large parking lots; nearly all customers drive to

Sam’s and ample parking is greatly appreciated in a country where crowded and expensive parking is the

norm otherwise. Sam’s strategies in China are an excellent example of how a firm must adapt it policies,

K
ev

in
F

o
y
/S

h
u
tt

er
st

o
ck

120 PART 2 • STRATEGY FORMuLATION

Opportunity 1

Threat 1

Opportunity 3

Threat 3

RATINGS

High

Low

W
E

IG
H

T
S

Middle

Opportunity 2

Threat 2

Opportunity 4

Threat 4

FIGURE 3- 5

A Weights-by-Ratings Matrix to Exemplify EFE Matrix Logic

1. http://finance.yahoo.com

2. www.hoovers.com

3. www.morningstar.com

4. www,mergentonline.com

5. http://globaledge.msu.edu/industries/

6. See Table 3-7 for Excellent Library Databases

Web Resources

Current Readings
Aggarwal, Vikas A., Hart E. Posen, and Maciej Workiewicz.

“Adaptive Capacity to Technological Change: A
Microfoundational Approach.” Strategic Management
Journal 38, no. 6 (June 2017): 1212–1231.

Cattani, Gino, Joseph F. Porac, and Howard Thomas.
“Categories and Competition.” Strategic Management
Journal 38, no. 1 (January 2017): 64–92.

Chin, M. K. and Matthew Semadeni. “CEO Political Ideologies
and Pay Egalitarianism within Top Management Teams.”
Strategic Management Journal 38, no. 8 (August 2017):
1608–1625.

Dowell, Glen W. S. and Suresh Muthulingam. “Will Firms
Go Green if It Pays? The Impact of Disruption, Cost,
and External Factors on the Adoption of Environmental

procedures, features, and actions when it enters a foreign land to capitalize on external opportunities and

threats in that country. What works in one country quite likely needs changing in another; pushing the

same business model globally has spelled doom for many firms that enter China, and then soon withdraw.

Questions

1. Consider the following two-dimensional matrix with weights on the y -axis and ratings on the

x -axis, as given in Figure 3- 5 . What are example opportunities and threats that could possi-

bly characterize Sam’s Club in China in the four corners of the matrix? Develop a hypotheti-

cal opportunity and threat for Sams’s that could be positioned in each of the four corners of

the matrix. Give a supporting rationale for each factor. Which corner of the matrix do you

think characterizes factors most commonly in an EFE Matrix? Why? Which corner of the

matrix do you think characterizes factors least commonly in an EFE Matrix? Why? What

could you say about the middle of the matrix in terms of factors commonly included in an

EFE Matrix?

Note: A purpose of this mini-case is to give students practice thinking about when, in developing an EFE

Matrix, could a particular factor receive the following weights and ratings:

1. a low weight and high rating

2. a high weight and high rating

3. a low weight and low rating

4. a high weight and low rating

Source; Based on Wayne Ma, “In China, Sam’s Goes Up Market and Scores,” Wall Street Journal , (December

8, 2017): B1.

http://finance.yahoo.com

http://www.hoovers.com

http://globaledge.msu.edu/industries/

http://www,mergentonline.com

CHAPTER 3 • THE ExTERNAL ASSESSMENT 121

Initiatives.” Strategic Management Journal 38, no. 6 (June
2017): 1287–1304.

Guo, Yidi, Quy Nguyen Huy, and Zhixing Xiao. “How Middle
Managers Manage the Political Environment to Achieve
Market Goals: Insights from China’s State-Owned
Enterprises.” Strategic Management Journal 38, no. 3
(March 2017): 676–696.

Jia, Nan and Kyle J. Mayer. “Political Hazards and Firms’
Geographic Concentration.” Strategic Management
Journal 38, no. 2 (February 2017): 203–231.

Li, Jing, Jun Xia, and Edward Zajac. “On the Duality of
Political and Economic Stakeholder Influence on Firm
Innovation Performance: Theory and Evidence from
Chinese Firms.” Strategic Management Journal 39, no. 1,
(January 2018): 193–216.

Madsen, Tammy L. and Gordon Walker. “Competitive
Heterogeneity, Cohorts, and Persistent Advantage.”
Strategic Management Journal 38, no 2 (February 2017):
184–202.

Ocasio, William, Tomi Laamanen, and Eero Vaara.
“Communication and Attention Dynamics: An Attention-
Based View of Strategic Change.” Strategic Management
Journal 39, no. 1 (January 2018): 155–167.

Oehmichen, Jana, Sebastian Schrapp, and Michael Wolff.
“Who Needs Experts Most? Board Industry Expertise and

Strategic Change—A Contingency Perspective.” Strategic
Management Journal 38, no. 3 (March 2017): 645–656.

Shepherd, Dean A., Jeffery S. McMullen, and William Ocasio.
“Is That an Opportunity? An Attention Model of Top
Managers’ Opportunity Beliefs for Strategic Action.”
Strategic Management Journal 38, no. 3 (March 2017):
626–644.

Souder, David, Akbar Zaheer, Harry Sapienza, and Rebecca
Ranucci. “How Family Influence, Socioemotional Wealth,
and Competitive Conditions Shape New Technology
Adoption.” Strategic Management Journal 38, Issue 9
(September 2017): 1774–1790.

Tan, David and Christopher I. Rider. “Let Them Go? How
Losing Employees to Competitors Can Enhance Firm
Status.” Strategic Management Journal 38, Issue 9
(September 2017): 1848–1874.

Verhaal, J. Cameron, Jake Hoskins, and Leif Lundmark. “Little
Fish in a Big Pond: Legitimacy Transfer, Authenticity,
and Factors of Peripheral Firm Entry and Growth in the
Market Center.” Strategic Management Journal 38, Issue
12 (December 2017): 2532–2552.

Wei, Shi, Yan Zhang, and Robert E. Hoskisson. “Ripple Effects
of CEO Awards: Investigating the Acquisition Activities
of Superstar CEOs’ Competitors.” Strategic Management
Journal 38, Issue 10 (October 2017): 2080–2102.

Endnotes

1. Josh Zumbrun, “Global Economic Expansion Exceeds

Forecasts, IMF Says,” Wall Street Journal, (October 11,

2017): A8.

2. Mike Colias, “Ford Set to Shirt $7 Billion Toward Trucks

and SUVs,” Wall Street Journal, (October 4, 2017): B3.

3. Shelly Banjo and Paul Ziobro, “Shoppers Flee Physical

Stores,” Wall Street Journal, (August 6, 2014): B1.

4. Based on Vanessa Fuhrmans, “A Future Without Jobs? Think

Again,” Wall Street Journal, (November 16, 2017): B5.

5. Arthur Thompson, Jr., A. J. Strickland III, and John

Gamble, Crafting and Executing Strategy: Text and Read-

ings (New York: McGraw-Hill/Irwin, 2005): 63.

6. Michael E. Porter, Competitive Strategy: Techniques for

Analyzing Industries and Competitors (New York: Free

Press, 1980): 24–27.

7. Dale McConkey, “Planning in a Changing Environment,”

Business Horizons 31, no. 5 (September–October

1988): 67.

122 PART 2 • STRATEGY FORMuLATION PART 2 • STRATEGY FORMuLATION

Strategy
Formulation

Feedback Loop

Strategy
Implementation

Strategy
Evaluation

Chapter 10: Business Ethics, Environmental Sustainability, and Social Responsibility

Chapter 11: Global and International Issues

Strategy
Evaluation

and
Governance
Chapter 9

Implementing
Strategies:

Finance and
Accounting

Issues
Chapter 8

Implementing
Strategies:

Management
and Marketing

Issues
Chapter 7

Business
Vision and

Mission
Chapter 2

Strategies
in Action
Chapter 5

Strategy
Analysis and

Choice
Chapter 6

The
Internal

Assessment
Chapter 4

The External
Assessment
Chapter 3

FIGURE 4- 1

The Comprehensive, Integrative Strategic-Management Model

Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 1 (February
1989): 91. See also Anik Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and Putu Artama Wiguna,
“Balance Scorecard of David’s Strategic Modeling at Industrial Business for National Construction
Contractor of Indonesia,” Journal of Mathematics and Technology , no. 4 (October 2010): 20.

123

ASSURANCE-OF-LEARNING EXERCISES

The following exercises are found at the end of this chapter:

SET 1 : Strategic Planning for Coca-Cola

EXERCISE 4A : Perform a Financial Ratio Analysis for Coca-Cola

EXERCISE 4B : Develop an IFE Matrix for Coca-Cola

SET 2 : Strategic Planning for My University

EXERCISE 4C : Construct an IFE Matrix for Your College or University

SET 3 : Strategic Planning for Myself

EXERCISE 4D : Construct an IFE Matrix for Yourself

SET 4 : Individual versus Group Strategic Planning

EXERCISE 4E : What Internal Functional Areas Are Most Important to Examine in
Strategic Planning?

LEARNING OBJECTIVES

After studying this chapter, you should be able to do the following:

4- 1. Describe the nature and role of an internal assessment in formulating strategies.

4- 2. Discuss the nature and role of management in formulating strategies.

4- 3. Discuss the nature and role of marketing in formulating strategies.

4- 4. Discuss the nature and role of finance and accounting in formulating strategies.

4- 5. Discuss management information systems (MIS) in terms of formulating strategies.

4- 6. Explain how to develop and use an Internal Factor Evaluation (IFE) Matrix.

The Internal Assessment

MyLab Management

Improve Your Grade!

If your instructor is using MyLab Management, visit www.pearson.com/mylab/ management

for videos, simulations, and writing exercises.

http://www.pearson.com/mylab/

124 PART 2 • STRATEGY FORMuLATION

T
his chapter focuses on identifying and evaluating a firm’s strengths and weaknesses in

the functional areas of business, including management, marketing, finance, accounting,

and management information systems (MIS). Careful evaluation of a business’ functional

areas is necessary to determine the firm’s core competencies and understand whether the firm’s

current strategy is effectively working to provide a sustainable competitive advantage. One ex-

cellent way to evaluate the effectiveness of a firm’s strategy is to study the firm’s financial per-

formance relative to competitors and industry averages. Financial information alone, however,

cannot provide a complete assessment of the effectiveness of a firm’s strategy, and strategists as

well as students of strategy must dig deep into management, marketing, finance, accounting, and

MIS issues simultaneously to fully understand why a firm’s strategy is effective or not.

The first two-thirds of this chapter address potential strengths and weaknesses in the func-

tional areas cited in terms of what, where, how, and why to obtain this information; the latter

one-third of this chapter explains how to assimilate and use this information through develop-

ment and evaluation of an Internal Factor Evaluation (IFE) Matrix.

Showcased as an exemplary strategist, Elon Musk does an excellent job using his company’s

internal strengths to capitalize on external opportunities. Elon Musk has founded four different

billion-dollar companies, PayPal, SolarX, Solar City, and Tesla. Once called a “technologist,”

Musk is revolutionizing the power and transportation industries and changing the world as we

know it today.

The Internal Assessment Phase of Strategy Formulation
All organizations have strengths and weaknesses in the functional areas of business. No enter-

prise is equally strong or weak in all areas. Objectives and strategies are established with the

intention of capitalizing on internal strengths and overcoming weaknesses. The internal-audit

part of the strategic-management process is illustrated in Figure 4-1 with white shading.

LO 4.1

Musk told his more than 17 million Twitter followers in late 2017 that

Tesla in 2020 would manufacture an F-150–type pickup truck except

all electric, following the company’s 2019 release of an all-electric com-

mercial semitrailer truck.

Source: Based on Brian Deagon, “The New Space Race,” Investor’s Business

Daily, September 11, 2017, B1 & B6. Also based on: http://www.rollingstone

.com/culture/features/elon-musk-inventors-plans-for-outer-space-cars-finding-

love-w511747 and https://www.cnbc.com/2017/11/21/how-tesla-and-elon-

musk-became-household-names.html

EXEMPLARY STRATEGIST SHOWCASED

Elon Musk, CEO and Cofounder
of Tesla, Inc. and Space
Exploration Technologies
Corporation (SpaceX)
For more than a decade, Elon Musk has been a U.S. exemplary

strategist on a mission to develop his rocket-ship company SpaceX

and send humans on a 7-month, 34-million-mile journey to Mars.

Headquartered in Los Angeles County, Musk’s SpaceX already fer-

ries supplies to and from the International Space Station. While pio-

neering private space exploration and preparing to colonize planets,

Musk has also catapulted Tesla to be the world’s leader in batteries

that supply energy for cars, trucks, homes, businesses, and rockets.

SpaceX and Tesla aren’t the only companies started by Musk; he also

started two other billion-dollar companies, PayPal and Solar City. Named

the “Architect of the Future,” Musk was recently featured as a Rolling

Stones Magazine cover story, highlighting his “world-changing plans to

inhabit outer space, revolutionize high-speed transportation, and rein-

vent cars.” As explained in Musk’s own words, his ambition stems in part

by his unfettered optimism for the future of human existence:

Fundamentally, the future is vastly more exciting and interesting if we are

a space-faring civilization and multi-planetary species than if we are not.

N
A

S
A

On the way to Mars?

http://www.rollingstone.com/culture/features/elon-musk-inventors-plans-for-outer-space-cars-finding-love-w511747

https://www.cnbc.com/2017/11/21/how-tesla-and-elon-musk-became-household-names.html

http://www.rollingstone.com/culture/features/elon-musk-inventors-plans-for-outer-space-cars-finding-love-w511747

CHAPTER 4 • THE INTERNAL ASSESSMENT 125

Some researchers emphasize the importance of the internal-audit part of the strategic-

management process by comparing it to the external audit in importance. Robert Grant, for

example, concluded that the internal audit is more important, saying:

In a world where customer preferences are volatile, the identity of customers is chang-

ing, and the technologies for serving customer requirements are continually evolving, an

externally focused orientation does not provide a secure foundation for formulating long-

term strategy. When the external environment is in a state of flux, the firm’s own resources

and capabilities may be a much more stable basis on which to define its identity. Hence,

a definition of a business in terms of what it is capable of doing may offer a more durable

basis for strategy.1

Resource-Based View

The resource-based view (RBV) approach to competitive advantage contends that internal

resources are more important for a firm than external factors in achieving and sustaining compet-

itive advantage. Proponents of RBV theory contend that a firm’s performance is primarily deter-

mined by internal resources that enable the firm to exploit opportunities and neutralize threats. A

firm’s resources can be tangible, such as labor, capital, land, plant, and equipment, or intangible,

such as culture, knowledge, brand equity, reputation, and intellectual property. Because tangible

resources can more easily be bought and sold, intangible resources are often more important for

gaining and sustaining competitive advantages.

A resource can be considered valuable to the extent that it is (1) rare, (2) hard to imitate,

or (3) not easily substitutable. Often called empirical indicators, these three characteristics of

resources enable a firm to implement strategies that improve its efficiency and effectiveness and

lead to a sustainable competitive advantage. The more a resource(s) is rare (not held by many

firms in the industry), hard to imitate (hard to copy or achieve), and not easily substitutable

(invulnerable to threat of substitution from different products), the stronger a firm’s competitive

advantage will be and the longer the advantage will last. Valuable resources comprise strengths

that a firm can capitalize on to prosper in a given industry.

The basic premise of RBV theory is that the mix, type, amount, and nature of a firm’s

internal resources should be considered first and foremost in devising strategies that can lead to

sustainable competitive advantage. Managing strategically according to the RBV involves devel-

oping and exploiting a firm’s unique resources and capabilities, and continually maintaining and

strengthening those resources.

As indicated in the Ethics Capsule 4, exploiting a firm’s unique resources and capabilities

can present ethical dilemmas.

Key Internal Forces

An internal strategic-management assessment includes analysis of how strong or weak a firm

is in each functional area of business, including management, marketing, finance, accounting,

and MIS. Uniqueness or distinctive competences a firm has or lacks in each area provides

the foundation for identifying strength and weakness factors. Strengths that cannot be easily

matched or imitated by competitors are called distinctive competencies. It is of paramount

importance in strategic planning to capitalize on and nurture strengths because competitive

advantages generally arise more from strengths, uniqueness, and distinctive competencies than

from weaknesses. Improving on weaknesses, however, is a vital task for all organizations and

generally helps to improve efficiencies, weaknesses are unlikely to develop into sustainable

competitive advantages, thus stressing the importance of nurturing strengths.

It is impossible in a strategic-management text to review in depth all the material pre-

sented in prior business courses; there are many subareas within these functions, such as

customer service, warranties, advertising, packaging, and pricing under marketing. However,

strategic planning must include a detailed assessment of how the firm is doing in all internal

areas. Thus, an overview of each of the functional business areas from a strategy perspective

is provided here. Regardless of the type or size of firm, effective strategic planning hinges

on identification and prioritization of internal strengths and weaknesses because a firm must

126 PART 2 • STRATEGY FORMuLATION

continually capitalize on its strengths and improve on its weaknesses to gain and sustain com-

petitive advantage.

Management
There are four basic activities that comprise management: planning, organizing, motivating,

and controlling. An overview of these activities is provided in Table 4-1 because an organization

should continually capitalize on its strengths and improve on its weaknesses in these four areas.

LO 4.2

ETHICS CAPSULE 4

The Sagebrush Lizard versus the Big Oil Man

The state of Texas leads the United States in crude oil production.

West Texas, in particular, is home to the largest oil deposit ever dis-

covered in the continental United States. With an estimated 20 bil-

lion barrels of oil, valued at more than $900 billion, West Texas has

become a mecca for oil and gas companies. Warm weather, a so-

phisticated labor and equipment industry, and favorable geological

formations all contribute to efficient drilling productions in West

Texas. Numerous reservoirs can be drilled simultaneously through a

process called fracking, in which a high-pressure mixture of water,

sand, and chemicals is forcefully injected into the rock, causing

gas to be released. Texas oil drilling helps oil and gas companies,

boosts the Texas and U.S. economies, adds jobs, increases exports,

reduces imports, and lowers gas prices for everybody. These touted

benefits make the oil drilling seem like a good, ethical practice, but

there is a dark side.

What many don’t know is that the unique sand used in fracking

in West Texas is also home to the dunes sagebrush lizard, a 3-inch

long, tan-colored animal that lives only in a small portion of a few

counties in West Texas and Southeastern New Mexico. The pretty,

picky little lizard may soon be added to the federal endangered spe-

cies list; more than half of the lizard’s habitat has been taken over by

miners and drillers, such as big Ben Brigham. Brigham has made hun-

dreds of millions of dollars as a Texas oilman and claims to be working

with biologists to recreate the sagebrush lizard’s habitat and relocate

the lizards to a new area that resembles the lizard’s home ecosystem.

From an internal analysis perspective, do you think Brigham’s estab-

lished oil-drilling operations and current production procedures that

yield the benefits described offset the possibility of the sagebrush liz-

ard becoming extinct? Investors, environmentalists, and policy makers

are meeting in hopes of finding an appropriate solution.

Source: Based on Christopher M. Matthews, “It’s Lizard vs. Oil Magnate In

the Latest Fracking Fight,” Wall Street Journal, (October 14, 2017): A1, A10.

I need help from people.

TABLE 4-1 The Basic Functions of Management

Function Description
Stage of Strategic-Management
Process When Most Important

Planning Planning consists of all managerial activities related to preparing for the future,

such as establishing objectives, devising strategies, and developing policies.

Strategy Formulation

Organizing Organizing includes all managerial activities that result in a structure of task

and authority relationships, such as organizational design, job specialization, job

descriptions, span of control, job design, and job analysis.

Strategy Implementation

Motivating Motivating involves efforts directed toward shaping human behavior, such as

leadership, communication, teamwork, job enrichment, and human resource

management (HRM).

Strategy Implementation

Controlling Controlling refers to all managerial activities that compare actual results with

planned results, such as quality control, financial control, inventory control,

expense control, analysis of variances, rewards, and sanctions.

Strategy Evaluation

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CHAPTER 4 • THE INTERNAL ASSESSMENT 127

Planning

Planning is the essential bridge between the present and the future; planning increases the likeli-

hood of achieving desired results. Even though planning is considered the foundation of manage-

ment, it is the task that managers most commonly neglect. Planning enables a firm to:

1. Take into account relevant factors and focus on the critical ones

2. Ensure that the firm is prepared for all reasonable eventualities and can make timely

changes and adapt as needed

3. Gather the resources needed and carry out tasks in the most efficient way possible

4. Conserve its own resources and avoid wasting natural resources

5. Assess whether the effort, costs, and implications associated with achieving desired objec-

tives are warranted

6. Be proactive, anticipate, and influence the future

Planning is more than simply projecting past and present trends into the future (long-range plan-

ning). Planning also includes revising a firm’s vision and mission, forecasting future events and trends,

establishing objectives, and choosing strategies to pursue. Successful organizations strive to guide their

own futures rather than merely react to external forces and events as they occur. Historically, organisms

and organizations that adapt well to changing conditions survive and prosper; others become extinct.

An organization can develop synergy through planning. Synergy exists when everyone pulls

together as a team that knows what it wants to achieve; synergy is the 2 + 2 = 5 effect. By

establishing and communicating clear objectives, employees and managers can work together

toward desired results. Synergy can result in powerful competitive advantages. The strategic-

management process itself is aimed at creating synergy in an organization.

Strengths and weaknesses with respect to planning could relate to: (1) quality of a firm’s vision

or mission and how well the firm’s strategies support the vision or mission, (2) divisions’ relative

contribution to the firm’s performance, and (3) resource allocation across regions and products.

Organizing

The purpose of organizing is to achieve coordinated effort by defining task and authority relation-

ships. Organizing means determining who does what and who reports to whom. There are count-

less examples in history of well-organized enterprises successfully competing against—and in

some cases defeating—much stronger but less-organized firms. A well-organized firm generally

has motivated managers and employees who are committed to seeing the organization succeed.

Resources are allocated more effectively and used more efficiently in a well-organized firm.

The organizing function of management can be viewed as consisting of three sequential

activities: breaking down tasks into jobs, combining jobs to form departments, and delegating

authority. In The Wealth of Nations, published in 1776, Adam Smith cited the advantages of work

specialization in the manufacture of pins:

One man draws the wire, another straightens it, a third cuts it, a fourth points it, a fifth

grinds it at the top for receiving the head. Ten men working in this manner can produce

48,000 pins in a single day, but if they had all wrought separately and independently, each

might at best produce twenty pins in a day.2

Organizing includes developing an appropriate structure, span of control, and chain of command.

Structure dictates how resources are allocated and how objectives are established in a firm. Changes

in strategy often require changes in structure because positions may be created, deleted, or merged.

The most common types of structure are discussed in Chapter 7. Strengths and weaknesses with

respect to organizing could relate to (1) how well the firm’s current structure matches the various

divisions and strategy of the firm, (2) the degree to which a clear chain of command is displayed

through executive titles, and (3) the extent of overlap among related jobs and job descriptions.

Motivating

Motivating is the process of influencing people to accomplish specific objectives. Motivation

helps explain why some people work hard and others do not. Strategies have little chance of

succeeding if employees are not motivated to implement them once they are formulated. The

128 PART 2 • STRATEGY FORMuLATION

motivating function of management includes such activities as developing leaders, managing

groups, communicating effectively, and managing organizational change.

When managers and employees of a firm strive to achieve high levels of productivity,

this indicates that the firm’s strategists are excellent leaders—persons that establish rap-

port with subordinates, empathize with their needs and concerns, set a good example, and

are trustworthy and fair. An excellent leader communicates a vision of the firm’s future

and inspires people to work hard to achieve that vision. Stressing the importance of leader-

ship, Sun Tzu stated, “Weak leadership can wreck the soundest strategy.” According to Peter

Drucker:

Leadership is not a magnetic personality. That can just as well be demagoguery. It is not

“making friends and influencing people.” That is flattery. Leadership is the lifting of a

person’s vision to higher sights, the raising of a person’s performance to a higher standard,

the building of a person’s personality beyond its normal limitations.3

An organization’s system of communication determines whether strategies can be imple-

mented successfully. Good two-way communication is vital for gaining support for departmen-

tal and divisional objectives and policies. Top-down communication can encourage bottom-up

communication. The strategic-management process becomes a lot easier when subordinates are

encouraged to discuss their concerns, reveal their problems, provide recommendations, and give

suggestions. A primary reason for instituting strategic management is to build and support effec-

tive communication networks throughout the firm.

Human resource management (HRM) includes activities such as recruiting, interviewing,

testing, selecting, orienting, training, developing, caring for, evaluating, rewarding, disciplining,

promoting, transferring, demoting, and dismissing employees, as well as managing union rela-

tions. The complexity and importance of HRM has increased to such a degree that all but the

smallest organizations generally have a full-time human resource manager. As employees and

managers come and go, HRM must manage this process effectively to maintain employee morale

and minimize workplace stress. Table 4-2 reveals several of many ways that effective HRM can

help create and maintain a competitive advantage for organizations. The type of HRM informa-

tion listed in Table 4-2 could be the source of a firm’s strengths or weaknesses with respect to the

overall motivation of managers and employees.

Controlling

All managers in an organization have controlling responsibilities, such as conducting performance

evaluations and taking necessary action to minimize inefficiencies. The controlling function of

management is particularly important for effective strategy evaluation (the focal topic of Chapter

9). Controlling consists of four basic steps:

1. Establishing performance standards

2. Measuring individual and organizational performance

3. Comparing actual performance to planned performance standards

4. Taking corrective actions

TABLE 4-2 Six Ways Human Resource Management Can Provide a
Competitive Advantage

1. Analyze turnover rates to determine where problems may lie.

2. Measure and monitor employee engagement and morale scores.

3. Track employee data to identify high and low performers.

4. Determine going market rates for talent and align compensation with company goals.

5. Design employee development and training pathways that take into account the strategic and

long-term needs of the organization.

6. Provide guidance on legal issues related to all personnel matters.

Source: Based on information from http://hrdailyadvisor.blr.com/2017/08/21/using-hr-competitive-advantage/

http://hrdailyadvisor.blr.com/2017/08/21/using-hr-competitive-advantage/

CHAPTER 4 • THE INTERNAL ASSESSMENT 129

The production/operations portion of a business consists of all those activities that trans-

form inputs (raw materials, labor, capital, machines, and facilities) into finished goods and ser-

vices. The extent to which a manufacturing plant’s output reaches its full potential output is

called capacity utilization, a key strategic variable. The higher the capacity utilization, the bet-

ter; otherwise, equipment may sit idle. For example, if a manufacturing firm’s plants are averag-

ing 60 percent capacity utilization, that would represent a severe weakness of the firm.

As indicated in Table 4-3, Roger Schroeder suggests that production/operations comprises

five decision areas: process, capacity, inventory, workforce, and quality. Production/operations

activities often represent the largest part of an organization’s human and capital assets. In many

industries, the major costs of producing a product are incurred within operations, so production/

operations can have great value as a competitive weapon in a company’s overall strategy. Strengths

and weaknesses in the five areas of production can mean the success or failure of an enterprise.

Increasingly in production settings, a new breed of robots called collaborative machines

are working alongside people. Priced as low as $20,000 and becoming widely used even in

small businesses, robots do not take lunch breaks or sick days or require health insurance, and

they can work nonstop all night tirelessly if needed. Collaborative machines are more flexi-

ble, often doing one task one day and a different task the next day. At Panek Precision Inc., a

Northbrook, Illinois-based machine shop, Mr. Panek states, “Having robots has allowed us to

move our existing workers into more useful tasks, such as monitoring more-advanced machines

that require human tending.” Workers are generally quite receptive to collaborative machines,

even giving them names, such as “Fred” at Stuller Inc., a jewelry factory in Lafayette, Louisiana,

and “Baxter” at K’NEX Brands, a toy maker in Hatfield, Pennsylvania.4 Strengths and weak-

nesses with respect to controlling could relate to (1) inventory turnover levels versus competitors,

(2) how well or poorly the firm’s operations are performing across various geographical regions,

and (3) how cost efficient the firm is in acquiring needed supplies.

Integrating Strategy and Culture

The functions of management can be performed best when a firm’s strategy and culture are inte-

grated. Every business entity has a unique organizational culture that impacts strategic-planning

activities. Organizational culture is “a pattern of behavior that has been developed by an orga-

nization as it learns to cope with its problem of external adaptation and internal integration, and

that has worked well enough to be considered valid and to be taught to new members as the cor-

rect way to perceive, think, and feel.”5 This definition emphasizes the importance of matching

external with internal factors in making strategic decisions. Organizational culture captures the

subtle, elusive, and largely unconscious forces that shape a workplace. Remarkably resistant to

change, culture can represent a major strength or weakness for any firm.

The strategic-management process takes place largely within a particular organization’s cul-

ture. A culture ideally supports the collective commitment of its people to a common purpose.

It must foster competence and enthusiasm among managers and employees. If strategies can

capitalize on cultural strengths, such as a strong work ethic or highly ethical beliefs, then man-

agement often can swiftly and easily implement changes. However, if the firm’s culture is not

TABLE 4-3 The Basic Decisions Areas Within Production/Operations

Decision Areas Example Decisions

1. Process Robotics, facility layout, process flow analysis, line balancing, process control,

and transportation analysis.

2. Capacity Forecasting, facilities planning, aggregate planning, scheduling, capacity plan-

ning, queuing analysis, and capacity utilization.

3. Inventory Level of raw materials, work-in-process, finished goods, what to order, when to

order, how much to order, and materials handling.

4. Workforce Managing the skilled, unskilled, clerical, and managerial employees by caring

for job design, work measurement, job enrichment, work standards, and moti-

vation techniques.

5. Quality Quality control, sampling, testing, quality assurance, and cost control.

Source: Based on a variety of sources.

130 PART 2 • STRATEGY FORMuLATION

supportive, strategic changes may be ineffective or even counterproductive. A firm’s culture can

become antagonistic to new strategies, with the result being confusion and disorientation.

To achieve and maintain competitive advantage, firms must continually learn, adapt, and

evolve. Adapting to change can be difficult, particularly when change includes forging new

alliances, partnerships, or mergers between different companies, each of which likely has its

own unique culture and unique identity. Table 4-4 provides some example (possible) aspects of

an organization’s culture and possible considerations for identifying strengths and weaknesses

within the firm.

When one firm acquires another firm, integrating the two cultures effectively can be vital

for success. For example, in Table 4-4, one firm may score mostly 1s (low) and the other firm

may score mostly 5s (high), which would present a challenging strategic problem. Regardless

of a firm’s industry, geography, or company history, it is imperative that firms effectively inte-

grate corporate strategy and culture, even as they continuously adapt and evolve overtime.

An organization’s culture should infuse individuals with enthusiasm for implementing

strategies. Internal strengths and weaknesses associated with a firm’s culture sometimes are

overlooked because of the interfunctional nature of this phenomenon. This is a key reason why

strategists need to view and understand their firm as a sociocultural system. Success is often

determined by links between a firm’s culture and strategies. The challenge of strategic manage-

ment today is to bring about the changes in organizational culture and individual mind-sets that

are needed to support the formulation, implementation, and evaluation of strategies.

Management Audit Checklist of Questions

The following checklist of questions can help determine specific strengths and weaknesses in

the management functional area of business. An answer of no to any question could indicate a

potential weakness, although the strategic significance and implications of negative answers, of

course, will vary by organization, industry, and severity of the weakness. Positive or yes answers

to the checklist questions suggest potential areas of strength.

1. Does the firm use strategic-management concepts?

2. Are company objectives and goals measurable and well communicated?

3. Do managers at all hierarchical levels plan effectively?

4. Do managers delegate authority well?

5. Is the organization’s structure appropriate?

6. Are job descriptions and job specifications clear?

7. Is employee morale high?

TABLE 4-4 15 Aspects of an Organization’s Culture

Dimension Low Degree High

1. Strong work ethic; arrive early and leave late 1 2 3 4 5

2. High ethical beliefs; clear code of business ethics followed 1 2 3 4 5

3. Formal dress; shirt and tie expected 1 2 3 4 5

4. Informal dress; many casual dress days 1 2 3 4 5

5. Socialize together outside of work 1 2 3 4 5

6. Do not question supervisor’s decision 1 2 3 4 5

7. Encourage whistle-blowing 1 2 3 4 5

8. Be health conscious; have a wellness program 1 2 3 4 5

9. Allow substantial “working from home” 1 2 3 4 5

10. Encourage creativity, innovation, and open-mindedness 1 2 3 4 5

11. Support women and minorities; no glass ceiling 1 2 3 4 5

12. Be highly socially responsible; be philanthropic 1 2 3 4 5

13. Have numerous meetings 1 2 3 4 5

14. Have a participative management style 1 2 3 4 5

15. Preserve the natural environment; have a sustainability program 1 2 3 4 5

CHAPTER 4 • THE INTERNAL ASSESSMENT 131

8. Are employee turnover and absenteeism low?

9. Are organizational reward and control mechanisms effective?

Marketing
Marketing can be described as the process of defining, anticipating, and fulfilling consum-

ers’ needs and wants. Marketing is about satisfying current and potential customers’ needs.

Excellent marketing can provide firms with a competitive advantage. Table 4-5 lists compa-

nies that lead their respective industries in customer satisfaction according to the American

Customer Satisfaction Index (ACSI) that surveys around 180,000 U.S. customers each year.

Marketing consists of five basic activities: (1) marketing research and target market analy-

sis, (2) product planning, (3) pricing products, (4) promoting products, and (5) placing or distrib-

uting products. Understanding these activities helps strategists identify and evaluate marketing

strengths and weaknesses—a vital strategy-formulation activity.

Marketing Research and Target Market Analysis

Marketing research is the systematic gathering, recording, and analyzing of data to identify and

define opportunities and problems related to the marketing of goods and services. Marketing

research is often used to help firms evaluate and formulate strategies. Marketing researchers

employ numerous scales, instruments, procedures, concepts, and techniques to gather infor-

mation; their research can uncover critical strengths and weaknesses. Organizations that pos-

sess excellent marketing research skills have a competitive advantage. According to the former

president of PepsiCo:

Looking at the competition is the company’s best form of market research. The majority

of our strategic successes are ideas that we borrow from the marketplace, usually from a

small regional or local competitor. In each case, we spot a promising new idea, improve on

it, and then out-execute our competitor.6

An important use of marketing research involves target market analysis—the examina-

tion and evaluation of consumer needs and wants. Marketing research involves methods such as

administering customer surveys, analyzing consumer information, evaluating market positioning

strategies, developing customer profiles, and determining optimal market segmentation strate-

gies, all of which contribute to effective customer analysis.

LO 4.3

TABLE 4-5 Companies that Lead Their Industries in Customer Satisfaction
According to the 2017 American Customer Satisfaction Index

Company Industry

JetBlue Airline

Lexus (Toyota) Automobiles

Dillard’s Department Stores

Cracker Barrel Full-Service Restaurants

LG Household Appliances

Vanguard Internet Investment Services

Amazon Internet Retail

Google Internet Search Engines and Information

Chick-fil-A Limited-Service Restaurants

Clorox Cleaning Products

Apple Personal Computers

AAA Property and Casualty Insurance

Trader Joe’s Supermarkets

Source: Based on information from http://www.theacsi.org/acsi-benchmarks/benchmarks-by-industry

http://www.theacsi.org/acsi-benchmarks/benchmarks-by-industry

132 PART 2 • STRATEGY FORMuLATION

Successful organizations continually monitor present and potential customers’ buying pat-

terns and engage in extensive marketing research to understand the needs and wants of differ-

ent segments of customers. Firms tailor their product offerings to fit the needs of their target

market(s). Many companies have recently shifted their target markets to focus on younger con-

sumers, and particularly millennials because these individuals now make up the largest group

of U.S. consumers. For example, Home Depot, P&G, Williams-Sonoma Inc., Sherwin-Williams

Co., and Scotts Miracle-Gro Company are now targeting millennials by offering online lessons

aimed at teaching basic skills such as how to mow a lawn, use a tape measure, hammer a nail,

and care for plants.

With a clearly defined target market, marketers can best use their strategic toolbox to ensure

that their firm’s offering delivers value to target customers. A clear understanding of a firm’s

target market(s) serves as the foundation on which the marketing mix is designed. Commonly

referred to as the “four Ps of marketing,” the marketing mix includes product, price, promotion,

and place, as indicated in Table 4-6. Marketers design a marketing mix to fit the unique needs of

each target market. Table 4-6 reveals key areas to consider when searching for and identifying

possible strengths and weaknesses related to the marketing functional area of a firm.

Product Planning

Products can be physical goods, services, ideas, or anything a company offers to satisfy individual

or business customer needs through the exchange process. Product planning includes devising

warranties; packaging; determining product options, features, brand style, and quality; deleting

old products; and providing customer service. Product planning is particularly important when

a company is pursuing product development or diversification. In such cases, companies often

must decide whether to extend an existing product line or create an entirely new product line. In

implementing a product development strategy, the Campbell Soup Company, for example, may

consider extending its line of soups by developing a new soup, or entering a new category of

products by perhaps offering a marinade.

One important part of product planning involves test marketing, which allows an organiza-

tion to examine alternative marketing plans, learn about potential problems with the product,

uncover ways to better market the product, or forecast future sales of new products. In conduct-

ing a test-market project, an organization must decide how many cities to include, which cities

to include, how long to run the test, what information to collect during the test, and what action

to take after the test has been completed. Test marketing is used more frequently by consumer

goods companies than industrial goods companies. The technique can enable an organization to

avoid substantial losses by revealing weak products and ineffective marketing approaches before

large-scale production begins.

Another important part of product planning is research and development (R&D). Many

firms today conduct no R&D, and yet many other companies depend on successful R&D activ-

ities for survival. Firms pursuing a product-development strategy especially need to have a

strong R&D orientation. High-tech firms, such as Microsoft, spend a much larger proportion

of their revenues on R&D. A key decision for many firms is whether to be a “first mover” or a

“fast follower” (i.e., spend heavily on R&D to be the first to develop radically new products,

or spend less on R&D by imitating, duplicating, or improving on products after rival firms

develop them).

TABLE 4-6 The Marketing Mix Component Variables

Product Place Promotion Price

Quality

Features and options

Style and brands

Packaging

Product line

Warranty and services

Distribution channels

Distribution coverage

Outlet location

Sales territories

Inventory levels

Transportation carriers

Advertising

Personal selling

Sales promotion

Publicity

Level

Discounts

Allowances

Payment terms

Source: Based on a variety of sources.

CHAPTER 4 • THE INTERNAL ASSESSMENT 133

Most firms have no choice but to continually develop new and improved products because

of changing consumer needs and tastes, new technologies, shortened product life cycles, and

increased domestic and foreign competition. A shortage of ideas for new products, increased

global competition, increased market segmentation, strong special-interest groups, and

increased government regulations are several factors making the successful development of

new products more and more difficult, costly, and risky. In the pharmaceutical industry, for

example, only one of every few thousand drugs created in the laboratory ends up on pharma-

cists’ shelves.

Strengths and weaknesses with respect to products could relate to (1) the value of a firm’s

brands relative to competitors’ brands, (2) the firm’s product assortment or cannibalism among

the firm’s existing products, or (3) features of the firm’s products relative to those of similar

products found in the marketplace.

Pricing

Pricing refers to deciding the amount an individual must exchange to receive a firm’s product

offering. Pricing objectives often include setting prices at levels which maximize profit, sales,

or market share or setting prices to weaken the competition’s marketing efforts, to enhance cus-

tomer satisfaction, or to enhance the image and prestige of a product. Pricing strategies are often

based on costs, demand, the competition, or on customers’ needs. Sometimes “free is a good

price,” as evidenced by what Google and Facebook charge basic customers.

Widespread Internet use and advances in technology have enabled firms to quickly adjust

prices to meet changes in the marketplace. In dynamic pricing strategies, the same product

may be sold to different customers for different prices, or even to the same customer for dif-

ferent prices. Intense price competition, coupled with Internet price-comparative shopping,

has reduced profit margins to bare minimum levels for many companies. Target and Best Buy

are among the many companies that now offer to match online prices of rival retailers. Both

companies are seeking to combat “showrooming” by shoppers who check out products in their

stores but buy them on rivals’ websites. Issues related to pricing can represent key strengths or

weaknesses for firms.

Firms must be aware of government constraints on pricing, including regulations regard-

ing price fixing, price discrimination, predatory pricing, unit pricing, price advertising, and

price controls. For example, the Robinson-Patman Act prohibits manufacturers and wholesal-

ers from discriminating in price among channel member purchasers (retailers and wholesal-

ers) if competition is lessened. Pricing products in digital currencies, as discussed in Global

Capsule 4, is increasingly a necessary consideration. Strengths and weaknesses with respect to

pricing could relate to whether the focal firm price matches or not and why, or how the firm’s

prices (including currencies in which the products can be paid) compare to similar products

sold by competitors.

Promotion

Successful strategy implementation generally rests on the ability of an organization to sell some

good or service. Promotion includes many marketing activities, such as advertising, sales pro-

motion, public relations, personal selling, and direct marketing. Common promotional tools

designed to inform consumers about products include TV advertising, magazine ads, billboards,

websites, and public relations, among others. Discounts, coupons, and samples are often used to

encourage purchase. Promotional tools such as personal selling, buzz building, and social media

are often used to build relationships with customers. The effectiveness of various promotional

tools for consumer and industrial products varies. Personal selling is especially important for

industrial goods companies, whereas advertising and social-media marketing are more impor-

tant for consumer goods companies. Determining organizational strengths and weaknesses in

the promotional function of marketing is an important part of performing an internal strategic-

management audit.

Promotion in general and advertising in particular can be expensive, a primary reason

marketing is a major business function to be studied carefully. Without marketing, even the

best products have little chance of being successful. Worldwide advertising expenditures are

increasing around 5 percent annually and are expected to reach $700 billion in 2021. Digital

134 PART 2 • STRATEGY FORMuLATION

advertising, especially on mobile devices, is fueling the increased ad spending because global

Internet advertising recently surpassed television advertising and is expected to reach nearly

$280 billion in 2020.7 Many successful brands are now using digital platforms and social media

to build relationships and establish emotional bonds with consumers. As social networks, virtual

worlds, product review sites, and location-based social apps become increasingly popular among

consumers, marketers spend heavily on social-media marketing. In performing a strategic-

planning analysis, in addition to comparing rival firms’ websites, it is important to compare rival

firms’ handling of social-media issues.

Strengths and weaknesses with respect to promotion could relate to a firm’s (1) website and

social media engagement (or lack thereof), (2) association with key celebrities or spokespersons,

or (3) advertising and brand slogans or images.

Channels of Distribution

Channels of distribution is a term that refers to the various intermediaries that take a product

from a producer to an end customer. These intermediaries bear a variety of names such as whole-

salers, retailers, brokers, facilitators, agents, vendors—or simply distributors. In this regard mar-

keters often make decisions related to warehousing, distribution channels, distribution coverage,

retail site locations, sales territories, inventory location, transportation carriers, wholesaling, and

retailing.

Marketers must determine how widely available their product should be for consumers to

find and purchase. Some firms offer their products through as many wholesalers and retailers

that will sell them while other firms offer products only through several select outlets or autho-

rized outlets.

Some of the most complex and challenging decisions facing a firm concern product distri-

bution. Successful organizations identify and evaluate alternative ways to reach their ultimate

market. Many companies today are increasingly making their products available for purchase

online, directly through their website, but this practice can upset retailers. Efficient supply chain

and distribution systems are essential for any firm to gain and sustain a competitive advantage.

Strengths and weaknesses with respect to promotion could relate to the effectiveness of

brick-and-mortar versus online sales or the average return on investment (ROI) of various pur-

chase locations.

GLOBAL CAPSULE 4

Bitcoin: The New Global Currency
Using cryptography, a new worldwide

digital payment system has emerged in

which money can be exchanged without

the involvement of a central authority or

bank. Cryptocurrencies, also referred to as

digital currencies or altcoins, are becoming

popular among investors, businesses, and

consumers around the world. Much like

cash for the Internet, but with no physical

backing, digital currencies are increasingly

prevalent as a means of value exchange

between individuals and businesses.

With a total market value of more

than $600 billion, the digital currency market is made up of several

players including Bitcoin, Ethereum, Ripple, and Litecoin. Bitcoin is the

most well-known and widely used digital currency, making up over

half of the cryptocurrency market value. Simply put, Bitcoin is a mobile

app that provides individuals with a personal Bitcoin wallet that can

be used to exchange Bitcoin with other users. Bitcoin is increasingly

being used; Bloomberg, Dish, Fidelity, Expedia, Overstock.com, Reddit,

Reeds Jeweler, United Way, and USAA

are among a growing number of busi-

nesses accepting Bitcoin. Key advantages

of Bitcoin include a simple payment pro-

cess that can easily and quickly be done

24 hours a day and across international

borders, all while protecting one’s iden-

tity, protecting against fraud, and avoiding

typical transaction fees imposed by banks

or other intermediaries.

Companies are increasingly being

faced with difficult decisions regard-

ing Bitcoin. Should firms accept Bitcoin

as a method of payment? Should products be priced in Bitcoin? If so,

should firms price their products in both the local currency and Bitcoin?

Executives are currently addressing these and other such questions.

Source: Based on https://bitcoin.org/en/how-it-works and Paul Vigna, “Rival

Digital Currencies Nip at Bitcoin,” Wall Street Journal, (December 20,

2017): B16.

Is this money?

T
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v
is

W
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lf

e/
1
2
3
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https://bitcoin.org/en/how-it-works

CHAPTER 4 • THE INTERNAL ASSESSMENT 135

Marketing Audit Checklist of Questions

The following types of questions about marketing must be examined in performing an internal

assessment

1. Are markets segmented effectively?

2. Is the organization positioned well among competitors?

3. Are present channels of distribution reliable and cost effective?

4. Is the firm conducting and using market research effectively?

5. Are product quality and customer service good?

6. Are the firm’s products and services priced appropriately?

7. Does the firm have an effective promotional strategy?

8. Is the firm’s Internet presence excellent as compared to rivals?

Finance and Accounting
Financial condition is often considered the single-best measure of a firm’s competitive

position and overall attractiveness to investors. Table 4-7 lists top companies for financial

strength according to the Drucker Institute, which assesses financial performance based on

return on assets, return on equity, return on invested capital, market share and profits, as well

as investors’ return on their shares. Note that Accenture PLC heads the list. Determining

an organization’s financial strengths and weaknesses is essential in formulating strategies.

A firm’s liquidity, leverage, working capital, profitability, asset utilization, cash flow, and

equity can eliminate some strategies as being feasible alternatives. Financial factors often

impact existing strategies and influence strategy-implementation plans.

Finance and Accounting

According to James Van Horne, finance and accounting activities can be categorized into

three decision areas: the investment decision, the financing decision, and the dividend

decision.8 The investment decision, also called capital budgeting, is the allocation and real-

location of capital and resources to projects, products, assets, and divisions of an organization.

After strategies are formulated, capital budgeting decisions are required to successfully imple-

ment strategies. The financing decision determines the best capital structure for the firm and

includes examining various methods by which the firm can raise capital (for example, by issuing

stock, increasing debt, selling assets, or using a combination of these approaches). The financing

decision must consider both short-term and long-term needs for working capital. Two key finan-

cial ratios that indicate whether a firm’s financing decisions have been effective are the debt-to-

equity ratio and the debt-to-total-assets ratio.

LO 4.4

TABLE 4-7 A Sampling of Top Companies for Financial Strength

Company Number of Employees 2017 Revenues (in billions)

Accenture PLC 425,000 $34.8

Altria Group, Inc. 8,300 $25.7

Apple Inc. 123,000 $215.6

Berkshire Hathaway, Inc. 45,500 $223.6

Home Depot, Inc. 406,000 $94.5

Mastercard, Inc. 11,900 $10.7

P&G Company 95,000 $65.0

Starbucks Corporation 254,000 $21.3

United Parcel Service, Inc. 434,000 $60.9

Verizon Communications, Inc. 160,900 $125.9

Walmart, Inc. 2,300,000 $482.1

Source: Based on Ezequiel Minaya, “Consumer-Goods Firms Shine in Financial Category,” Wall Street
Journal, (December 6, 2017): R2.

136 PART 2 • STRATEGY FORMuLATION

Dividend decisions concern issues such as the dollar amount per share to pay quarterly to stock-

holders, the stability of dividends paid over time, and the repurchase or issuance of stock. Dividend

decisions determine the amount of funds that are retained in a firm compared to the amount paid out

to stockholders. Three financial ratios that are helpful in evaluating a firm’s dividend decisions are

the earnings-per-share ratio, the dividends-per-share ratio, and the price-earnings ratio. The benefits

of paying dividends to investors must be balanced against the benefits of internally retaining funds,

and there is no set formula on how to balance this trade-off. Sometimes to appease shareholders,

dividends are paid out (1) even when the firm has incurred a negative annual net income, (2) even

when the firm has to obtain outside sources of capital to pay for the dividends, and (3) even when the

funds were needed as reinvestment in the business. Reasons for this practice are as follows:

1. Paying cash dividends is customary for some firms. Failure to do so could be thought of as

a stigma. A dividend change is a signal about the future.

2. Dividends represent a sales point for investment bankers. Some institutional investors can

buy only dividend-paying stocks.

3. Shareholders often demand dividends, even in companies with great opportunities for rein-

vesting all available funds.

4. A myth exists that paying dividends will result in a higher stock price.

Financial Ratios

Financial ratio analysis is the most widely used method for determining an organization’s streng-

ths and weaknesses in the investment, financing, and dividend areas. Because the functional areas of

business are so closely related, financial ratios can actually signal strengths or weaknesses anywhere

up and down a firm’s value chain from suppliers through production to distribution.

Financial ratios are computed from an organization’s income statement and balance sheet.

Computing financial ratios is like taking a photograph: The results reflect a situation at just one point

in time. Comparing ratios over time and to industry averages is more likely to result in meaningful

statistics that can be used to identify and evaluate strengths and weaknesses. Financial ratio trend

analysis, illustrated in Figure 4-2, is a useful technique that incorporates both the time and industry

average dimensions of financial ratios. Note that the dotted lines reveal projected ratios.

Financial ratios are equally applicable in for-profit and nonprofit organizations, but the ratios

vary considerably across types of industries. Even though nonprofit organizations would not have

return-on-investment or earnings-per-share ratios, they would routinely monitor many other spe-

cial ratios. For example, a religious organization would monitor the ratio of dollar contributions

to the number of members, whereas a zoo would monitor dollar food sales to number of visitors.

A university would monitor number of students divided by number of professors. Nonprofit

organizations because strive to be financially sound just as for-profit firms do. Nonprofit organi-

zations need strategic planning just as much as for-profit firms.

Financial ratio analysis should be conducted on three separate fronts:

1. How has each ratio changed over time? This information provides a means of evaluating

historical trends. Examine whether each ratio has been historically increasing, decreasing,

or nearly constant. Analysts often calculate the percentage change in a ratio from one year

to the next to assess historical financial performance on that dimension. Large percentage

changes can be especially relevant, but be mindful that if base numbers are small then large

percentage changes can ensue more easily.

2. How does each ratio compare to industry norms? A firm’s inventory turnover ratio may

appear impressive at first glance but may pale when compared to industry standards or

norms. Industries can differ dramatically on certain ratios. For example, grocery companies

have a high inventory turnover, whereas automobile dealerships have a lower turnover.

Therefore, comparison of a firm’s ratios within its particular industry can be essential in

determining strengths and weaknesses.

3. How does each ratio compare with key competitors? Often competition is more intense

between several competitors in a given industry or location than across all rival firms in

the industry. When this is true, financial ratio analysis should include comparison to those

key competitors. For example, if a firm’s profitability ratio is trending up over time and

compares favorably to the industry average, but it is trending down relative to its leading

competitor, there may be reason for concern.

CHAPTER 4 • THE INTERNAL ASSESSMENT 137

Excellent free online and subscription (fee-based) resources for obtaining financial information

about firms and industries are provided in Table 4-8. Some sources listed provide financial ratios.

The free Excel template at www.strategyclub.com calculates ratios once students enter in rel-

evant data.

Financial ratio analysis is not without some limitations. For example, financial ratios are

based on accounting data, and firms differ in their treatment of such items as depreciation, inven-

tory valuation, R&D expenditures, pension plan costs, mergers, and taxes. Also, seasonal factors

can influence comparative ratios. Therefore, conformity to industry composite ratios does not

establish with certainty that a firm is performing normally or that it is well managed. Likewise,

departures from industry averages do not always indicate that a firm is doing especially well or

badly. For example, a high inventory turnover ratio could indicate efficient inventory manage-

ment and a strong working capital position, but it also could indicate a serious inventory shortage

and a weak working capital position.

Another limitation of financial ratios in terms of including them as key internal factors in

the upcoming IFE Matrix is that financial ratios are not very “actionable” in terms of reveal-

ing potential strategies needed (i.e., because they generally are based on performance of the

overall firm). For example, to include as a key internal factor that the firm’s “current ratio

increased from 1.8 to 2.1” is not as actionable because the factor does not specify which cur-

rent assets or current liabilities were most significant in contributing to the change. In contrast,

a factor such as “the firm’s fragrance division revenues increased 18 percent in Africa in 2018”

would be considerably more actionable because more insight is provided as to actions needed

to address the issue. Recall from the prior chapter the importance of factors being stated in

actionable terms. The AQCD (actionable-quantitative-comparative-divisional) Test discussed

in the prior chapter for performing an external assessment is equally important in performing

an internal assessment.

Table 4-9 provides a summary of key financial ratios showing how each ratio is calculated

and what each ratio measures. However, all the ratios are not significant for all industries and

companies. For example, accounts receivable turnover and average collection period are not

5.0
4.0
3.0
2.0
1.0
0.0

2017

Current ratio

2017

Profit margin

10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0

2018 2019 2020 2021

Industry average

Company

Industry average

FIGURE 4-2

Financial Ratio Trend Analysis

http://globaledge.msu.edu/industries/

138 PART 2 • STRATEGY FORMuLATION

meaningful to a company that takes only cash receipts. As indicated in Table 4-9, key financial

ratios can be classified into the following five types: liquidity (how is the firm’s cash position),

leverage (how is the firm’s debt position), activity (how efficient is the firm’s operations), profit-

ability (how is the firm performing), and growth (is the firm meeting shareholders’ expectations).

Finance and Accounting Audit Checklist

Strengths and weaknesses in finance and accounting commonly arise from answering the follow-

ing types of questions:

1. Where is the firm financially strong and weak as indicated by financial ratio analysis?

2. Can the firm raise needed short-term capital?

3. Should the firm raise needed long-term capital through debt or equity?

4. Does the firm have sufficient working capital?

5. Are capital budgeting procedures effective?

6. Are dividend payout policies reasonable?

7. Does the firm have excellent relations with its investors and stockholders?

8. Are the firm’s financial managers experienced and well trained?

9. Is the firm’s debt situation excellent?

TABLE 4-8 Excellent Websites to Obtain Strategic Information (Including
Financial Ratios) on Companies and Industries

1. Online Free Resources.

a. Form 10K or Annual Report

b. http://finance.yahoo.com

c. www.hoovers.com

d. http://globaledge.msu.edu/industries/

e. www.morningstar.com

2. Online Subscription Resources (Likely Subscribed to by Your University Library)

a. Mergent Online: www.mergentonline.com

At this website, financial statements seem to be more complete than at other sites. You can also

search for companies with the same SIC or NAICS code and then create a comparison financial

ratio report. A number of different ratios can be used as comparison criteria to create a tailored

report that can then be exported into a Microsoft Excel format. Alternatively, use the Competi-

tors Tab in Mergent to build a list of companies and compare their ratios. Your college library

likely subscribes to this service.

b. Factiva: http://new.dowjones.com/products/factiva/

At this website, first use the Companies & Markets tab to search for a company. Next, click

“Reports” and choose the “Ratio Comparison Report” to get a company’s ratios compared to

industry averages. Your college library likely subscribes to this service.

c. S&P NetAdvantage: http://www.standardandpoors.com/products-services/industry_surveys/en/us

This website provides company and industry ratios and information in two sections of the da-

tabase: (1) the Compustat Excel Analytics section of a particular company’s information page

and (2) the S&P Industry Surveys.

d. Onesource: www.avention.com/OneSource

This is a widely used source for financial ratio information. Search for a particular company

and then click on the link for “Ratio Comparisons” on the left side of the company information

page. The data in Onesource will compare your company against the industry, against the sec-

tor, and against the stock market as a whole.

e. Yahoo Industry Center: http://biz.yahoo.com/ic/

This is an excellent free resource that allows a user to browse industries by performance rank-

ings, including return on equity, price-earnings ratio, market cap, price change, profit margin,

price-to-book value, long-term debt, and more.

3. Hardcopy Reference Books for Financial Ratios in Most Libraries

a. Robert Morris Associate’s Annual Statement Studies: An excellent source of financial ratio

information.

b. Dun & Bradstreet’s Industry Norms & Key Business Ratios: An excellent source of financial

ratio information.

Source: Based on a variety of sources.

http://finance.yahoo.com

http://www.hoovers.com

http://www.morningstar.com

http://www.mergentonline.com

http://new.dowjones.com/products/factiva/

http://www.standardandpoors.com/products-services/industry_surveys/en/us

http://www.avention.com/OneSource

http://biz.yahoo.com/ic/

CHAPTER 4 • THE INTERNAL ASSESSMENT 139

TABLE 4-9 A Summary of Key Financial Ratios

Ratio How Calculated What It Measures

I. Liquidity Ratios

Current Ratio Current assets

Current liabilities

The extent to which a firm can meet its short-term

obligations

Quick Ratio Current assets minus inventory

Current liabilities

The extent to which a firm can meet its short-

term obligations without relying on the sale of its

inventories

II. Leverage Ratios

Debt-to-Total-Assets Ratio Total debt

Total Assets

The percentage of total funds provided by creditors

Debt-to-Equity Ratio Total debt

Total stockholders’ equity

The percentage of total funds provided by creditors

versus by owners

Long-Term Debt-to-Equity Ratio Long-term debt

Total stockholders’ equity

The balance between debt and equity in a firm’s

long-term capital structure

Times-Interest-Earned Ratio Profits before interest and taxes

Total interest charges

The extent to which earnings can decline without

the firm becoming unable to meet its annual interest

costs

III. Activity Ratios

Inventory Turnover COGS/Inventory Whether a firm holds excessive stocks of inventories

and whether a firm is slowly selling its inventories

compared to the industry average

Fixed Assets Turnover Sales

Fixed assets

Sales productivity and plant and equipment

utilization

Total Assets Turnover Sales

Total assets

Whether a firm is generating a sufficient volume

of business for the size of its asset investment

Accounts Receivable Turnover Sales/Accounts Receivable The average length of time it takes a firm to collect

credit sales (in percentage terms)

Average Collection Period Accounts receivable

Total credit sales/365 days

The average length of time it takes a firm to collect

on credit sales (in days)

IV. Profitability Ratios

Gross Profit Margin Gross Profit/Sales The total margin available to cover operating

expenses and yield a profit

Operating Profit Margin Earning before interest and taxes EBIT

Sales

Profitability without concern for taxes and

interest

Net Profit Margin Net income

Sales

After-tax profits per dollar of sales

Return on Total Assets (ROA) Net income

Total assets

After-tax profits per dollar of assets; this ratio

is also called return on investment (ROI)

Return on Stockholders’ Equity

(ROE)

Net Income

Total stockholders’ equity

After-tax profits per dollar of stockholders’

investment in the firm

Earnings Per Share (EPS) Net income

Number of shares of common stock outstanding

Earnings available to the owners of common

stock

Price-Earnings Ratio Market price per share

Earnings per share

Attractiveness of firm on equity markets

V. Growth Ratios

Sales Annual percentage growth in total sales Firm’s growth rate in sales

Net Income Annual percentage growth in profits Firm’s growth rate in profits

Earnings Per Share Annual percentage growth in EPS Firm’s growth rate in EPS

Dividends Per Share Annual percentage growth in dividends per share Firm’s growth rate in dividends per share

140 PART 2 • STRATEGY FORMuLATION

Financial analysis provides an excellent tool for identifying many strengths and weaknesses of

the firm but the numbers themselves generally do not reveal the source of issues, which could

stem for example from marketing and promotional effectiveness, HRM and employee produc-

tivity, accounting errors, and so on. Therefore, carefully study your firm’s Form 10K or Annual

Report and other company documents including quarterly reports to uncover strengths and weak-

nesses associated within the functional areas. Finance and accounting strengths and weaknesses

could relate to issues such as the firm’s use of debt versus equity to raise capital, the firms divi-

dend policy, or the firm’s acquisition versus organic growth practices.

Management Information Systems
Information ties all business functions together and provides the basis for all managerial

decisions. Information can represent a major source of competitive advantage or disadvan-

tage and a major source of a firm’s internal strength and weakness factors. A management

information system (MIS) collects, codes, stores, synthesizes, and presents information in

such a manner that it aids in operational and strategic decision making. The heart of an infor-

mation system is a database containing the kinds of records and data important to managers.

If a business fails to manage information well, this is an internal weakness that needs fixing.

Business Analytics

Business analytics is a business technique that involves using software to mine huge volumes

of data to help executives make decisions. Sometimes called predictive analytics, machine

learning, or data mining, this software enables a researcher to assess and use the aggregate

experience of an organization, which is a priceless strategic asset for a firm. The history of a

firm’s interaction with its customers, suppliers, distributors, employees, rival firms, and more

can all be tapped with data mining to generate predictive models. Business analytics is similar

to the actuarial methods used by insurance companies to rate customers by the chance of posi-

tive or negative outcomes. Every business is basically a risk management endeavor! Therefore,

like insurance companies, all businesses can benefit from measuring, tracking, and computing

the risk associated with hundreds of strategic and tactical decisions made every day.

Strategists use business analytics to provide a firm with proprietary business intelligence

regarding, for example, which segment(s) of customers choose your firm versus those who defer,

delay, or defect to a competitor and why. In addition to understanding consumer behavior better,

which yields more effective and efficient marketing, business analytics also is being used to slash

expenses by, for example, withholding retention offers from customers who are going to stay

with the firm anyway, or managing fraudulent transactions involving invoices, credit-card pur-

chases, tax returns, insurance claims, mobile phone calls, online ad clicks, and more. Business

analytics can also reveal where competitors are weak so that marketing activities can be directly

targeted to take advantage of resultant opportunities.

Business analytics enables a firm to learn from experience and to make current and future

decisions based on prior information. Deriving robust predictive models from data mining to

support hundreds of commonly occurring business decisions is the essence of learning from

experience. The mathematical models and analysis of thousands, millions, or even billions of

prior data points can reveal patterns of behavior for optimizing the deployment of resources and

can dramatically enhance decision making at all organizational levels and all stages of strategic

management. Business analytics can identify and analyze patterns, but perhaps more impor-

tantly, they can reveal the likelihood of an event, and that information can be worth millions of

dollars to companies, organizations, and governments.

In 2018, global data analytics software is expected to reach $21.7 billion, a 64 percent

increase from 2012.9 Leading firms providing the software include IBM, SAP, Oracle, Microsoft,

Qlik Technologies, Tibco Software, and Tableau Software. CEOs are increasingly worried about

cybersecurity issues. The number of U.S. data breaches reached a record of 791 in the first

6 months of 2017, up 29 percent from the same period the prior year.10 Fearing potential data

breaches, CEOs are emphasizing to individuals throughout the company the importance of data

security and are prioritizing cybersecurity efforts.

In terms of cyberthreats, a recent Wall Street Journal article revealed what companies should

be most concerned about and what they can do to mitigate the threat.11 The biggest threat currently

LO 4.5

CHAPTER 4 • THE INTERNAL ASSESSMENT 141

facing firms is that too many people in too many organizations have too much access to too much

information not needed to do their particular job, whether it is access to sales data, patent informa-

tion, or even material about the next new product being developed. Technical controls must be put in

place in organizations to prevent employees from having broad access to company information and

data because hackers from various countries and companies and lone wolves are increasingly gain-

ing access to corporate files through employees and managers who unknowingly allow the access to

seemingly honest “constituencies.” Cyberthreats are more a people threat than a technology threat.

The Internal Factor Evaluation (IFE) Matrix
The internal topics discussed so far in this chapter provide a foundation for identifying

strengths and weaknesses of a firm as they relate to a firm’s current strategies, paying careful

attention to strengths and weaknesses that are unique and lead to or hinder sustaining a com-

petitive advantage. An internal assessment reveals key strengths and weaknesses confronting an

organization; this is vital information for managers in formulating strategies that capitalize on

strengths and mitigate/overcome/improve upon weaknesses.

The Actionable-Quantitative-Comparative-Divisional (AQCD) Test

When identifying and prioritizing key internal factors in strategic planning, make sure the factors

selected meet the following four criteria to the extent possible:

1. Actionable (i.e., meaningful and helpful in ultimately deciding what actions or strategies a

firm should consider pursuing);

2. Quantitative (i.e., include percentages, ratios, dollars, and numbers to the extent possible);

3. Comparative (i.e., reveals changes over time), and

4. Divisional (relates to the firm’s products and/or regions (rather than consolidated) so infer-

ences can be drawn regarding what products and regions are doing well or not).

As mentioned in the prior chapter, factors that meet the four criteria pass what can be called

the “Actionable-Quantitative-Comparative-Divisional (AQCD) Test,” that is a measure of the

quality of an internal factor. In addition to passing the AQCD Test, make sure that internal fac-

tors are indeed internal (not external). Also, make sure the internal factors relate closely to the

firm achieving its mission (strengths) or hindering its mission (weaknesses). Factors selected for

inclusion in an internal assessment should be mission-driven.

Regarding the AQCD criteria, strive to include all high quality factors in an internal assess-

ment for a firm. A high quality factor will meet three or four of the AQCD criteria; a low quality

factor will meet two or fewer of the AQCD criteria. Engage in an engineering hunt for facts to

make sure as many factors as possible pass the AQCD Test. It is important to state internal factors

to the extent possible in actionable, quantitative, comparative, and divisional terms. Vagueness in

stating factors must be avoided because vagueness gives little guidance in assigning weights or

ratings in developing an IFE Matrix.

High quality and low quality internal factors (hypothetical) for Exxon Mobil Corporation

are given below to further exemplify this important concept:

ASK YOuRSELF IS THE FACTOR

Actionable Quantitative Comparative Divisional

A High Quality

Internal Factor

Exxon’s natural gas

segment sales grew

14% in 2018.

yes yes yes yes

A Low Quality

Internal Factor

Exxon’s price earn-

ings ratio in 2018

was 14.4.

no yes no no

LO 4.6

142 PART 2 • STRATEGY FORMuLATION

Steps in Developing an IFE Matrix

An internal strategic-management audit includes development of an Internal Factor Evaluation

(IFE) Matrix. This strategy-formulation tool weights and rates major strengths and weaknesses

in the functional areas of a business, providing a total weighted score indicating the overall

strength of a firm’s internal position. The IFE Matrix is an evaluation of the effectiveness of the

firm’s current strategies, not taking into account opportunities and threats. The purpose of the

IFE Matrix and the internal assessment as a whole is to determine how effective the firm’s cur-

rent strategies are based on the firm’s strengths and weaknesses.

Strategists analyze the firm’s response to key strengths and weaknesses (the ratings in step 3)

in relation to the importance of these factors within the industry it operates (the weights in step 2).

The resulting total weighted score (step 5) indicates the internal effectiveness of the current

strategy. The IFE Matrix total weighted score is suggestive of whether a continuation of strategy

is needed (scores above 2.5) or a change in strategy is warranted (scores below 2.5). Used in

conjunction with the EFE Matrix and CPM discussed in Chapter 3, the IFE Matrix provides the

input needed to perform strategy-matching analyses described in Chapter 6.

An IFE Matrix can be developed in five steps:

Step 1: Develop a Full and Narrow List of Key Internal Factors

Conduct research about the focal company using the resources listed in Table 4.8. Compile

and organize information into two data sets, strengths and weaknesses, developing a full list of

perhaps 50 to 100 strength and weakness factors. Be sure to include factors from management,

marketing, finance, accounting, and MIS that are of strategic importance. Then, narrow your

data sets down to 20 key internal factors that include specifically 10 strengths and 10 weak-

nesses. (Note: We use 10 and 10 because organizations commonly use this breakdown and the

template at www.strategyclub.com uses 10 and 10). List strengths first and then weaknesses.

Firms determine the most important 20 factors among a full list usually by rating the factors

according to importance (1 = least important to 10 = most important) and consolidating the rat-

ing data or by ranking the factors (1 = most important to 50 = least important) and consolidating

the ranking data. Both methods will yield the 20 most important factors to include. The impor-

tant point here is that companies (and students) never should include just the first 20 factors

that come to mind. For example, a student recently included as a weakness in her IFE Matrix

for a college that “there are feral cats on campus”; 99 percent of the time that factor should not

be included in the matrix. Instead, conduct research to identify internal factors that relate to the

university’s vision, mission, strategies, and competitive advantages.

When determining particular factors to include in an IFE Matrix and when assigning weights

and ratings, focus on a narrow industry perspective. Within the narrow industry, consider the

vision and mission of the firm, and the firm’s current strategies (i.e., when selecting factors and

assigning weights and ratings). For example, for McDonald’s, the industry is fast-food restau-

rants, rather than restaurants in general, and for Porsche, the industry is luxury sports cars, not

simply automobiles. This narrow industry perspective is important, as indicated in Table 4-10.

Step 2: Assign Weights to Key Internal Factors

In developing an IFE Matrix, assign a weight that ranges from 0.01 (not important) to 1.0 (all-

important) for each factor. The weight assigned to a given factor indicates the relative impor-

tance of the factor for being successful in the firm’s industry relative to other factors included

in the IFE. For example, a factor receiving a weight of 0.04 is 100 percent more important than

a factor receiving a weight of 0.02 for success in the industry. Regardless of whether a key fac-

tor for a particular firm is a strength or weakness, factors considered to have the greatest effect

on organizational performance of all firms in a specific industry should be assigned the highest

weights. The sum of all weights must equal 1.0. Do not try to even weights out to total 0.50

for strengths and 0.50 for weaknesses. Weights are industry-based, not company-based. List

strengths from highest weight to lowest weight; do the same for weaknesses.

Step 3: Assign Ratings to Key Internal Factors

In developing an IFE Matrix, assign a rating between 1 and 4 to each key internal factor to

indicate how effectively (or ineffectively) the firm’s strategies are responding to the strength

http://www.nasdaq.com/article/the-current-and-future-trends-of-digital-advertising-cm669129

CHAPTER 4 • THE INTERNAL ASSESSMENT 143

or weakness, where 4 = the response is superior, 3 = the response is above average, 2 = the

response is average, and 1 = the response is poor. Even though both strengths and weaknesses

can receive a rating of 1, 2, 3, or 4 at any time, generally there should be a compelling reason

to assign a rating of 3 or 4 to a weakness; it is more common for a firm to be responding in a

superior fashion to strengths because competitive advantages are built on strengths; strategies

that result in strengths are generally excellent. Responding well to a weakness may not lead to

competitive advantage, whereas turning a strength into a distinctive competency could yield a

competitive advantage. Ratings are based on the effectiveness of a firm’s strategies in capital-

izing on strengths or improving weaknesses. Ratings are company-based, not industry-based.

Assignment of numerical values down the rating column in an IFE Matrix should be with

consideration that companies carve out niches in industries that enable them to gain and sus-

tain competitive advantages through effective strategies. These niches are most often based on

some unique strength(s) that yield prosperity amid rivals that are so strong in various areas the

focal firm will rarely, if ever, want to attack those areas. This is not to say weaknesses are not

important because they are, and firms need to continually strive to improve weaknesses, but

strengths versus rivals are of paramount importance. If a firm possesses many highly-weighted

strengths, this is likely the result of effective strategies, so higher ratings in general are warranted

for strengths; higher ratings increase the total weighted score in an IFE Matrix.

Step 4: Obtain Weighted Scores

Along each row in an IFE Matrix, multiply the factor’s weight by its rating to determine a

weighted score for each factor.

Step 5: Obtain Total Weighted Score

Sum the weighted scores to determine the total weighted score for the organization. Regardless

of how many factors are included in an IFE Matrix, the total weighted score can range from a

low of 1.0 to a high of 4.0, with the average score being 2.5. Total weighted scores well below

2.5 characterize organizations that are weak internally, implying that new strategies are likely

needed and perhaps a new direction, new vision, or mission. Total weighted scores well above

2.5 indicate a strong internal position, whereby a continuation of current strategies may be pru-

dent. (Note: The IE Matrix presented in Chapter 6 focuses on matching of EFE and IFE total

weighted scores in formulating strategies.)

TABLE 4-10 Guidelines for Developing an IFE Matrix

1. Use the Narrow (Not Broad) Industry the Firm Competes In

Example: Burger King competes in the fast-food industry (as opposed to the more general restaurant

industry). Therefore, for Burger King, if including a weakness regarding the lack of healthy options

on their menu, this factor should likely receive a low weight because healthy menu options are not as

vital to the fast-food industry, whose customer base mostly desire quick service, good taste, and filling

food. Similarly, Burger King’s weakness related to low-quality meats should not receive a high weight

either because quality meats are not that important in the fast-food industry; customers simply are not

willing to pay for them. Similarly, Burger King’s strength of providing low-priced coffee would re-

ceive a high weight if the analyst views coffee as being especially important in the fast-food industry

for success. If however the analysts views coffee not to be especially important in the fast-food indus-

try for success, then this strength of Burger King should receive a relatively low weight.

2. State Factors So They Pass the Actionable-Quantitative-Comparative-Divisional (AQCD) Test

Example: A firm’s revenues may have decreased 15 percent from one year to the next, but stated in this

manner, this “weakness” is not actionable because it does not reveal the reason, or reasons, why rev-

enues declined; the reason(s) could range from competition driving down prices to raw materials being

unavailable for one product or division of the firm. Nonactionable factors could lead managers astray

if they make false assumptions regarding what to do about the factor. Therefore, state the “revenue

decline factor” perhaps as follows: Revenues in the chocolate segment of the firm declined 21 percent

in the most recent quarter because of factory recall problems. Now the factor passes the AQCD Test in

providing insightful, relevant, useful, information for formulating strategies.

144 PART 2 • STRATEGY FORMuLATION

An Example IFE Matrix

An example IFE Matrix is provided in Table 4-11 for a retail computer store. The table reveals that

the two most important factors to be successful in the retail computer store business (as indicated

by the highest weighted factors) are Strength #1: “Revenues from repair/service in the store,”

and Weakness #1: Location of store negatively impacted by new Highway 34. Note that among

the strengths, the store’s strategies are not responding well (rating is 2) to two factors: “Average

customer purchase increased from $97 to $128” and “Debt-to-total assets ratio declines to 34%,”

as indicated by the assigned 2 ratings. Regarding the store’s weaknesses, note that the owner’s

strategies are responding “superior” to two factors: (1) “Location of store negatively impacted by

new Highway 34,” as indicated by the rating of 4 (because plans are underway to perhaps relocate

the store), and (2) “Bathroom needs refurbishing,” as indicated by the rating of 4 (because the

bathroom is in the process of being remodeled). Note that the store’s IFE Matrix overall contains

numerous dollars, numbers, percentages, and ratios, rather than vague statements; this is excel-

lent. This store receives a 2.73 total weighted score, which on a 1- to 4-scale, indicates some suc-

cess but there is room for improvement in store operations, strategies, policies, and procedures.

Coupled with the EFE Matrix, the IFE Matrix provides important information for strategy

formulation. For example, this retail computer store might want to hire another checkout person

and repair its carpet and paint. Also, the store may want to increase advertising for its repair/ser-

vices, because that is a really important (weight 0.15) factor to being successful in this business.

In multidivisional firms, each autonomous division or strategic business unit should con-

struct their own IFE Matrix (and their own EFE Matrix). Divisional matrices then can be inte-

grated to develop an overall corporate IFE Matrix. Be as divisional as possible when developing

a corporate IFE Matrix. Also, in developing an IFE Matrix, do not allow more than 30 percent

of the key factors to be financial ratios. Financial ratios are generally the result of many fac-

tors, so it is difficult to know what particular strategies should be considered based on financial

ratios. For example, a firm would have no insight on whether to sell in Brazil or South Africa to

take advantage of a high corporate ROI ratio.

TABLE 4-11 Sample Internal Factor Evaluation Matrix for a Retail Computer Store

Key Internal Factors Weight Rating Weighted Score

Strengths

1. Revenues from repair/service in the store up 16%. 0.15 3 0.45

2. Employee morale is excellent. 0.10 3 0.30

3. Average customer purchase increased from $97 to $128. 0.07 2 0.14

4. In-store promotions resulted in 20% increase in sales. 0.05 3 0.15

5. In-store technical support personnel have MIS college

degrees.

0.05 4 0.20

6. Inventory turnover increased from 5.8 to 6.7. 0.05 3 0.15

7. Debt-to-total assets ratio declines to 34%. 0.03 2 0.06

8. Newspaper advertising expenditures increased 10%. 0.02 3 0.06

9. Revenues per employee up 19%. 0.02 3 0.06

Weaknesses

1. Location of store negatively impacted by new Highway 34. 0.15 4 0.60

2. Revenues from software segment of store down 12%. 0.10 2 0.20

3. Often customers wait 15 minutes to check out. 0.05 1 0.05

4. Store has no website. 0.05 2 0.10

5. Revenues from service segment down 8%. 0.04 1 0.04

6. Supplier on-time delivery increased to 2.4 days. 0.03 1 0.03

7. Carpet and paint in store somewhat in disrepair. 0.02 3 0.06

8. Bathroom in store needs refurbishing. 0.02 4 0.08

Total 1.00 2.73

CHAPTER 4 • THE INTERNAL ASSESSMENT 145

IMPLICATIONS FOR STRATEGISTS

Figure 4-3 illustrates that to gain and sustain competitive advantages, a

firm must formulate strategies that capitalize on internal strengths and

continually improve on its internal weaknesses. Firms must nurture and

build on competitive advantages embedded largely within the list of

strengths included in an IFE Matrix. Coupled with the vision or mission

and external audit, the internal audit must be performed methodically

and carefully because survival of the firm could hinge on the strategic

plan that ensues from these assessments. Do not let assignment of

weights and ratings become based on mere guessing, emotion, and

opinion; use the sources of information mentioned in this chapter and

others to extract actionable, quantitative, comparative, divisional, fac-

tors for inclusion in matrices. Use the AQCD Test as a guide for devel-

oping effective, useful strength and weakness factors.

The Process of Performing an Internal Audit

The process of performing an internal audit closely parallels the

process of performing an external audit. Representative managers

and employees throughout the firm need to be involved in deter-

mining a firm’s strengths and weaknesses. The internal audit requires

gathering, assimilating, and prioritizing information about the firm’s

management, marketing, finance, accounting, production, and MIS

operations to reveal the firm’s most important strengths and most

severe weaknesses.

Compared to the external audit, the process of performing an

internal audit provides more opportunity for participants to under-

stand how their jobs, departments, and divisions fit into the whole

organization. This is a great benefit because managers and employ-

ees perform better when they understand how their work affects

other areas and activities of the firm. For example, when marketing

and manufacturing managers jointly discuss issues related to inter-

nal strengths and weaknesses, they gain a better appreciation of the

issues, problems, concerns, and needs of all the functional areas.

Thus, performing an internal audit is an excellent vehicle or forum

for improving the process of communication in an organization.

Establish A Clear
Vision & Mission

Evaluate & Monitor
Results:

Take Corrective
Actions; Adapt

To Change

Gain & Sustain
Competitive
Advantages

Formulate Strategies:
Collect, Analyze, &

Prioritize Data Using
Matrices; Establish A
Clear Strategic Plan

Implement Strategies:
Establish Structure;
Allocate Resources;
Motivate & Reward;
Attract Customers;
Manage Finances

FIGURE 4-3

How to Gain and Sustain Competitive Advantages

146 PART 2 • STRATEGY FORMuLATION

IMPLICATIONS FOR STUDENTS

To obtain the most recent management, marketing, and financial

information about your case company, read the firm’s most recent

quarterly report; the narrative that accompanies quarterly reports is

excellent for revealing what a company is doing and the most recent

financial results. Use these reports to obtain comparative informa-

tion for developing an IFE Matrix.

Gaining and sustaining competitive advantage is the essence or

purpose of strategic planning. In the internal portion of your case

analysis, emphasize how and why your internal strengths and weak-

nesses can both be leveraged to gain competitive advantage and

overcome competitive disadvantage, in light of the direction you

are taking the firm. Maintain your project’s upbeat, insightful, and

forward-thinking demeanor during the internal assessment, rather

than being mundane, descriptive, and vague. Focus on how your

firm’s resources, capabilities, structure, and strategies, with your rec-

ommended improvements, can lead the firm to prosperity.

Although the numbers must provide the basis for your analysis and

must be accurate and reasonable, do not bore a live audience or class

with overreliance on numbers. In contrast, throughout your presenta-

tion or written analysis, refer to your recommendations, explaining how

your plan of action will improve the firm’s weaknesses and capitalize on

strengths in light of anticipated competitor countermoves. Keep your

audience’s attention, interest, and suspense, rather than “reading” to

them or “defining” ratios for them.

William King believes a task force of managers from different

units of the organization, supported by staff, should be charged with

determining the 20 most important strengths and weaknesses that

should influence the future of the firm. According to King,

The development of conclusions on the 20 most important

organizational strengths and weaknesses can be, as any ex-

perienced manager knows, a difficult task, when it involves

managers representing various organizational interests and

points of view. Developing a 20-page list of strengths and

weaknesses could be accomplished relatively easily, but a list

of the 20 most important ones involves significant analysis

and negotiation. This is true because of the judgments that

are required and the impact that such a list will inevitably

have as it is used in the formulation, implementation, and

evaluation of strategies.12

Strategic planning is most successful when managers and em-

ployees from all functional areas work together to provide ideas

and information. Financial managers, for example, may need to

restrict the number of feasible options available to operations

managers, or R&D managers may develop products for which mar-

keting managers need to set higher objectives.

A key to organizational success is effective coordination and

understanding among managers from all functional business

areas. Through involvement in performing an internal strategic-

management audit, managers from different departments and

divisions of the firm come to understand the nature and effect of

decisions in other functional business areas in their firm. Knowledge

of these relationships is critical for effectively establishing objectives

and strategies. Financial ratio analysis, for example, exemplifies the

complexity of relationships among the functional areas of business.

A declining return on investment or profit margin ratio could, for

example, be the result of ineffective marketing, poor management

policies, R&D errors, or a weak MIS.

Strategists should follow the guidelines presented in this chap-

ter and throughout this book to help assure that their firm is head-

ing in the right direction for the right reasons, and rewarding the

right people for doing the right things, in the right places.

Chapter Summary
Management, marketing, finance and accounting, and MIS represent the core operations of

most businesses and the sources of competitive advantages. A strategic-management audit

of a firm’s internal operations is vital to organizational health. Many companies still prefer

to be judged solely on their bottom-line performance. However, it is essential that strategists

identify and evaluate internal strengths and weaknesses to effectively formulate and choose

among alternative strategies. The IFE Matrix, coupled with the CPM, the EFE Matrix, and

clear statements of vision and mission provide the basic information needed to successfully

formulate competitive strategies. The process of performing an internal audit represents an

opportunity for managers and employees throughout the organization to participate in deter-

mining the future of the firm. Involvement in the process can energize and mobilize manag-

ers and employees.

Understanding both external and internal factors and relationships among them (see

SWOT analysis in Chapter 6) is the key to effective strategy formulation. Because both

external and internal factors continually change, strategists seek to identify and take ad-

vantage of positive changes and buffer against negative changes in a continuing effort

to gain and sustain a firm’s competitive advantage. This is the essence and challenge of

CHAPTER 4 • THE INTERNAL ASSESSMENT 147

Key Terms and Concepts
activity ratios (p. 139)

business analytics (p. 140)

capacity utilization (p. 129)

capital budgeting (p. 135)

channel of distribution (p. 134)

collaborative machines (p. 129)

controlling (p. 128)

Customer Analysis (p. 131)

data mining (p. 140)

distinctive competencies (p. 125)

Distribution (p. 134)

dividend decisions (p. 136)

empirical indicators (p. 125)

financial ratio analysis (p. 136)

financing decision (p. 135)

growth ratios (p. 139)

human resource management (HRM) (p. 128)

internal audit (p. 145)

Internal Factor Evaluation (IFE) Matrix (p. 142)

investment decision (p. 135)

leverage ratios (p. 139)

liquidity ratios (p. 139)

management (p. 126)

management information system (MIS) (p. 140)

marketing (p. 131)

marketing research (p. 131)

motivating (p. 127)

organizational culture (p. 129)

organizing (p. 127)

planning (p. 127)

production/operations (p. 129)

profitability ratios (p. 139)

promotion (p. 133)

research and development (p. 132)

resource-based view (RBV) (p. 125)

synergy (p. 127)

target market analysis (p. 131)

test marketing (p. 132)

Issues for Review and Discussion

4-1. Explain why strengths are more important than

weaknesses in strategic planning.

4-2. What is bitcoin? Explain how to use bitcoin.

4-3. Do strengths always receive higher weights than

weaknesses? Explain why.

4-4. Do strengths always receive higher ratings than

weaknesses? Explain why.

4-5. Should assignment of weights down an IFE Matrix

weight column be contingent on “intensity of indus-

try rivalry”? Discuss.

4-6. Explain why it is so important to focus on a firm’s

narrow industry rather than its broader industry in

developing an IFE Matrix?

4-7. Explain the concept of factors being “actionable.”

4-8. Explain why companies develop a list of 50 to 100

internal factors before distilling the list to 20 to in-

clude in an IFE Matrix?

4-9. Describe two ways how a firm can determine from a

list of 50 to 100 internal factors the 20 most impor-

tant factors to include in an IFE Matrix.

4-10. Discuss strategic implications of a firm receiving a

total weighted IFE Matrix score of 1.5 versus 3.5.

4-11. If IFE Matrix strength factor 4 receives a rating of 4

what does that signify for the analyst? If weakness

factor 4 receives a rating of 4 what does that signify?

4-12. The primary means for gaining and sustaining com-

petitive advantages for most companies are shifting

downstream. Explain and discuss this statement.

4-13. In analyzing big data, there is a shift from focusing

largely on aggregates or averages to also focusing

on outliers because outliers oftentimes reveal (pre-

dict) critical innovations, trends, disruptions, and

revolutions on the horizon. Explain and discuss this

statement.

4-14. What are some limitations of financial ratio analysis?

4-15. Does RBV theory determine diversification targets?

Explain and discuss.

4-16. True or False: Personal selling is typically more use-

ful for industrial-goods companies, whereas advertis-

ing is typically more effective for consumer-goods

companies. Explain.

4-17. What are “collaborative machines”?

4-18. Identify some excellent online resources for finding

financial ratio information.

strategic management, and oftentimes survival of the firm hinges on this work. Adherence

to the AQCD Test regarding internal (and external) factors statements will enable excellent

“matching matrices” to be constructed (in Chapter 6).

148 PART 2 • STRATEGY FORMuLATION

4-19. How might elements of the marketing mix, particu-

larly “price” and “place” vary for common household

goods versus luxury products?

4-20. Is a capacity utilization rate of 50 percent good?

Why?

4-21. Explain why communication may be the most impor-

tant word in management. What do you think is the

most important word in marketing? In finance? In

accounting?

4-22. Discuss how the nature of marketing has changed in

the last few years.

4-23. Explain why it is best not to have more than 30

percent of the factors in an IFE Matrix be financial

ratios.

4-24. List three firms you are familiar with and give a dis-

tinctive competence for each firm.

4-25. Give some key reasons why it is essential to priori-

tize strengths and weaknesses.

4-26. Why may it be easier in performing an internal as-

sessment to develop a list of 80 strengths and weak-

nesses than to decide on the top 20 to use in formu-

lating strategies?

4-27. Think of an organization with which you are familiar.

List three resources of that entity that are empirical

indicators.

4-28. Think of an organization with which you are familiar.

Rate that entity’s organizational culture on the 15

example dimensions listed in Table 4-4.

4-29. If you and a partner were going to visit a foreign

country where you have never been before, how

much planning would you do ahead of time?

What benefit would you expect that planning to

provide?

4-30. Even though planning is considered the foundation

of management, why do you think it is commonly the

task that managers neglect most?

4-31. Are you more organized than the person sitting

beside you in class? If not, what problems could that

present in terms of your performance and rank in

the class? How analogous is this situation to rival

companies?

4-32. List the three ways that financial ratios should be

compared or used. Which of the three comparisons

do you feel is most important? Why?

4-33. In an IFE Matrix, would it be advantageous to list

your strengths, and then your weaknesses, in order of

decreasing “weight”? Why?

4-34. In an IFE Matrix, a critic may say there is no signifi-

cant difference between a “weight” of 0.08 and 0.06.

How would you respond? What is the mathematical

difference?

4-35. Why do many firms consistently pay out dividends?

4-36. What is marketing promotion? Name several example

forms of promotion commonly used by marketers.

4-37. Explain why prioritizing the relative importance of

strengths and weaknesses in an IFE Matrix is an

important strategic-management activity.

4-38. How can delegation of authority contribute to effec-

tive strategic management?

4-39. Explain how you would motivate managers and em-

ployees to implement a major new strategy.

4-40. Why do you think production and operations manag-

ers often are not directly involved in strategy-formu-

lation activities? Why can this be a major organiza-

tional weakness?

4-41. Give two examples of human resource management

(HRM) strengths and two examples of HRM

weaknesses of an organization with which you are

familiar.

4-42. Define, compare, and contrast weights versus ratings

in an EFE Matrix versus an IFE Matrix.

4-43. If a firm has zero debt in its capital structure, is that

always an organizational strength? Why or why not?

4-44. After conducting an internal audit, a firm discovers

a total of 100 strengths and 100 weaknesses. What

procedures then could be used to determine the most

important of these? Why is it important to reduce the

total number of key factors?

4-45. Why is it important for companies to conduct mar-

keting research? What type of information might they

discover from marketing research?

4-46. What are 10 activities that comprise human resource

management?

4-47. Explain the difference between data and information

in terms of each being useful to strategists.

4-48. What are the most important characteristics of an ef-

fective management information system?

4-49. Do you agree or disagree with the resource-based

view theorists that internal resources are more impor-

tant for a firm than external factors in achieving and

sustaining competitive advantage? Explain your and

their position.

4-50. What makes a resource valuable to a company?

4-51. List five financial ratios that may be used by your

university to monitor operations.

4-52. What is the most severe cyberthreat facing compa-

nies today, and how can firms best mitigate against

this threat?

CHAPTER 4 • THE INTERNAL ASSESSMENT 149

ASSURANCE-OF-LEARNING EXERCISES

SET 1: STRATEGIC PLANNING FOR COCA-COLA

EXERCISE 4A

Perform a Financial Ratio Analysis for Coca-Cola

Purpose

Financial ratio analysis is one of the best techniques for identifying and evaluating internal strengths

and weaknesses. Potential investors and current shareholders look closely at firms’ financial ratios,

making detailed comparisons to industry averages and to previous periods of time. Financial ratio

analyses provide vital input information for developing an IFE Matrix.

Instructions

Step 1 Using the resources listed in Table 4-8, find as many Coca-Cola financial ratios as possible.

Record your sources. Report your research to your classmates and your professor.

EXERCISE 4B

Construct an IFE Matrix for Coca-Cola

Purpose

This exercise will give you experience in developing an IFE Matrix. Identifying and prioritizing

factors to include in an IFE Matrix fosters communication among functional and divisional man-

agers. Preparing an IFE Matrix allows managers to articulate their concerns and thoughts regard-

ing the business condition of the firm. This results in an improved collective understanding of the

business.

Instructions

Step 1 Join with two other individuals to form a three-person team. Develop a team IFE Matrix for

Coca-Cola. Use information from Exercise 1B on page 66.

Step 2 Compare your team’s IFE Matrix to other teams’ IFE matrices. Discuss any major

differences.

Step 3 What strategies do you think would allow Coca-Cola to capitalize on its major strengths?

What strategies would allow Coca-Cola to improve on its major weaknesses?

SET 2: STRATEGIC PLANNING FOR MY UNIVERSITY

EXERCISE 4C

Construct an IFE Matrix for Your College
or University

Purpose

This exercise gives you the opportunity to evaluate your university’s major strengths and weaknesses.

As will become clearer in the next chapter, an organization’s strategies are largely based on striving to

take advantage of strengths and improving on weaknesses.

Instructions

Step 1 Join with two other individuals to form a three-person team. Develop a team IFE Matrix for

your university.

Step 2 What was your team’s total weighted score?

Step 3 Compare your team’s IFE Matrix to other teams’ IFE matrices. Discuss any major

differences.

Step 4 What strategies do you think would allow your university to capitalize on its major strengths?

What strategies would allow your university to improve on its major weaknesses?

150 PART 2 • STRATEGY FORMuLATION

SET 3: STRATEGIC PLANNING FOR MYSELF

EXERCISE 4D

Construct an IFE Matrix for Yourself

Purpose

This exercise gives you the opportunity to evaluate your own personal strengths and weaknesses.

As will become clearer in the next chapter, an organization’s strategies are largely based on striving

to take advantage of strengths and improving on weaknesses. Similarly, in planning for your career,

you should formulate and implement personal strategies based on capitalizing on your strengths and

improving on your weaknesses.

Instructions

Step 1 Develop an IFE Matrix for yourself. As you assign weights, consider the relative importance

of each factor for success in your desired career.

Step 2 What was your team’s total weighted score? Compare your total weighted score to the aver-

age score of 2.5.

Step 3 What strategies might enable you to capitalize on your major strengths? What strategies

might help you improve on your major weaknesses?

SET 4: INDIVIDUAL VERSUS GROUP STRATEGIC PLANNING

EXERCISE 4E

What Internal Functional Areas Are Most Important
to Examine in Strategic Planning?

Purpose

A prioritized list of internal factors is needed for effective strategic planning. Often, the process en-

tails all managers individually ranking the factors identified, from 1 (most important) to 20 (least

important). Prioritization is absolutely essential in strategic planning because no organization can do

everything that would benefit the firm; tough choices among good choices have to be made.

Internal functional areas that yield strengths/weaknesses can be divided into five broad categories

or areas: (1) management, (2) marketing, (3) finance, (4) accounting, and (5) MIS. For some compa-

nies or organizations at various times, some areas are more important than others. This exercise re-

veals the authors’ ranking of the relative importance of six functional areas for inclusion in a strategic

planning internal assessment.

The purpose of this exercise is to examine more closely the functional areas of business. In ad-

dition, the purpose of this exercise is to examine whether individual decision making is better than

group decision making. Academic research suggests that groups make better decisions than individu-

als about 80 percent of the time.

Instructions

Rank five internal areas as to their relative importance (1 = most important, 5 = least important) in

doing strategic planning. First, rank the areas as an individual. Then, rank the areas as a group of

three. Thus, determine what person(s) and what group(s) here today can come closest to the expert

ranking. This exercise enables examination of the relative effectiveness of individual versus group

decision making in strategic planning.

Steps

1. Fill in Column 1 in Table 4-12 to reveal your individual ranking of the relative importance of

the six areas (1 = most important, 2 = next most important, etc.). For example, if you feel man-

agement is the third-most important functional area in doing strategic planning, then enter a 3 in

Table 4-12 in Column 1 beside Management.

2. Fill in Column 2 in Table 4-12 to reveal your group’s ranking of the relative importance of the

five areas (1 = most important, 2 = next most important, etc.).

3. Fill in Column 3 in Table 4-12 to reveal the expert’s ranking of the relative importance of the

five functional areas.

CHAPTER 4 • THE INTERNAL ASSESSMENT 151

4. Fill in Column 4 in Table 4- 12 to reveal the absolute difference between Column 1 and Column

3 to reveal how well you performed as an individual in this exercise. (Note: Absolute difference

disregards negative numbers.)

5. Fill in Column 5 in Table 4- 12 to reveal the absolute difference between Column 2 and Column

3 to reveal how well your group performed in this exercise.

6. Sum Column 4. Sum Column 5.

7. Compare the Column 4 sum with the Column 5 sum. If your Column 4 sum is less than your

Column 5 sum, then you performed better as an individual than as a group. Normally, group

decision making is superior to individual decision making, so if you did better than your group,

you did excellent.

8. The Individual Winner(s): The individual(s) with the lowest Column 4 sum is the WINNER.

9. The Group Winners(s): The group(s) with the lowest Column 5 score is the WINNER.

TABLE 4- 12 Internal Functional Area Analysis: Comparing Individual versus
Group Decision Making

Internal Functional Areas Column 1 Column 2 Column 3 Column 4 Column 5

1. Management

2. Marketing

3. Finance

4. Accounting

5. MIS

Sums

MINI-CASE ON PROCTER & GAMBLE (P&G) COMPANY

WHAT COMPANY IS BEST MANAGED
IN THE UNITED STATES?
The answer could be P&G. Ratings by the Drucker Institute on overall corporate effectiveness show

that P&G is certainly among the most effectively managed firms in the United States. P&G CEO,

David Taylor, explains that, “Every day P&G people work to serve consumers with superior brands

and reward shareholders with balanced, sustainable long-term growth and value creation. This rec-

ognition is further validation that we are on the right track.”

The Drucker Institute analyzes performance of companies across the functional areas of busi-

ness, including more than 35 metrics, such as market-share data, patents, and employee ratings.

Information is collected and analyzed to determine how well companies are doing according to

Drucker’s core principles: customer satisfaction, financial strength, employee development, inno-

vation, and corporate social responsibility. P&G received exceptionally high scores on innovation,

social responsibility, and financial strength.

P&G competes in the consumer-products industry. The company’s finance chief, Jon Moeller,

explains that P&G wants to focus on product categories that are used daily, such as toothpaste and

soap, so of late has narrowed its product mix, disposing of underperforming brands and cutting

back from more than 100 brands to around 65. Simultaneously, P&G has cut over 20,000 jobs and

trimmed nearly $10 billion in costs. P&G puts its cash to good use and is considered a “dividend

king” by some experts. P&G Chief Information Officer, Javier Polit, explained that “What was pre-

viously cost-prohibitive is now cost-effective with the use of the cloud. We’re about to forecast now

in ways we couldn’t before. We’ve seen improvements in regard to the quantity of raw materials we

buy, and the costs associated with ship and restock.”

M
id

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152 PART 2 • STRATEGY FORMuLATION

As stated by CEO David Taylor, “it is a combination of a few key capabilities that determine

whether any company will be successful, especially “superior products that delight customers,” “ex-

emplary technology,” and what underpins it all is “acquiring the best people.”

Questions

1. Consider the following two-dimensional matrix with weights on the y -axis and ratings on the

x -axis as given in Figure 4- 4 . What are example strengths and weaknesses that could possibly

characterize P&G in the four corners of the matrix? Develop a hypothetical strength and weak-

ness for P&G that could be positioned in each of the four corners of the matrix. Give a support-

ing rationale for each factor. Which corner of the matrix do you think characterizes factors most

commonly in an IFE Matrix? Why? Which corner of the matrix do you think characterizes fac-

tors least commonly in an IFE Matrix? Why? What could you say about the middle of the matrix

in terms of factors commonly included in an IFE Matrix?

Strength 1

Weakness 1

Strength 2

Weakness 2

Strength 3

Weakness 3

RATINGS

High

Low

W
E

IG
H

T
S

Middle

Strength 4

Weakness 4

FIGURE 4- 4

A Weights-by-Ratings Matrix to Exemplify IFE Matrix Logic

Note: A purpose of this mini-case is to give students practice thinking about when, in developing an IFE Matrix, could

a particular factor receive the following weights and ratings:

1. a low weight and high rating

2. a high weight and high rating

3. a low weight and low rating

4. a high weight and low rating

Source: Company documents and a variety of sources including Sara Castellanos, “Tech Innovation Isn’t Just for Tech

Firms,” Wall Street Journal, (December 6, 2017): R6, and Vanessa Fuhrmans and Yoree Koh, “The Most Effectively

Managed U.S. Companies and How They Got That Way,” Wall Street Journal , (December 6, 2017): R1–R2.

Web Resources
1. See Table 4- 8 on page 138.

Current Readings
Arora, Ashish, Sharon Belenzon, and Andrea Patacconi. “The

Decline of Science in Corporate R&D.” Strategic Manage-

ment Journal 39, Issue 1 (January 2018): 3–32.
Bridoux, Flore, Régis Coeurderoy, and Rodolphe Durand.

“Heterogeneous Social Motives and Interactions: The
Three Predictable Paths of Capability Development.”
Strategic Management Journal 38, no. 9 (September
2017): 1755–1773.

Chatain, Oliver and Denisa Mindruta. “Estimating Value
Creation from Revealed Preferences: Application to Value-
based Strategies.” Strategic Management Journal 38,
no. 10 (October 2017): 1964–1985.

David, Fred R., Meredith E. David, and Forest R. David. “The
Integration of Marketing Concepts in Strategic Management
Courses: An Empirical Analysis.” SAM Advanced
Management Journal 82, no. 1 (Winter 2017): 26–47.

David, Fred R., Meredith E. David, and Forest R. David. “How
Important Is Finance Coverage in Strategic Management?
A Content Analysis of Textbooks.” International Journal
of Business, Marketing, and Decision Sciences (IJBMDS)
4, no. 1 (Winter 2016): 64–78.

David, Meredith E. and Fred R. David. “Are Key Marketing
Topics Adequately Covered in Strategic Management?”
Journal of Strategic Marketing 24, (March 2016): 1–13.

Fleit, Caren. “The Evolution of the CMO.” Harvard Business
Review 95, no. 4 (July–August 2017): 60.

Furr, Nathan and Rahul Kapoor. “Capabilities, Technologies,
and Firm Exit During Industry Shakeout: Evidence
from the Global Solar Photovoltaic Industry.” Strategic
Management Journal 39, no. 1 (January 2018): 33–61.

Grigoriou, Konstantinos and Frank T. Rothaermel. “Organizing
for Knowledge Generation: Internal Knowledge Networks
and the Contingent Effect of External Knowledge
Sourcing.” Strategic Management Journal 38, no. 2
(February 2017): 395–414.

Hoisl, Karin, Marc Gruber, and Annamaria Conti. “R&D
Team Diversity and Performance in Hypercompetitive
Environments.” Strategic Management Journal 38, no. 7
(July 2017): 1455–1477.

Lee, Joon Mahn, Byoung-Hyoun Hwang, and Hailiang Chen.
“Are Founder CEOs More Overconfident than Professional
CEOs? Evidence from S&P 1500 Companies.” Strategic
Management Journal 38, no. 3 (March 2017): 751–769.

Menon, Anoop R. and Dennis A. Yao. “Elevating Repositioning
Costs: Strategy Dynamics and Competitive Interactions.”
Strategic Management Journal 38, no. 10 (October 2017):
1953–1963.

Morris, Shad S., Sharon A. Alvarez, Jay B. Barney, and
Janice C. Mollo. “Firm-Specific Human Capital
Investments as a Signal of General Value: Revisiting
Assumptions about Human Capital and How It Is
Managed.” Strategic Management Journal 38, no, 4
(April 2017): 912–919.

Quigley, Timothy J., Craig Crossland, and Robert J. Campbell.
“Shareholder Perceptions of the Changing Impact of
CEOs: Market Reactions to Unexpected CEO Deaths,
1950–2009.” Strategic Management Journal 38, no. 4
(April 2017): 939–949.

Selladurai, Raj and Carraher, Shawn. Servant Leadership:
Research and Practice, 1st edition, Business Science
Reference, 2014, 406 pages.

Theeke, Matt and Hun Lee. “Multimarket Contact and
Rivalry over Knowledge-Based Resources.” Strategic
Management Journal 38, no. 12, (December 2017):
2508–2531.

Vanacker, Tom, Veroniek Collewaert, and Shaker A. Zahra.
“Slack Resources, Firm Performance, and the Institutional
Context: Evidence from Privately Held European Firms.”
Strategic Management Journal 38, no. 6 (June 2017):
1305–1326.

Endnotes
1. Robert Grant, “The Resource-Based Theory of Competi-

tive Advantage: Implications for Strategy Formulation,”

California Management Review (Spring 1991): 116.

2. Adam Smith, The Wealth of Nations (New York: Modern

Library, 1937), 3–4.

3. Peter Drucker, Management Tasks, Responsibilities, and

Practice (New York: Harper & Row, 1973), 463.

4. Timothy Aeppel, “Robots Work Their Way into Small

Factories,” Wall Street Journal (September 18, 2004): B1.

5. Edgar Schein, Organizational Culture and Leadership

(San Francisco: Jossey-Bass, 1985), 9.

6. Quoted in Robert Waterman, Jr., “The Renewal Factor,”

BusinessWeek (September 14, 1987): 108.

7. ____http://www.nasdaq.com/article/the-current-and-

future-trends-of-digital-advertising-cm669129

8. J. Van Horne, Financial Management and Policy (Upper

Saddle River, NJ: Prentice-Hall, 1974): 10.

9. G. George, M. Haas, and A. Pentland, “Big Data and

Management,” Academy of Management Journal 52, no. 2

(April 2014): 321–326. See also P. Barlas, “Data Analytics

Gets in the Sports Game,” Investor’s Business Daily (July

11, 2014): A1

10. Vanessa Fuhrmans, “CEOs Make Protecting Data a Top

Goal,” Wall Street Journal (October 13, 2017): B4.

11. Stephen Schmidt and Scott Smith, “Where the Cyberthreats

Are,” Wall Street Journal (December 19, 2017): R1.

12. Reprinted by permission of the publisher from “Integrating

Strength–Weakness Analysis into Strategic Planning,” by

William King, Journal of Business Research 2, no. 4: 481.

CHAPTER 4 • THE INTERNAL ASSESSMENT 153

154

Strategy
Formulation

Feedback Loop

Strategy
Implementation

Strategy
Evaluation

Chapter 10: Business Ethics, Environmental Sustainability, and Social Responsibility

Chapter 11: Global and International Issues

Strategy
Evaluation

and
Governance
Chapter 9

Implementing
Strategies:

Finance and
Accounting

Issues
Chapter 8

Implementing
Strategies:

Management
and Marketing

Issues
Chapter 7

Business
Vision and

Mission
Chapter 2

Strategies
in Action
Chapter 5

Strategy
Analysis and

Choice
Chapter 6

The
Internal

Assessment
Chapter 4

The External
Assessment
Chapter 3

FIGURE 5- 1

The Comprehensive, Integrative Strategic-Management Model

Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22,
no. 1 (February 1989): 91. See also Anik Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and
Putu Artama Wiguna, “Balance Scorecard of David’s Strategic Modeling at Industrial Business for National
Construction Contractor of Indonesia,” Journal of Mathematics and Technology , no. 4 (October 2010): 20.

155

LEARNING OBJECTIVES

After studying this chapter, you should be able to do the following:

5- 1. Identify and discuss 5 characteristics and 10 benefits of clear objectives.

5- 2. Define and give an example of 11 types of strategies.

5- 3. Identify and discuss the three types of “Integration Strategies.”

5- 4. Give specific guidelines when market penetration, market development, and product
development are especially effective strategies.

5- 5. Explain when diversification is an effective business strategy.

5- 6. List guidelines for when retrenchment, divestiture, and liquidation are especially effec-
tive strategies.

5- 7. Explain value chain analysis and benchmarking in strategic management.

5- 8. Identify and discuss Porter’s two generic strategies: cost leadership and differentiation.

5- 9. Compare and contrast when companies should “build, borrow, or buy” as key means
for achieving strategies.

5- 10. Discuss first-mover advantages and disadvantages.

5- 11. Explain how strategic planning differs in for-profit, not-for-profit, and small firms.

ASSURANCE-OF-LEARNING EXERCISES

The following exercises are found at the end of this chapter:

SET 1: Strategic Planning for Coca-Cola

EXERCISE 5A: Develop Hypothetical Coca-Cola Company Strategies

EXERCISE 5B: Should Coca-Cola Build, Borrow, or Buy in 2020–2021?

SET 2: Strategic Planning for My University

EXERCISE 5C: Develop Alternative Strategies for Your University

SET 3: Strategic Planning for Myself

EXERCISE 5D: The Key to Personal Strategic Planning: Simultaneously Build and Borrow

SET 4: Individual versus Group Strategic Planning

EXERCISE 5E: What Is the Best Mix of Strategies for Coca-Cola Company?

Strategies in Action

MyLab Management

Improve Your Grade!

If your instructor is using MyLab Management, visit www.pearson.com/mylab/management

for videos, simulations, and writing exercises.

156 PART 2 • STRATEGY FORMuLATION

H
undreds of companies today have embraced strategic planning in their quest for higher

revenues and profits. Kent Nelson, former chair and CEO of UPS, explains why his com-

pany created a new strategic-planning department: “Because we’re making bigger bets

on investments in technology, we can’t afford to spend a whole lot of money in one direction and

then find out five years later it was the wrong direction.”1 As illustrated in Figure 5-1, long-term

objectives are needed before strategies can be generated, evaluated, and selected.

This chapter brings strategic management to life with many contemporary examples.

Different types of strategies are defined and exemplified, including Michael Porter’s generic

strategies: cost leadership and differentiation. Guidelines are presented for determining when

each strategy is most appropriate to pursue. The integral importance of value chain analysis and

benchmarking in strategic planning is revealed. An overview of strategic management in non-

profit organizations, governmental agencies, and small firms is provided. As showcased next,

Tim Cook is arguably the best strategist on the planet; he has led Apple to be the most admired

company in the world. Read to see why Cook and Apple are “insanely great.”

Long-Term Objectives
Long-term objectives represent the results expected from pursuing certain strategies. Strategies

represent the actions to be taken to accomplish long-term objectives. The time frame for objec-

tives and strategies should be consistent, usually from 2 to 5 years. Without long-term objectives,

an organization would drift aimlessly toward some unknown end or become too focused on

short-term fads and stray away from the firm’s mission.

It is hard to imagine an organization or an individual being successful without clear objec-

tives. You probably have worked hard the last few years striving to achieve an objective to gradu-

ate with a business degree. Success rarely occurs by accident; rather, it is the result of hard work

directed toward achieving certain objectives.

Characteristics and Benefits of Objectives

Objectives should be quantitative, understandable, challenging, compatible (consistent vertically

and horizontally in a chain of command), and obtainable. Each objective should also be associ-

ated with a timeline. Objectives are commonly stated in terms such as growth in assets, growth

LO 5.1

EXEMPLARY STRATEGIST SHOWCASED

Tim Cook, CEO of Apple, Inc.
The editor of Businessweek, Megan Murphy, recently asked the CEO of

Apple, Tim Cook, what he thought his legacy at Apple would be. Tim re-

sponded: “To be honest I don’t think about it; I think about doing stuff.”

Cook went on to explain how and why Apple’s founder, Steve Jobs,

rather than himself, should be the person revered forever as Apple’s

supreme strategist extraordinaire. Cook told Megan that Apple in the

past, present, and future is all about its founder Jobs. Tim explained that

Job’s “DNA” or “ethos” is and always will be Apple’s “Constitution” or

guiding set of principles. According to Cook, Jobs’s ethos ingrained into

Apple forever include the following items (paraphrased):

1. Pay acute attention to detail.

2. Keep it simple and genuinely care.

3. Focus on the user and user experience.

4. Focus on building the best.

5. Follow the motto “good isn’t good enough”; every product and

process must be, as Jobs’s often said, “insanely great.”

6. Apple should own the proprietary technology it uses to control

its own quality of product and user experience.

7. Walk away and be honest with yourself when you do something

wrong.

8. Never get married to your position or pride.

9. Invest for the long-term rather than striving to be the first to

market with a product.

Source: Based on Megan Murphy, “Tim Cook,” Bloomberg Businessweek, June

19, 2017, pp. 52–56.

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CHAPTER 5 • STRATEGIES IN ACTION 157

in sales, profitability, market share, degree and nature of diversification, degree and nature of

vertical integration, earnings per share, and social responsibility. (Note: Do not emulate many

Annual Reports that print really vague objectives for the firm, such as Macy’s Annual Report that

states as objectives “to grow sales profitably” and “to improve return on invested capital.” Such

statements are useless in strategic planning.

Clearly established objectives offer many benefits. They provide direction, allow synergy, assist

in evaluation, establish priorities, reduce uncertainty, minimize conflicts, stimulate exertion, and aid

in both the allocation of resources and the design of jobs. Objectives provide a basis for consistent

decision making by managers whose values and attitudes differ. Objectives serve as standards by

which individuals, groups, departments, divisions, and entire organizations can be evaluated.

Table 5-1 and Table 5-2 summarize the desired characteristics and benefits, respectively, of

having clear objectives.

TABLE 5-1 Five Characteristics of Objectives

1. Quantitative: measurable

2. Understandable: clear

3. Challenging: achievable

4. Compatible: consistent vertically and horizontally in a chain of command

5. Obtainable: realistic

TABLE 5-2 10 Benefits of Having Clear Objectives

1. Provide direction by revealing expectations.

2. Allow synergy.

3. Assist in evaluation by serving as standards.

4. Establish priorities.

5. Reduce uncertainty.

6. Minimize conflicts.

7. Stimulate exertion.

8. Aid in allocation of resources.

9. Aid in design of jobs.

10. Provide basis for consistent decision making.

Financial versus Strategic Objectives

Two types of objectives are especially common in organizations: financial and strategic objec-

tives. Financial objectives include those associated with growth in revenues, growth in earn-

ings, higher dividends, larger profit margins, greater return on investment, higher earnings per

share, a rising stock price, improved cash flow, and all other objectives relating to the financial

position of the firm, whereas strategic objectives focus on goals for obtaining a competitive

advantage, including factors such as a larger market share, quicker on-time delivery than rivals,

lower costs than rivals, higher product quality than rivals, wider geographic coverage than rivals,

achieving technological leadership, and consistently getting new or improved products to mar-

ket ahead of rivals.

Often there is a trade-off between financial and strategic objectives such that crucial deci-

sions have to be made. For example, a firm can do certain activities to maximize short-term

financial objectives that would harm long-term strategic objectives. To improve financial posi-

tion in the short run through higher prices may, for example, jeopardize long-term market share.

The dangers associated with trading off long-term strategic objectives with near-term bottom-

line performance are especially severe if competitors relentlessly pursue increased market share

at the expense of short-term profitability. Amazon, for example, operated for decades without

concern for profits, instead concentrating on gaining market share. There are other trade-offs

between financial and strategic objectives, related to riskiness of actions, concern for business

ethics, the need to preserve the natural environment, and social responsibility issues. Both fi-

nancial and strategic objectives should include annual and long-term performance targets.

158 PART 2 • STRATEGY FORMuLATION

Ultimately, the best way to sustain competitive advantage is to relentlessly pursue strategic ob-

jectives that strengthen a firm’s business position over rivals.

Avoid Managing by Crisis, Hope, Extrapolation, and Mystery (CHEM)

Derek Bok, former President of Harvard University, once said, “If you think education is expen-

sive, try ignorance.” The idea behind this saying also applies to establishing objectives because

strategists should avoid managing by CHEM.

• Managing By Crisis—Based on the belief that the true measure of a really good strate-

gist is the ability to solve problems. Because there are plenty of crises and problems to go

around for every person and organization, strategists ought to bring their time and creative

energy to bear on solving the most pressing problems of the day. Managing by crisis is

actually a form of reacting, letting events dictate the what and when of management

decisions.
• Managing By Hope—Based on the fact that the future is laden with great uncertainty and

that if we try and do not succeed, then we hope our second (or third) attempt will suc-

ceed. Decisions are predicated on the hope that they will work and that good times are just

around the corner, especially if luck and good fortune are on our side.
• Managing By Extrapolation—Adheres to the principle “If it ain’t broke, don’t fix it.” The

idea is to keep on doing the same things in the same ways because things are going well.
• Managing By Mystery—Built on the idea that there is no general plan for which way to go and

what to do; just do the best you can to accomplish what you think should be done. In short, “Do

your own thing, the best way you know how” (sometimes referred to as the mystery approach

to decision making because subordinates are left to figure out what is happening and why).2

Types of Strategies
Defined and exemplified in Table 5-3, alternative strategies that an enterprise could pursue can

be categorized into 11 actions: forward integration, backward integration, horizontal integration,

market penetration, market development, product development, related diversification, unrelated

diversification, retrenchment, divestiture, and liquidation. Each alternative strategy has countless

variations. For example, market penetration can include adding salespersons, increasing adver-

tising expenditures, couponing, and using similar actions to increase market share in a given

geographic area. Note for a particular company the strategy is very specific; be specific to the

extent possible in all aspects of strategic planning.

Most organizations simultaneously pursue a combination of two or more strategies, but a

combination strategy can be exceptionally risky if carried too far. No organization can afford to

pursue all the strategies that might benefit the firm; priorities must be established. Difficult deci-

sions must be made. Organizations, like individuals, have limited resources. Both organizations

and individuals must choose among alternative strategies and avoid excessive indebtedness.

LO 5.2

TABLE 5-3 Alternative Strategies Defined and Recent Examples Given

Strategy Definition Example

Forward Integration Gaining ownership or increased con-

trol over distributors or retailers

Nike opening 100 outlet stores and sell-

ing 30% more products on its website

Backward Integration Seeking ownership or increased con-

trol over suppliers

Boeing building 80% of its wing flap

motors in-house

Horizontal Integration Seeking ownership or increased con-

trol over competitors
Nestlé purchasing Sweet Earth Foods

Market Penetration Seeking increased market share for

present products in present markets

through greater marketing

Cristiano Ronaldo and LeBron James

sign lifetime endorsement deal with

Nike

Market Development Introducing present products into

new geographic area

Publix building 20 new supermarkets

in North and South Carolina

Product Development Seeking increased sales by improv-

ing present products or developing

new ones

Ford shifting one-third of its sched-

uled R&D budget on gas/diesel en-

gines to electric engines

CHAPTER 5 • STRATEGIES IN ACTION 159

Strategic planning thus involves “choices that risk resources, and trade-offs that sacrifice

opportunity.” In other words, if you have a strategy to go north, then you must buy snowshoes

and warm jackets (spend resources) and forgo the opportunity of “faster population growth in

southern states.” You cannot have a strategy to go north and then take a step east, south, or west

“just to be on the safe side.” Strategy is all about “what to do” and “what not to do.”

Firms spend resources and focus on a finite number of opportunities in pursuing strategies

to achieve an uncertain outcome in the future. Strategic planning is much more than a roll of the

dice; it is an educated wager based on predictions and hypotheses that are continually tested and

refined by knowledge, research, experience, and learning. Survival of the firm often hinges on an

excellent strategic plan.3

Organizations cannot excel in multiple different strategic pursuits because resources and

talents get spread thin and competitors gain advantage. In large, diversified companies, a com-

bination strategy is commonly employed when different divisions pursue different strategies.

Organizations struggling to survive may simultaneously employ a combination of several defen-

sive strategies, such as divestiture and retrenchment.

Levels of Strategies

Strategy making is not just a task for top executives. Middle- and lower-level managers also must be

involved in the strategic-planning process to the extent possible. In large firms, there are actually four

levels of strategies: corporate, divisional, functional, and operational—as illustrated in Figure 5-2.

However, in small firms, there are three levels of strategies: company, functional, and operational.

Related Diversification Adding new but related products Walmart acquired Jet.com for

$3.3 billion

Unrelated Diversification Adding new, unrelated products CVS pharmacy acquiring Aetna

insurance

Retrenchment Regrouping through cost and asset

reduction to reverse declining sales

and profit

Eli Lilly laying off 3,500 employees

Divestiture Selling a division or part of an

organization

Toshiba aims to sell its memory-chip

unit to Bain Capital

Liquidation Selling all of a company’s assets, in

parts, for their tangible worth

Ringling Bros. and Barnum & Bailey

Circus liquidated (last performance

was on May 21, 2017)

Corporate
Level—chief

executive officer

Divisional Level—division
president or executive

vice president

Functional Level—finance, marketing,
R&D, manufacturing, information systems,

and human resource managers

Operational Level—plant managers, sales managers,
production and department managers

Large Company

Company
Level—owner
or president

Functional Level—
finance, marketing, R&D,

manufacturing, information
systems, and human
resource managers

Operational Level—plant managers, sales
managers, production and department managers

Small Company

FIGURE 5-2

Levels of Strategies with Persons Most Responsible

160 PART 2 • STRATEGY FORMuLATION

The persons primarily responsible for having effective strategies at the various levels

include the CEO at the corporate level; the president of segments at the divisional level;

the chief finance officer (CFO), chief information officer (CIO), human resource manager

(HRM), chief marketing officer (CMO), other executives at the functional level, and the

plant manager, regional sales manager, and so on at the operational level. It is important that

all managers at all levels participate and understand the firm’s strategic plan to help ensure

coordination, facilitation, and commitment, while avoiding inconsistency, inefficiency, and

miscommunication.

Long-term objectives are needed at the corporate, divisional, functional, and opera-

tional levels of an organization. They are an important measure of managerial performance.

Bonuses or merit pay for managers today should be based to a greater extent on long-term

objectives and strategies. An example framework for relating objectives to performance

evaluation is provided in Table 5-4. A particular organization could tailor these guidelines

to meet their own needs, but incentives should be attached to both long-term and annual

objectives.

Integration Strategies
Forward integration and backward integration are sometimes collectively referred to as verti-

cal integration. Vertical integration strategies allow a firm to gain control over distributors

and suppliers, whereas horizontal integration refers to gaining ownership or control over

competitors. Vertical and horizontal actions by firms are broadly referred to as integration

strategies.

Historically, vertical integration strategies have been difficult to implement because of

the firm operating in businesses out of its core competency, and because large fixed costs are

generally associated with such strategies. For example, if Coke wished to vertically integrate,

it could acquire sugar farms to gain control over its suppliers and open its own brick-and-

mortar stores to gain control of distributors. Both would be excessively costly and divert

Coke from what it does best: producing beverage products. Although the risk of depending

on suppliers and distributors may be high, owning these businesses is often associated with

even greater risks. Viable options to vertical integration are joint ventures and strategic alli-

ances discussed later in the chapter. Opportunity costs associated with the resources used for

vertical integration usually could be more effectively deployed to other endeavors.

Forward Integration

Forward integration involves gaining ownership or increased control over distributors or retail-

ers as a means of moving closer to the end customer and cutting out the middleman. Increasing

numbers of manufacturers (suppliers) are pursuing forward integration to market the products

they produce. For example, Nike sells millions of shoes and shirts in a variety of retail stores rang-

ing from Foot Locker to J. C. Penney, but the company is rapidly boosting its direct- to-consumer

business, bypassing, and in some cases infuriating, retail stores. Nike’s forward- integration

LO 5.3

TABLE 5-4 Varying Performance Measures By Organizational Level

Organizational-Level Basis for Annual Bonus or Merit Pay

Corporate: overall firm 75% based on long-term objectives

25% based on annual objectives

Divisional such as by product or region 50% based on long-term objectives

50% based on annual objectives

Functional such as marketing and finance 25% based on long-term objectives

75% based on annual objectives

Operational such as manufacturing plants or stores 25% based on long-term objectives

75% based on annual objectives

CHAPTER 5 • STRATEGIES IN ACTION 161

strategy has hundreds of retail stores upset; sales on the Nike.com website recently rose 50 per-

cent. By 2020, Nike projects that its direct sales to consumers will exceed $16 billion annually

and account for one-third of the company’s revenue. At the three largest publicly traded U.S.

athletic retailers, Finish Line, Foot Locker, and Dick’s Sporting Goods, the percentage of their

merchandise that comes from Nike is 73, 73, and 19 percent, respectively, so these firms must

adapt or face disaster.

Forward integration is an increasingly popular strategy among U.S.-based restaurants.

Scores of mainstream restaurant chains now use or are developing online-ordering apps that often

entail delivery of food to customers. For example, Panera Bread has installed online- ordering

and delivery in about 50 percent of its restaurants. Panera employs more than 10,000 of its own

delivery drivers. Similarly, Dunkin’ Brands is now delivering doughnuts and coffee in Dallas,

Atlanta, Chicago, Los Angeles, and numerous other cities. Chipotle Mexican Grill has instituted

a second food assembly line in its restaurants to accommodate delivery and online orders. Taco

Bell now takes online orders and delivers in more than 50 markets through nearly 1,000 Taco

Bell restaurants. Online ordering and delivery of restaurant food in general is expected to soon

surpass pizzas.

An effective means of implementing forward integration is franchising. Approximately

2,000 companies in about 50 different industries in the United States use franchising to distrib-

ute their products or services. Businesses can expand rapidly by franchising because costs and

opportunities are spread among many individuals. Total sales by franchises in the United States

exceed $1 trillion annually. There are about 800,000 franchise businesses in the U.S. Subway

is today in turmoil as the 100 percent franchised firm has mostly franchisees that disagree with

top executives on the overall vision and mission of the firm. Year 2017 was the fourth consecu-

tive year of declining sales at Subway. Top executives want to continue adding stores to the over

25,000 in the U.S., but franchisees cannot take further cannibalization caused by new Subways

opening nearby. Instead, franchisees want more control over their supplier choices, more ad-

vertising from corporate, more flexibility on what promotions to participate in, more R&D to

enhance a menu that has not changed much in a decade, and permission to add drive-through

services.

The following six guidelines indicate when forward integration may be an especially effec-

tive strategy:4

1. An organization’s present distributors are especially expensive, unreliable, or incapable of

meeting the firm’s distribution needs.

2. The availability of quality distributors is so limited a rival could potentially sign an exclu-

sive contract, thus locking down a competitive advantage.

3. An organization competes in an industry that is growing and is expected to continue to

grow markedly; this is a factor because forward integration reduces an organization’s abil-

ity to diversify if its basic industry falters.

4. An organization has both the capital and human resources needed to manage the new busi-

ness of distributing its own products.

5. The advantages of stable production are particularly high; this is a consideration because

an organization can increase the predictability of the demand for its output through forward

integration.

6. Present distributors or retailers have high-profit margins; this situation suggests that a

company could profitably distribute its own products and price them more competitively

by integrating forward.

Backward Integration

Backward integration is a strategy of seeking ownership or increased control of a firm’s sup-

pliers. This strategy can be especially appropriate when a firm’s current suppliers are unreliable,

too costly, or cannot meet the firm’s needs. Starbucks recently purchased its first coffee farm—a

600-acre property in Costa Rica. This backward integration strategy was used primarily to de-

velop new coffee varieties and to test methods to combat a fungal disease known as coffee rust

that plagues the industry. Manufacturers, as well as retailers, purchase needed materials from

suppliers.

162 PART 2 • STRATEGY FORMuLATION

Consolidation in the aircraft parts industry has resulted in increased prices of these parts,

which has prompted Boeing and Airbus to begin producing many aircraft parts internally. Boeing

is constructing a plant in England that will produce motors that aid in the movement of wing

flaps. Airbus CEO Fabrice Bregier commented on how the firm continually reviews “make-or-

buy” decisions on most of its components used in aircraft construction.

Some industries, such as automotive and aluminum producers, are reducing their histori-

cal pursuit of backward integration; this practice is called de-integration. Instead of owning

their suppliers, companies negotiate with outside suppliers. Ford and Chrysler buy more than

half of their component parts from outside suppliers such as TRW, Eaton, General Electric

(GE), and Johnson Controls. This makes sense in industries that have global sources of sup-

ply. Companies today shop around, play one seller against another, and go with the best deal.

Global competition is also spurring firms to reduce their number of suppliers and to demand

higher levels of service and quality from those they keep. Although traditionally relying on

many suppliers to ensure uninterrupted supplies and low prices, many U.S. firms now are

following the lead of Japanese firms, which have far fewer suppliers and closer, long-term

relationships with those few. “Keeping track of so many suppliers is onerous,” said Mark

Shimelonis, formerly of Xerox.

Four major U.S. hospital systems recently launched a nonprofit company to produce ge-

neric drugs in order to offset skyrocketing prices of drugs. The four firms are Intermountain

Healthcare, Ascension, SSM Health, and Trinity Health; these four organizations own hundreds

of hospitals.

Seven guidelines when backward integration may be an especially effective strategy are:5

1. An organization’s present suppliers are especially expensive, unreliable, or incapable of

meeting the firm’s needs for parts, components, assemblies, or raw materials.

2. The number of suppliers is small and the number of competitors is large.

3. An organization competes in an industry that is growing rapidly; this is a factor because

integrative-type strategies (forward, backward, and horizontal) reduce an organization’s

ability to diversify in a declining industry.

4. An organization has both capital and human resources to manage the new business of sup-

plying its own raw materials.

5. The advantages of stable prices of raw materials are of upmost importance.

6. Present suppliers have high-profit margins, which suggest that the business of supplying

products or services in a given industry is a worthwhile venture.

7. Whenever various resources may be needed quickly.

Horizontal Integration

Horizontal integration is a strategy aimed at gaining control over a firm’s competitors; this is

arguably the most common growth strategy. Thousands of mergers, acquisitions, and takeovers

among competitors are consummated annually and most aim for increased economies of scale,

enhanced transfer of resources and competencies, reduced competition, and fewer price wars.

Kenneth Davidson makes the following observation about horizontal integration:

The trend towards horizontal integration seems to reflect strategists’ misgivings about their

ability to operate many unrelated businesses. Mergers between direct competitors are more

likely to create efficiencies than mergers between unrelated businesses, both because there

is a greater potential for eliminating duplicate facilities and because the management of the

acquiring firm is more likely to understand the business of the target.6

Walgreens Boot Alliance recently purchased two thousand Rite Aid stores; the remaining

two thousand Rite Aid stores are being acquired by Albertsons Companies LLC. Horizontal inte-

gration is often met with legal antitrust challenges as the one displayed with Walgreens and Rite

Aid, which took the Federal Trade Commission 18 months before giving final approval of the

deal.

The largest merger of homebuilders in 10 years occurred in 2018 when Lennar Corp. ac-

quired CalAtlantic Group to create a combined company with revenues more than $17 billion

annually. The next largest homebuilders in the United States in rank order are D. R. Horton,

PulteGroup, NVR, Toll Brothers, and KB Home.

CHAPTER 5 • STRATEGIES IN ACTION 163

Britain’s Cineworld Group PLC in 2018 acquired its U.S. counterpart Regal Entertainment

Group for $3.6 billion, creating the world’s second-largest movie cinema operator. The com-

bined company now has more than 9,000 movie screens. The largest firm in the industry is AMC

Entertainment Holdings that is part of China’s Dalian Wanda Group. Cinemark Holdings is the

third-largest cinema chain in the United States.

The following six guidelines indicate when horizontal integration may be an especially ef-

fective strategy:7

1. An organization can gain monopolistic characteristics in a particular area or region with-

out being challenged by the federal government for “tending substantially” to reduce

competition.

2. An organization competes in a growing industry.

3. Increased economies of scale provide major competitive advantages.

4. An organization has both the capital and human talent needed to successfully manage an

expanded organization.

5. When competitors are faltering and can be acquired at a discount.

6. When a firm desires to enter a new geographic market quickly.

Intensive Strategies
Market penetration, market development, and product development are sometimes referred to as

intensive strategies because they require intensive efforts if a firm’s competitive position with

existing products is to improve. Intensive strategies are normally good options because they

involve a firm sticking to what it does best with the only variation being (1) redoubling your

effort (market penetration), (2) taking what it does best on the “road” (market development), or

(3) improving on what it does best (product development). In contrast, forward and backward

integration and diversification strategies take firms away from their core products, services, or

competencies.

Market Penetration

A market penetration strategy seeks to increase market share for present products or ser-

vices in present markets through greater marketing efforts. This strategy is widely used alone

and in combination with other strategies. Market penetration includes increasing the number

of salespersons, increasing advertising expenditures, offering extensive sales promotions, or

increasing publicity efforts. For example, Verizon is spending millions of dollars on a new

advertising theme named “Humanability” that tells stories about how Verizon’s technology

products are easing traffic flow, keeping fish fresh in transit, and supporting advancements in

virtual surgery and health care; this new theme replaces Verizon’s “Can You Hear Me Now?”

theme.

The following five guidelines indicate when market penetration may be an especially effec-

tive strategy:8

1. Current markets are not saturated with a particular product or service.

2. The usage rate of present customers could be increased significantly.

3. The market shares of major competitors have been declining, whereas total industry sales

have been increasing.

4. The correlation between dollar sales and dollar marketing expenditures historically has

been high.

5. Increased economies of scale provide major competitive advantages.

Market Development

Market development involves introducing present products or services into new geographic

areas. Tesla will soon manufacture (and sell) cars in China based on the Chinese government’s

plans to relax restrictions on automakers needing a local partner. For thousands of firms, market

development means adding facilities and operations globally. The Global Capsule 5 reveals a key

variable used to determine where we should concentrate new business.

LO 5.4

164 PART 2 • STRATEGY FORMuLATION

Millions of small businesses annually add a second, third, or fourth store, office, or restau-

rant in new locations; that is market development. Dollar General is adding 1,000 new stores

every 12 months across the United States, primarily in poor, rural communities. There are pres-

ently more than 14,000 one-story plain yellow-and-black Dollar Generals in the United States,

more than Starbucks’ two-tailed green mermaid stores.

These following seven guidelines indicate when market development may be an especially

effective strategy:9

1. New channels of distribution are available that are reliable, inexpensive, and of good quality.

2. An organization is successful at what it does.

3. New untapped or unsaturated markets exist.

4. An organization has the needed capital and human resources to manage expanded

operations.

5. An organization has excess production capacity.

6. An organization’s basic industry is rapidly becoming global in scope.

7. Consumption habits of the firm’s products are similar in other geographic areas.

Product Development

Product development is a strategy that seeks increased sales by improving or modifying

present products or services. Product development usually entails large research-and-devel-

opment (R&D) expenditures. For example, Ford recently announced that up to one-third of its

R&D budget scheduled for research on combustible engines would be shifted to battery and

electric car research. Ford also shifted $7 billion in investment away from smaller cars into

trucks and SUVs.

Kellogg recently purchased RXBAR in a move to shift its product mix away from traditional

sugary breakfast foods such as Frosted Flakes and Pop-Tarts, which have experienced declining

sales in recent years as customers turn to more healthy options. RXBARs get their sweeteners

solely from dates rather than added sugar. In a similar product development move, Campbell

Soup recently acquired Pacific Foods, a firm that specializes in organic soups.

GLOBAL CAPSULE 5

How Can a Firm Determine Where to Initiate New Business? Use Gross
Domestic Product (GDP) as a Guide.

Country
GDP Percent

2017 2018

United States 2.1 2.5

United Kingdom 1.5 1.4

Mexico 2.3 2.3

Japan 1.5 0.9

Germany 2.1 1.6

Canada 3.0 1.9

China 6.8 6.4

India 7.1 7.0

Thousands of companies and organizations

desire to grow globally, but they are not sure

where among the two-hundred-plus countries

in the world. A key barometer for examining

how to determine where to begin or expand

company operations is gross domestic product

(GDP) of various countries. GDP is a quanti-

tative measure of a nation’s total economic

output, growth, or activity over a specified

period of time. According to a recent issue of

Bloomberg Businessweek, the 2018 GDP will

be a bit less than 2017 for most countries, and the magical 4 per-

cent number is expected only in India and China for the sample

countries.

Caveat: GPD is important, but consumption habits are more im-

portant. Does the foreign market value your product? If not, who

cares about GDP? Market development allows for good risk/reward

compared to other strategy types if consumption habits are similar

in the targeted markets because the firm continues to focus on its

core competency rather than entering businesses it knows less about.

Also, brand recognition can likely transfer to a new market more eas-

ily when consumption habits are similar.

Source: Based on Peter Coy, “The World Economy Should Grow Nicely

Again in 2018. (Unless Someone Does Something Dumb.)” Bloomberg

Businessweek (November 6, 2017 to January 8, 2018):17.

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CHAPTER 5 • STRATEGIES IN ACTION 165

Automobile companies use product development extensively. Some old truck brands are

making a comeback as Americans buy more pickups and SUVs. For example, the follow-

ing brands are being reintroduced in the respective years given: Jeep Scrambler (2019), Jeep

Wagoneer (2019), Chevy Blazer (2019), Ford Bronco (2020), Ford Ranger (2019), and Land

Rover Defender (2019). The bulk of profits earned at Ford, GM, and Fiat Chrysler today come

from pickups and SUVs.

Product development overall is an excellent option because a firm does not stray far from

what it does best. The following five guidelines indicate when product development may be an

especially effective strategy to pursue:10

1. An organization has successful products that are in the maturity stage of the product life

cycle; the idea here is to attract satisfied customers to try new (improved) products as a re-

sult of their positive experience with the organization’s present products or services.

2. An organization competes in an industry that is characterized by rapid technological

developments.

3. Major competitors offer better-quality products at comparable prices.

4. An organization competes in a high-growth industry.

5. An organization has especially strong research and development capabilities.

Diversification Strategies
The two general types of diversification strategies are related diversification and unrelated

diversification. Businesses are said to be related when their value chains possess competitively

valuable cross-business strategic fits; businesses are said to be unrelated when their value chains

are so dissimilar that few competitively valuable cross-business relationships exist.11 Most com-

panies favor related diversification strategies to capitalize on synergies such as follows:

• Transferring competitively valuable expertise, technological know-how, or other capabili-

ties from one business to another
• Combining related activities of separate businesses into a single operation to achieve lower costs
• Exploiting common use of a well-known brand name
• Cross-business collaboration to create competitively valuable resource strengths and

capabilities12

Diversification strategies are becoming less popular because organizations are finding it more

difficult to manage diverse business activities. In the 1960s and 1970s, the trend was to diversify

to avoid being dependent on any single industry, but the 1980s saw a general reversal of that

thinking. Diversification is still on the retreat. Michael Porter, of the Harvard Business School,

commented, “Management found it couldn’t manage the beast.” Businesses are still selling, clos-

ing, or spinning off less profitable or “different” divisions to focus on their core businesses. For

example, ITT recently divided itself into three separate, specialized companies. At one time, ITT

owned everything from Sheraton Hotels and Hartford Insurance to the maker of Wonder Bread

and Hostess Twinkies. About the ITT breakup, analyst Barry Knap said, “Companies generally

are not very efficient diversifiers; investors usually can do a better job of that by purchasing stock

in a variety of companies.” Rapidly appearing new technologies, new products, and fast-shifting

buyer preferences make diversification difficult. Another highly diversified company, General

Electric, is selling off many of its diversified parts.

Diversification must do more than simply spread business risks across different industries;

after all, shareholders could accomplish this by simply purchasing equity in different firms across

different industries or by investing in mutual funds. Diversification makes sense only to the ex-

tent that the strategy adds more to shareholder value than what shareholders could accomplish

acting individually. Any industry chosen for diversification must be attractive enough to yield

consistently high returns on investment and offer potential synergies across the operating divi-

sions that are greater than those entities could achieve alone. Many strategists contend that firms

should “stick to the knitting” and not stray too far from the firms’ basic areas of competence.

A few companies today, however, pride themselves on being conglomerates, from small

firms such as Pentair Inc. and Blount International to huge companies such as Textron, Berkshire

Hathaway, Allied Signal, Emerson Electric, GE, Viacom, Amazon, Google, Disney, and Samsung.

LO 5.5

166 PART 2 • STRATEGY FORMuLATION

Conglomerates prove that focus and diversity are not always mutually exclusive. In an unattractive

industry, diversification makes sense, such as for Philip Morris, because cigarette consumption is

declining, product liability suits are a risk, and some investors reject tobacco stocks on principle.

Related Diversification

In a related diversification move, Walt Disney recently acquired 21st Century Fox’s film and TV stu-

dios in a deal worth over $52 million. The deal included Fox-owned cable networks, including FX

and National Geographic, and Fox’s stakes in international networks like Star TV, Sky, and Hulu.

Five guidelines reveal when related diversification may be an effective strategy to follow:13

1. An organization competes in a no-growth or a slow-growth industry.

2. Adding new, but related, products would significantly enhance the sale of current products.

3. New, but related, products could be offered at highly competitive prices.

4. New, but related, products have seasonal sales levels that counterbalance an organization’s

existing peaks and valleys.

5. An organization has a strong management team.

Unrelated Diversification

An unrelated diversification strategy favors capitalizing on a portfolio of businesses that are capa-

ble of delivering excellent financial performance in their respective industries, rather than striving

to capitalize on strategic fit among the businesses. Firms that employ unrelated diversification

continually search across different industries for companies that can be acquired for a deal and yet

have potential to provide a high return on investment. Pursuing unrelated diversification entails

being on the hunt to acquire companies whose assets are undervalued, companies that are finan-

cially distressed, or companies that have high-growth prospects but are short on investment capital.

In an unrelated diversification move, Amazon.com is planning to enter the $412 billion phar-

macy business. Today, 9 out of 10 patients pick up their prescriptions at a retail pharmacy, but

Amazon is betting that home delivery of pharmaceuticals are soon to be the rule rather than the

exception. Partly because of this external threat, CVS recently acquired the huge insurance firm,

Aetna, Inc., in an unrelated diversification move targeted to offset their reliance on the drugstore

industry, which as a whole has been experiencing faltering revenues and profits.

Five guidelines reveal when unrelated diversification may be an especially effective strategy

follow:14

1. Existing markets for an organization’s present products are saturated.

2. An organization competes in a highly competitive or a no-growth industry, as indicated by

low industry profit margins and returns.

3. An organization’s present channels of distribution can be used to market new products to

current customers.

4. New products have countercyclical sales patterns compared to an organization’s present

products.

5. An organization has the capital and managerial talent needed to compete successfully in a

new industry.

Defensive Strategies
In addition to integrative, intensive, and diversification strategies, organizations also could pur-

sue defensive strategies such as retrenchment, divestiture, or liquidation. Retrenchment is a broad

term that can include divestiture and liquidation.

Retrenchment
Retrenchment occurs when an organization regroups through cost and asset reduction to re-

verse declining sales and profits. Sometimes called a turnaround strategy, retrenchment is de-

signed to fortify an organization’s basic distinctive competence. During retrenchment, strategists

LO 5.6

CHAPTER 5 • STRATEGIES IN ACTION 167

work with limited resources and face pressure from shareholders, employees, and the media.

Retrenchment can involve selling off land and buildings to raise needed cash, pruning product

lines, closing marginal businesses, closing obsolete factories, automating processes, reducing the

number of employees, and instituting expense control systems.

Eli Lilly is cutting 8 percent of its global workforce mostly centered on the production and mar-

keting of existing drugs that are nearing patent expiration because competition from lower-priced

generics is forecasted to be fierce. Eli Lilly is deploying much of the salary savings into R&D of new

drugs.

The world’s largest seller of generic drugs, Teva Pharmaceutical Industries is laying off

25 percent of its workforce, or about 14,000 employees around the world, and closing facto-

ries and research centers, and suspending its dividend to cut costs. Headquartered in Tel Aviv,

Israel, Teva expects its retrenchment strategy to save $3 billion in costs in 2018–2019.

The action-camera company, GoPro Inc. in 2018 laid off one-fifth of its workforce and ex-

ited the drone market as part of the firm’s retrenchment strategy. As smartphone cameras and

videos have improved, GoPro’s camera business has suffered.

In some cases, declaring bankruptcy can be an effective retrenchment strategy. Bankruptcy

can allow a firm to avoid major debt obligations and to void union contracts. Chapter 7

bankruptcy is a liquidation procedure used only when a corporation sees no hope of being

able to operate successfully or to obtain the necessary creditor agreement. All the organization’s

assets are sold in parts for their tangible worth. Several hundred thousand companies declare

Chapter 7 bankruptcy annually with most of the firms being small.

Chapter 11 bankruptcy allows organizations to retrench, reorganize, and come back after

filing a petition for protection. About 40 large U.S. retail companies declared bankruptcy in both

2017 and 2018, up from 18 in 2016. Firms declaring bankruptcy in 2017 included RadioShack,

Payless Shoes, The Limited, HHGregg, Rue 21, Gander Mountain, and Toys R Us. Other retail com-

panies closing stores rapidly and possibly heading for bankruptcy include Gymboree, Bebe, Crocs,

Gamestop, Sears/Kmart, J. C. Penney, Michael Kors, Staples, Macy’s, and Chico’s. A key problem

for retail firms is shoppers’ discount addiction spurred by Amazon’s prowess and also smartphone-

shopping tools and apps prompting never-ending price-cutting, price matching, and price wars. The

dramatic shift to online purchasing has also severely curtailed the need for brick-and-mortar stores

of all kinds.

Three guidelines reveal when retrenchment may be an especially effective strategy to pursue

follow:15

1. An organization is plagued by inefficiency, low profitability, poor employee morale, and

pressure from stockholders to improve performance.

2. An organization has failed to capitalize on external opportunities, minimize external

threats, take advantage of internal strengths, and overcome internal weaknesses over time;

that is, when the organization’s strategic managers have failed (and possibly will be re-

placed by more competent individuals).

3. An organization has grown so large so quickly that major internal reorganization is

needed.

Divestiture

Selling a division or part of an organization is called divestiture. It is often used to raise

capital for further strategic acquisitions or investments. Divestiture can be part of an overall

retrenchment strategy to rid an organization of businesses that are unprofitable, that require

too much capital, or that do not fit well with the firm’s other activities. Divestiture has also

become a popular strategy for firms to refocus on their core businesses and become less

diversified.

Volkswagen AG recently divested upward of 20 percent of the company’s assets that are

not part of the firm’s core business including the potential sale of Ducati, the motorcycle brand.

Commonwealth Bank of Australia recently divested all of its life insurance businesses in Australia

and New Zealand totaling more than $3 billion, partly in response to pressure from regulators in

168 PART 2 • STRATEGY FORMuLATION

the countries. Nestlé SA recently divested its U.S. chocolate segment to the Italian firm Ferrero

International SA for $2.8 billion, making the family-owned Ferrero company the third-largest

chocolate seller in the United States.

A form of divestiture occurs when a corporation splits into two or more parts. Most

often, divested segments become separate, publicly traded companies. Many large conglom-

erate firms are employing this strategy. Sometimes this strategy is a prelude to the firm

selling the separated part(s) to a rival firm. Corporations annually split off about $2 trillion

worth of subsidiaries. Part of the reason for splitting diversified firms is that the homogenous

parts are generally much more attractive to potential buyers. Most times, the acquiring firms

desire to promote homogeneity to complement their own operations, rather than heteroge-

neity, and are willing to pay for homogeneity. For example, Nacco Industries is divesting

its Hamilton Beach Brands appliances and a kitchen-accessory store chain in an effort to

refocus on its core coal and mining businesses. Nacco’s revenues are about $900 million

annually with Hamilton Beach bringing in about $605 million and Kitchen Collection about

$144 million. Similarly, Britain’s GKN PLC in 2018 split into two companies, separating its

aerospace and automotive businesses. Based in Redditch, England, GKN is one of Britain’s

oldest companies (250 years) and today has about 58,000 employees.

Another example is the German company Daimler AG in 2018 consolidating its five busi-

ness divisions into three separately registered, wholly-owned subsidiary companies. Analysts

expect the Daimler restructuring is a prelude for Daimler divesting (spinning off) the three seg-

ments into separate publicly listed companies: (1) Mercedes-Benz cars and vans, (2) Daimler

trucks and buses, and (3) Daimler Financial Services. Pfizer Inc. and Honeywell International

Inc. recently divested several of their major business units, spinning them off into separate pub-

licly listed companies.

Here are some guidelines for when divestiture may be an especially effective strategy to pursue:16

1. An organization has pursued a retrenchment strategy and failed to accomplish needed

improvements.

2. A division is responsible for an organization’s overall poor performance.

3. A division is a misfit with the rest of an organization; this can result from radically differ-

ent markets, customers, managers, employees, values, or needs.

4. A large amount of cash is needed quickly and cannot be obtained reasonably from other

sources.

5. Government antitrust action threatens an organization.

Liquidation

Selling all of a company’s assets, in parts, for their tangible worth is called liquidation.

Liquidation is a recognition of defeat and consequently can be an emotionally difficult strat-

egy. However, it may be better to cease operating than to continue losing large sums of money

Chapter 7 bankruptcy is a liquidation procedure used only when a corporation sees no hope of

being able to operate successfully or to obtain the necessary creditor agreement. All the organi-

zation’s assets are sold in parts for their tangible worth. Several hundred thousand companies

declare Chapter 7 bankruptcy annually with most of the firms being small.

The legendary, world famous, Ringling Bros. and Barnum & Bailey circus liquidated in

2017 after 146 years in business because of “declining tickets sales and high operating costs.”

The final circus performances were in Providence, Rhode Island, on May 7 and Uniondale,

New York, on May 21, 2017. In May 2016, the circus had previously retired its elephant act,

years after a suit by activists. The animal rights group PETA says “we herald the end of what

has been the saddest show on earth for wild animals, and ask all other animal circuses to follow

suit, as this is a sign of changing times.” PETA President Ingrid Newkirk says “our protests

have awoken the world to the plight of animals in captivity.” The Ringling Bros. and Barnum &

Bailey circus went by the slogan: “The greatest show on earth,” a catchphrase so famous it was

employed for the title of the 1952 Cecil B. DeMille best picture Oscar-winning film starring

Charlton Heston and Betty Hutton. For more than 100 years, schools would close in towns and

cities when Ringling Bros. and Barnum & Bailey came to town; those days are long gone.

CHAPTER 5 • STRATEGIES IN ACTION 169

The American iconic toy store chain Toys “R” Us Inc. in 2018 liquidated, selling or clos-

ing all its 885 U.S. stores deleting about 33,000 jobs. The company is likely to liquidate also in

France, Spain, Poland, and Australia. The company hopes to sell its operation in Canada, Central

Europe, and Asia.

Two guidelines reveal when liquidation may be an especially effective strategy to pursue:17

1. An organization has pursued both a retrenchment strategy and a divestiture strategy, and

neither has been successful.

2. The stockholders of a firm can minimize their losses by selling the organization’s assets.

Value Chain Analysis and Benchmarking
Whenever a customer buys a product it is because that consumer feels the “value” to be derived

from that product in terms of price paid versus benefits received is worthwhile. However, the

ultimate price paid by a consumer for a product is determined from scores of activities that went

into producing that product, from raw materials to suppliers, to production processes, to distribu-

tors, etc. This collection of activities that leads to the ultimate price of a product is commonly

referred to as a firm’s value chain.18 Firm’s seek competitive advantages anywhere they can up

and down their value chain, to ultimately provide some product at some price and some level of

quality that consumers will perceive to be of sufficient value to warrant the purchase. The value

chain concept, as illustrated in Figure 5-3, is important in strategic management.

Value chain analysis (VCA) can be defined as the process whereby a firm determines the

value (price minus cost) of each and all activities that went into producing and marketing a prod-

uct, from purchasing raw materials to manufacturing, distributing, and marketing those products.

VCA is an excellent way to identify both external opportunities/threats and internal strengths/

weaknesses of a firm. Companies strive to gain competitive advantages wherever possible up and

down their value chain, because such “value activities” are not easily duplicated or imitable by

rival firms. In contrast, just lowering the price of an end product or hiring a celebrity to promote

an end product is easily imitable; such actions do not represent a sustainable competitive advan-

tage. In other words, at every step along a firm’s value chain, the firm strives to create value (price

LO 5.7

VALUE
CHAIN

Company

Supplier

Distribution

Customer

FIGURE 5-3

A Value Chain Illustrated

170 PART 2 • STRATEGY FORMuLATION

minus cost) that can ultimately be transferred to the end user (customers), so customers

will buy the product at some price to obtain the perceived value.

Substantial judgment may be required in performing a VCA because different items

along the value chain may impact other items positively or negatively, at times creat-

ing complex interrelationships. For example, exceptional customer service may be es-

pecially expensive yet may reduce the costs of returns and increase revenues. Cost and

price differences among rival firms can have their origins in activities performed by sup-

pliers, distributors, creditors, or even shareholders.

The initial step in implementing VCA is to divide a firm’s operations into specific

activities or business processes. Then the analyst attempts to attach a cost of each discrete

activity versus the price to be paid; the costs could be in terms of both time and money.

Finally, the analyst converts the “value data” into information by looking for competitive

oppotunities/threats and/or strengths/weaknesses that may yield competitive advantage

or disadvantage. Conducting a VCA is supportive of the research-based view’s examina-

tion of a firm’s assets and capabilities as sources of distinctive competence.

When a major competitor or new market entrant offers products or services at low

prices, this may be because that firm has substantially lower value chain costs or perhaps

the rival firm is just waging a desperate attempt to gain sales or market share. VCA en-

ables a firm to examine and monitor the extent that its prices and costs are competitive

throughout the value chain; those value segments lead cumulatively to the customers’

perceived value received by paying some price for some end product.

A value chain is illustrated in Figure 5-4. There can be more than a hundred particu-

lar value-creating activities associated with the business of producing and marketing a

product or service, and each one of the activities can represent a sustainable competitive

advantage or disadvantage for the firm. The combined costs of all the various activities

in a company’s value chain define the firm’s cost of doing business. Firms should deter-

mine where cost advantages and disadvantages in their value chain occur relative to the

value chain of rival firms.

Value chains differ immensely across industries and firms. Whereas a paper prod-

ucts company, such as Stone Container, would include on its value chain timber farm-

ing, logging, pulp mills, and papermaking, a company such as Hewlett-Packard would

include programming, peripherals, mining of metals, licensing, software, hardware, and

laptops. A motel would include food, housekeeping, check-in and check-out operations,

website, reservations system where they order supplies and so on.

All firms should use VCA to develop and nurture a core competence and convert

this competence into a distinctive competence. A core competence is any element of a

firm’s value chain that performs especially well (yields high value). When a core compe-

tence evolves into a major competitive advantage, then it is called a distinctive compe-

tence. Figure 5-5 illustrates this process.

More and more companies are using VCA to gain and sustain competitive advantage

by becoming especially efficient and effective along various parts of the value chain. For

example, Walmart has built powerful value advantages by focusing on exceptionally tight

inventory control and volume purchasing of products. In contrast, computer companies

compete aggressively along the distribution end of the value chain. Price competitive-

ness is a key component of competitiveness for both mass retailers and computer firms.

To gain and sustain competitive advantage, a firm must create value for a product or

service that exceeds the value offered by rivals.19 This is commonly done in one of two

ways: (1) operating at the lowest cost, or (2) commanding a premium price. A few firms

try to do both simultaneously. The bottom line, however, is that a business needs to be

better than rivals on many points along its value chain because these points likely cannot

be easily copied, thus they are sustainable. Rival firms ask, “How do they do it?” The

answer for many successful firms is “through effective value chain analysis.”

VCA focuses on the quality differences in activities among rival firms. Not all firms

in a given industry will place equal weights on various value chain items. For exam-

ple, Rolex and Timex both produce watches, yet each value chain will differ substan-

tially on key areas. Rolex creates value for the customer through prestige and elegance,

whereas Timex creates value through price and utility. Each firm creates value so long

Supplier Costs

Production Costs

Distribution Costs

Sales and Marketing Costs

Customer Service Costs

Management Costs

Raw materials

Fuel

Energy

Transportation

Truck drivers

Truck maintenance

Component parts

Inspection

Storing

Warehouse

Inventory system

Receiving

Plant layout

Maintenance

Plant location

Computer

R&D

Cost accounting

Shipping

Budgeting

Personnel

Internet

Trucking

Railroads

Fuel

Maintenance

Salespersons

Website

Internet

Publicity

Promotion

Advertising

Transportation

Food and lodging

Postage

Phone

Internet

Warranty

Human resources

Administration

Employee benefits

Labor relations

Managers

Employees

Finance and legal

FIGURE 5-4

An Example Value Chain for a
Typical Manufacturing Company

CHAPTER 5 • STRATEGIES IN ACTION 171

as consumers feel they are getting value for the price paid for the product or service and each

firm can have its own competitive advantage in the watch industry. Even though the weights on

various value chain items can differ within the same industry, firms should strive to understand

not only their own value chain operations, but also those of the industry, competitors, suppliers,

and distributors.

VCA is a tool used to examine each step along the path of creating value from upstream

operations such as suppliers all the way to downstream operations of delivering the product to

customers. One of the main benefits of VCA is that each activity from start to finish has a value

element that can be improved upon. Pay careful attention to areas along the value chain that are

likely to lead to higher quality or lower cost. Also, be mindful it is generally more advantageous

to choose a path of being different than a rival on select value chain activities than simply trying

to compete with them on every item. The jewelry firms Tiffany and Blue Nile are great examples

of firms that have chosen to be different in the way they create value for customers.

Benchmarking

Benchmarking is another analytical tool used to determine whether a firm’s value chain is

competitive compared to those of rivals and thus conducive to winning in the marketplace.

Benchmarking entails examination of value chain activities across an industry to determine

“best practices” among competing firms; firms engage in benchmarking for the purpose of du-

plicating or improving on those best practices. Similar to VCA, benchmarking is an analyti-

cal tool used to identify key external opportunities/threats and internal strengths/weaknesses.

Benchmarking enables a firm to take action to improve its competitiveness by identifying (and

improving on) value chain activities where rival firms have comparative advantages in cost, ser-

vice, reputation, or operation.

A challenging part of benchmarking can be gaining access to other firms’ VCAs with asso-

ciated costs. Typical sources of benchmarking information, however, include published reports,

trade publications, suppliers, distributors, customers, partners, creditors, shareholders, lobbyists,

and willing rival firms. Some rival firms share benchmarking data. However, the International

Benchmarking Clearinghouse provides guidelines to help ensure that restraint of trade, price fixing,

bid rigging, bribery, and other improper business conduct do not arise between participating firms.

Although benchmarking is useful, strategists should be mindful of their firm’s unique po-

sition and how their firm differs from rivals when selecting which factors along a value chain

to benchmark. Never benchmark variable after variable without discretion. For example, Five

Guys who specialize in burgers made to order with quality ingredients should not benchmark

McDonald’s “service time” component, just as McDonald’s should not benchmark Five Guys

“quality” component. Five Guys benchmarking and attempting to compete with McDonald’s

on service time would be dysfunctional to Five Guys unique strategy and position of offering

higher quality burgers; erroneous benchmarking could lead a firm away from what made the firm

successful. This is not to say “improving on service time” is not important; it is just that Five

Guys should not sacrifice “made to order burgers” for “premade burgers” simply to benchmark

McDonald’s service-time component. Recall that uniqueness is important in strategic manage-

ment, so use benchmarking wisely.

Core Competencies
Arise in
Some

Activities

Some Distinctive
Competencies Yield

Sustained
Competitive
Advantages

Some Core
Competencies
Evolve into
Distinctive

Competencies

Value Chain
Activities Are
Identified and

Assessed

FIGURE 5-5

Transforming Value Chain Activities into Sustained Competitive Advantages

172 PART 2 • STRATEGY FORMuLATION

Michael Porter’s Two Generic Strategies
According to Michael Porter, strategies allow organizations to gain competitive advantage

from two different bases: cost leadership and differentiation. Porter calls these bases generic

strategies because generally firms should be mindful it is often best to develop product lines

that compete on cost or compete on unique value; it is difficult to compete on both simulta-

neously. Cost leadership emphasizes producing standardized products or services at a low

per-unit cost for consumers who are price sensitive. Differentiation is a strategy aimed at

producing products and services considered unique to the industry and directed at consumers

who are relatively price insensitive. Unlike with cost leadership where a firm examines how to

reduce costs all along its value chain, with differentiation the firm looks to maximize value all

along its value chain.

Cost Leadership

As indicated in Table 5-5, there are two types of cost leadership strategies. Type 1 is a broad low-

cost strategy that offers products or services to a wide range of customers at one of the lowest

prices available on the market. Type 2 is a narrow or focused low-cost strategy that offers prod-

ucts or services to a small range of customers at one of the lowest prices on the market. A cost

leadership strategy aims to offer customers a range of products or services at the lowest price

available compared to a rival’s products with similar attributes.

Walmart could serve as an example firm pursuing a Type 1 cost leadership strategy because the

company serves a broad range of market segments with varied socioeconomic backgrounds. Dollar

General would serve as an example of Type 2 focusing mostly on rural areas, limited product lines,

less décor devoted to the stores, and less service. Both Type 1 and Type 2 strategies target a large

market. This is an important distinction of any cost leadership market; in order to achieve economies

of scale, there must be large market potential. Both Walmart and Dollar General met the large mar-

ket potential criteria, even though Dollar General has a significantly more focused target customer

base. Amazon is potentially another example of Type 1 cost leadership; Jiffy Lube, Little Caesars

Pizza, and Spirit Airlines are all examples of successful Type 2 cost-leadership strategies, as well

as examples of firms “saying no and accepting trade-offs” as a part of their cost leadership strategy.

Striving to be the low-cost producer in an industry can be especially effective when the

market is composed of many price-sensitive buyers, when there are few ways to achieve prod-

uct differentiation, when buyers do not care much about differences from brand to brand, or

when there are a large number of buyers with significant bargaining power. The basic idea

is to underprice competitors and thereby gain market share and sales, entirely driving some

competitors out of the market. Companies employing a cost-leadership strategy must achieve

their competitive advantage in ways that are difficult for competitors to copy or match. If ri-

vals find it relatively easy or inexpensive to imitate the leader’s cost-leadership methods, the

leaders’ advantage will not last long enough to yield a valuable edge in the marketplace. In

other words, firms try to gain competitive advantages all along their value chain, so the firm

can ultimately provide some product at some price low enough to yield compelling value to

customers.

For a resource to be valuable, it must be either rare, hard to imitate, or not easily substitutable.

To employ a cost-leadership strategy successfully, a firm must ensure that its total costs across

its overall value chain are lower than competitors’ total costs. A key way to first ensure the firm

is maintaining its cost-leadership competitive advantage is to routinely examine every level of its

value chain relative to rival firms for areas of possible cost savings. A successful cost-leadership

LO 5.8

TABLE 5-5 The Four Types of Generic Strategies

Generic Strategies

Cost Leadership Differentiation

Market Segments

Broad Type 1 Type 3

Narrow Type 2 Type 4

CHAPTER 5 • STRATEGIES IN ACTION 173

strategy usually permeates the entire firm, as evidenced by high efficiency, low overhead, limited

perks, intolerance of waste, intensive screening of budget requests, wide spans of control, rewards

linked to cost containment, and broad employee participation in cost control efforts.

Some risks of pursuing cost leadership are that competitors may imitate the strategy, thus driv-

ing overall industry profits down; technological breakthroughs in the industry may make the strategy

ineffective; or buyer interest may swing to other differentiating features besides price; simply cutting

retail prices will not yield a cost leadership position since such actions are easily copied and will

erode margins.

Differentiation

There are two levels of a successful differentiation strategy, Type 3 having a wide target market

and Type 4 having a narrow target market, as revealed in Table 5-5. Under differentiation strat-

egies, firms are not as reliant on economies of scale, so targeting a small group of customers

can be advantageous if they are willing to pay a premium for the products or services offered.

A differentiation strategy should be pursued only after a careful study of buyers’ needs and

preferences has determined the feasibility of incorporating one or more differentiating features

into a unique product that showcases the desired attributes. A successful differentiation strategy

allows a firm to charge a higher price for its product and to gain customer loyalty because con-

sumers may become strongly attached to the differentiating features, such as superior service,

spare parts availability, engineering design, product performance, useful life, gas mileage, or

ease of use.

Examples of firms employing Type 3-wide differentiation strategies would include Monster

Beverage, Apple, and BMW; these firms employ a strategy that adds perceived value over Coca-

Cola, an LG smartphone, or a Ford Escort at significantly higher prices than their counterparts.

All three also target a wider audience than brands like Louis Vuitton, Rolex, or Maserati which

operate under a Type 4 strategy. A firm does not have to offer extremely expensive products to

use a Type 4 strategy, but generally this is the case because creating value at every step of the

value chain is expensive and with limited buyers reducing economies of scale prices tend to be

expensive.

Generally, environments favorable to differentiation are those where buyers have many dif-

ferent tastes or application needs. For example, the quality and type of food desired by consum-

ers varies greatly, leading to many different types of restaurants. When technology is changing

rapidly, firms can release new products and often have customers “trained” to purchase the lat-

est and greatest. Apple enjoys being differentiated through its own IOS software. All the other

leading phone manufacturers use Android, Windows, or some other operating system created by

different firms. Whenever customers view products as commodities, there is a need for differen-

tiation; even “commodities” such as milk or eggs can often be differentiated through marketing,

attractive packaging, and other tactics leading to prices often twice as high as competitors.

Differentiation does not guarantee competitive advantage, especially if standard products

sufficiently meet customer needs or if rapid imitation by competitors is possible. Products pro-

tected by barriers which prevent quick copying by competitors are best. Successful differentia-

tion can mean greater product flexibility, greater compatibility, lower costs, improved service,

less maintenance, greater convenience, or more features. Product development is an example of

a strategy that offers the advantages of differentiation.

A risk of pursuing a differentiation strategy is that the unique product may not be valued

highly enough by customers to justify the higher price. When this happens, a cost-leadership strat-

egy will easily defeat a differentiation strategy. Another risk of pursuing a differentiation strategy

is that competitors may quickly develop ways to copy the differentiating features. Thus, firms must

find durable sources of uniqueness that cannot be imitated quickly or inexpensively by rival firms.

Common organizational requirements for a successful differentiation strategy include strong

coordination among the R&D and marketing functions and substantial amenities to attract sci-

entists and creative people. Firms can pursue a differentiation strategy based on many different

competitive aspects. Differentiation opportunities exist or can potentially be developed anywhere

along the firm’s value chain, including supply chain activities, product R&D activities, produc-

tion and technological activities, manufacturing activities, human resource management activi-

ties, distribution activities, or marketing activities.

174 PART 2 • STRATEGY FORMuLATION

The most effective differentiation bases are those that are difficult or expensive for rivals to

duplicate. Competitors are continually trying to imitate, duplicate, and outperform rivals along

any differentiation variable that yields competitive advantage. Firms must be careful when em-

ploying a differentiation strategy because buyers will not pay a higher price unless their per-

ceived value of the differentiated offering exceeds its price.20

Means for Achieving Strategies
Companies are under continual pressure from stockholders to maintain top line (revenues) and

bottom line (net income) growth (usually 4+ percent) and pay higher dividends. To accomplish

this end, firms are often faced with a BUILD, BORROW, or BUY decision. Building is growing

internally (organically), borrowing is growing externally using means such as partnerships, joint

ventures, and alliances; finally, buying includes mergers and acquisitions. Let’s look at build,

borrow, or buy options a bit closer.

BUILD from Within to Grow

When firms build from within, sometimes called organic growth, as a means for achieving strat-

egies, strategists must consider how well current internal resources match the capabilities needed

to grow (4+ percent). Building from within can include new training programs, hiring new em-

ployees, building (instead of buying rival’s) stores, or developing a “blue ocean strategy.” A blue

ocean strategy aims to target a new market where competition is not yet present, thus creating

a “blue ocean” as opposed to a red ocean where many firms are competing often on price, and

the gains of one firm are often at the expense of another. Blue ocean strategy is similar to being

a first mover seeking market space not yet occupied by rivals.

Kim and Mauborgne’s research on blue oceans revealed that existing line extensions ac-

count for 86 percent of new products created; only 14 percent of new ventures are targeted at

new markets or industries.21 Blue ocean thinking in developing news markets and products

can provide benefits far greater than competing in traditional markets. Apple’s development

of the PC and smartphone were blue ocean examples where customers did not even know

they desired the products before they were brought to market by Apple. However, the blue

ocean environment did not last long for Apple on either product because competitors en-

tered quickly, forcing Apple to operate under what Porter would classify as a differentiation

strategy.

Netflix, Southwest, eBay, and Amazon, like Apple, were all derived partly from blue

ocean thinking. These examples are of blue oceans where there was no defined industry or

market for the products previously, but according to Kim and Mauborgne, blue oceans can

arise from already established industries as well. It is likely blue oceans within current indus-

tries will not be as sustainable and may even erode a firm’s mission, moving it away from its

core competencies. Extra care should be taken when considering blue ocean thinking while

operating within an already established industry. However, a firm does not have to have a blue

ocean to build.

BORROW from Others to Grow

Firms tend to “borrow” capabilities through joint ventures or strategic alliances when the (1)

firm does not believe it can develop the necessary resources internally, or (2) the costs and risks

of merging are too high. Joint venture occurs when two or more companies form a temporary

partnership or consortium for the purpose of capitalizing on some opportunity and have shared

equity ownership in the new entity. Joint ventures are being used increasingly because they allow

companies to improve communications and networking, to globalize operations, and to minimize

risk. They are formed when a given opportunity is too complex, uneconomical, or risky for a

single firm to pursue alone, or when an endeavor requires a broader range of competencies and

know-how than any one firm possesses. Joint ventures are less common than alliances but more

common than mergers or acquisitions.

Qualcomm formed a joint venture with China’s Guizhou province to produce server

chips in China. The new company is owned 55 percent by the Chinese province and 45 per-

cent by Qualcomm. Coca-Cola and Nestlé recently agreed to dissolve their tea joint venture

LO 5.9

CHAPTER 5 • STRATEGIES IN ACTION 175

named Beverage Partners Worldwide. Kathryn Rudie Harrigan summarizes the trend toward

increased joint venturing: “In today’s global business environment of scarce resources, rapid

rates of technological change, and rising capital requirements, the important question is no

longer ‘Shall we form a joint venture?’ Now the question is ‘Which joint ventures and co-

operative arrangements are most appropriate for our needs and expectations?’ followed by

‘How do we manage these ventures most effectively?’ ”22 Four common reasons joint ventures

struggle are:

1. Managers who must collaborate daily in operating the venture are not involved in forming

or shaping the venture.

2. The venture may benefit the partnering companies but may not benefit customers, who

then complain about poorer service or criticize the companies in other ways.

3. The venture may not be supported equally by both partners. If supported unequally, prob-

lems arise.

4. The venture may begin to compete more with one of the partners than the other.23

Six guidelines for when a joint venture may be an especially effective means for pursuing

strategies are:24

1. A privately owned firm forms a joint venture with a publicly owned organization. The

advantages to being privately held, such as closed ownership, and the advantages of being

publicly held, such as access to stock issuances as a source of capital, can sometimes be

synergistically combined in a joint venture.

2. A domestic firm forms a joint venture with a foreign company. A joint venture can provide

a domestic firm with the opportunity for obtaining local management in a foreign country,

thereby reducing risks such as expropriation and harassment by host country officials.

3. The distinct competencies of two or more firms complement each other especially well.

4. A particular project is potentially profitable but requires overwhelming resources and risks.

5. Two or more smaller firms have trouble competing with a large firm.

6. There is a need to quickly introduce a new technology.

Cooperation among competitors is a popular borrow strategy. Microsoft and business-

software vendor SAP SE recently formed an alliance to challenge Amazon.com’s dominance

in the $23 billion annual market for web-based, on-demand computing resources. As part of the

deal, SAP is now using Microsoft’s Azure cloud-computing services. The Microsoft-SAP deal

follows a similar deal whereby Microsoft and Adobe Systems agreed to cross promote each

other’s products.

Cooperation among competitors is becoming more common. For collaboration to suc-

ceed, both firms must contribute something distinctive, such as technology, distribution, basic

research, or manufacturing capacity. But a major risk is that unintended transfers of important

skills or technology may occur at organizational levels below where the deal was signed.25

Information not covered in the formal agreement often gets traded in the day-to-day interactions

and dealings of engineers, marketers, and product developers. Firms often give away too much

information to rival firms when operating under cooperative agreements! Tighter formal agree-

ments are needed.

Perhaps the best example of rival firms in an industry forming alliances to compete

against each other is the airline industry. Today, there are three major alliances: Star,

SkyTeam, and Oneworld. Joint ventures and cooperative arrangements among competitors

demand a certain amount of trust if companies are to combat paranoia about whether one

firm will injure the other. Increasing numbers of domestic firms are joining forces with

competitive foreign firms to reap mutual benefits. Kathryn Harrigan at Columbia University

contends, “Within a decade, most companies will be members of teams that compete against

each other.”

Often, U.S. companies enter alliances primarily to reduce costs and risks of entering new

businesses or markets. In contrast, learning from the partner is a major reason why Asian

and European firms enter into cooperative agreements. U.S. firms, too, should place learn-

ing high on the list of reasons to be cooperative with competitors. Companies in the United

States often form alliances with firms in Asia to gain an understanding of their manufacturing

176 PART 2 • STRATEGY FORMuLATION

excellence, but manufacturing competence is not easily transferable. Manufacturing excel-

lence is a complex system that includes employee training and involvement, integration with

suppliers, statistical process controls, value engineering, and design. In contrast, U.S. know-

how in technology and related areas can be imitated more easily. Therefore, U.S. firms need

to be careful not to give away more intelligence than they receive in cooperative agreements

with rival Asian firms.

BUY Others to Grow

Merger and acquisition refers to firms buying others to grow. A merger occurs when two orga-

nizations of about equal size unite to form one enterprise. An acquisition occurs when a large

organization purchases (acquires) a smaller firm or vice versa. If a merger or acquisition is not

desired by both parties, it is called a hostile takeover, as opposed to a friendly merger. Most

mergers are friendly, but the number of hostile takeovers is on the rise. A hostile takeover is

not unethical as long as it is conducted in a civil and legal manner. Sometimes shareholders are

skeptical, though, given that current research reveals CEOs to be less ethical today, as indicated

in Ethics Capsule 5.

Not all mergers are effective and successful. For example, soon after Halliburton acquired

Baker Hughes, Halliburton’s stock price declined 11 percent. So, a merger between two firms

can yield great benefits, but the price and reasoning must be right. More than 10,000 mergers

transpire annually in the United States, with same-industry combinations predominating. A gen-

eral market consolidation is occurring in most industries.

Six reasons why many mergers and acquisitions fail are provided in Table 5-6. Table 5-7

presents the potential benefits of merging with or acquiring another firm.

A leveraged buyout (LBO) occurs when a firm’s shareholders are bought (hence buyout)

by the company’s management and other private investors using borrowed funds (hence lever-

age). Besides trying to avoid a hostile takeover, other reasons for initiating an LBO include

instances when a particular division(s) lacks fit with an overall corporate strategy, as well as

when selling a division could raise needed cash. An LBO converts a public firm into a private

company.

Another popular way for firms to grow occurs whenever a private-equity (PE) firm acquires

and takes private some target firm. For example, Ruby Tuesday was taken private in late 2017

when the private-equity firm NRD Capital Management bought the casual-dining restaurant

ETHICS CAPSULE 5

Are CEOs Less Ethical Today Than in the Past?

A recent article suggests that the answer to the question posed is

YES. CEO dismissals for ethical misconduct rose in North America

and Western Europe from 4.6 percent in 2007–2011 to 7.8 per-

cent in 2012–2016, a 68 percent increase. According to the 2017

Edelman Trust Barometer, only 37 percent of people consider CEOs

credible/ethical today, an all-time low for the survey, and down from

59 percent the prior year. Confidence and trust in large corporations,

and CEOs in particular, has declined for decades. Ethical miscon-

duct was a key reason for passage of the Dodd-Frank Act of 2010

that imposed new regulations and standards on top executives and

board members, including further measures to detect, discourage,

and punish corporate wrongdoing. Also to combat wrongdoing, ac-

cording to the Spencer Stuart Board Index, 85 percent of all board

members of S&P 500 companies are independent (not employees

of the firm), and 27 percent of these boards have an independent

chairperson, up from 9 percent in 2005. Thus, the days of an all-

powerful CEO presiding over a board composed of friends and in-

siders are essentially gone. The share of incoming CEOs who also

serve as chair of the board has steadily declined at the world’s 2,500

largest companies from 48 percent in 2002 to less than 10 percent

today.

Source: Based on Per-Ola Karlsson, DeAnne Aguirre, and Kristin Rivera,

“Are CEOs Less Ethical Than in the Past?” Strategy & Leadership (Summer

2017): 57–65.

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CHAPTER 5 • STRATEGIES IN ACTION 177

TABLE 5-7 Twelve Potential Benefits of Merging With or Acquiring Another Firm

1. To provide improved capacity utilization

2. To make better use of the existing sales force

3. To reduce managerial staff

4. To gain economies of scale

5. To smooth out seasonal trends in sales

6. To gain access to new suppliers, distributors, customers, products, and creditors

7. To gain new technology

8. To gain market share

9. To enter global markets

10. To gain pricing power

11. To reduce tax obligations

12. To eliminate competitors

TABLE 5-6 Six Reasons Why Many Mergers and Acquisitions Fail

1. Integration difficulties up and down the two value chains

2. Taking on too much new debt the target firm owes or to buy the target

3. Inability to achieve synergy

4. Too much diversification

5. Difficult to integrate different organizational cultures

6. Reduced employee morale due to layoffs and relocations

chain for a 21 percent premium amount of about $146 million. At the time, there were 599 Ruby

Tuesday restaurants in 41 states and 14 foreign countries.

The intent of virtually all PE acquisitions is to buy firms at a low price and sell them later at

a high price, which is arguably just good business. Buffalo Wild Wings (BWW) recently received

a $2.3-billion takeover bid from the PE firm Roark Capital Group. Roark’s offer of $151 per

share was a premium of at least 28 percent over BWW’s stock price at the time. Roark eventually

bought BWW for $157 per share, representing a premium of 7.2 percent (low because BWW

stock price had increased).

PE firms are rapidly acquiring opioid-addiction clinics and treatment centers, such as

Kohlberg & Co.’s recent $180 million acquisition of the Meadows in Wickenburg, Arizona. U.S.

drug- and alcohol-addiction clinics generate over $10 billion in revenue annually through more

than 3,000 facilities that are quickly growing.

First-Mover Advantages
First-mover advantages refer to the benefits a firm may achieve by entering a new market

or developing a new product or service prior to rival firms. As indicated in Table 5-8, some

advantages of being a first mover include securing access to rare resources, gaining new

knowledge of key factors and issues, and carving out market share and a position that is easy

to defend and costly for rival firms to overtake. First-mover advantages are analogous to

taking the high ground first, which puts one in an excellent strategic position to launch ag-

gressive campaigns and to defend territory. Being the first mover can be an excellent strategy

when such actions (1) build a firm’s image and reputation with buyers; (2) produce cost ad-

vantages over rivals in terms of new technologies, new components, new distribution chan-

nels; (3) create strongly loyal customers; and (4) make imitation or duplication by a rival

difficult or unlikely.

LO 5.10

178 PART 2 • STRATEGY FORMuLATION

One of the keys in deciding to be a first mover is how quickly will a new technology, prod-

uct, or service catch-on with a target market. Quicker adoption by the bulk of the customer base

enhances the incentive to be a first mover. Quick adoption may especially be likely in industries

such as pharmaceuticals where patent protection can virtually lock out anyone other than the first

mover.

To sustain the competitive advantage gained by being the first mover, a firm needs to be a

fast learner. There are, however, risks associated with being the first mover, such as unantici-

pated problems and costs that occur from being the first firm doing business in the new market.

Therefore, being a slow mover (also called fast follower or late mover) can be effective when a

firm can easily copy or imitate the lead firm’s products or services, especially when initial costs

are high. If technology is advancing rapidly, slow movers can often leapfrog a first-mover’s prod-

ucts with improved second-generation products, so being a late mover has potential advantages.

In some industries, being a fast follower may be the better strategy, such as in the elec-

tric car business where most customers have not quickly adopted the new technology, due to

high switching costs, lack of infrastructure of charging stations, and uneasiness. Apple was a

first mover in the PC market, but initially struggled as the market was not ready to adopt PCs

widespread. However, in iPods and iPhones, Apple was a first mover and continues to enjoy

many benefits of entering the market first and profiting from high-switching costs that customers

would incur by switching from Apple’s unique operating system.

Strategic Management in Nonprofit and Small Firms
Nonprofit organizations are similar to for-profit companies in virtually evey respect except for two

major differences: (1) Nonprofits do not pay taxes, and (2) nonprofits do not have shareholders to

provide capital. Nonprofits have employees, customers, creditors, suppliers, and distributors as well

as financial budgets, income statements, balance sheets, cash flow statements, and so on. Nonprofit

organizations embrace strategic planning as much as for-profit firms, and perhaps even more. Both

nonprofit and for-profit organizations have competitors that want to put them out of business.

The strategic-management process is being used effectively by countless nonprofit and govern-

mental organizations, such as the Girl Scouts, Boy Scouts, the Red Cross, chambers of commerce,

educational institutions, medical institutions, public utilities, libraries, government agencies, zoos,

cities, and churches. Many nonprofit and governmental organizations outperform private firms

and corporations on innovativeness, motivation, productivity, and strategic management.

Compared to for-profit firms, nonprofit and governmental organizations may be totally

dependent on outside financing. Especially for these organizations, strategic management pro-

vides an excellent vehicle for developing and justifying requests for needed financial support.

Nonprofits and governmental organizations owe it to their constituencies to garner and use mon-

ies wisely; that requires excellent strategy formulation, implementation, and evaluation.

Educational Institutions

Accrediting bodies that audit colleges and universities (such as SACS and AACSB) require con-

tinuous strategic planning. The Institute of International Education reported in late 2017 that

the number of international new students attending U.S. universities declined by 7 percent in

the fall of 2017, the largest drop in a few years. Some MBA programs across the United States

are closing because of falling enrollments, including at the University of Iowa, Wake Forest

University, Virginia Tech, Simmons College, and possibly even at the University of Wisconsin.

LO 5.11

TABLE 5-8 Six Benefits of a Firm Being the First Mover

1. Secure access and commitments to rare resources.

2. Gain new knowledge of critical success factors and issues.

3. Gain market share and position in the best locations.

4. Establish and secure long-term relationships with customers, suppliers, distributors, and

investors.

5. Gain customer loyalty and commitments.

6. Gain patent protection early.

CHAPTER 5 • STRATEGIES IN ACTION 179

College enrollments in general are declining. State and federal support/monies given to institu-

tions of higher learning in the United States is dropping more than 5 percent annually. All these

factors make strategic planning essential for institutions of higher learning.

Population shifts nationally from the Northeast and Midwest to the Southeast and West are an-

other threat. To cope with severe external threats, educational institutions are more frequently using

strategic-management concepts, tools, and techniques. Richard Cyert, former president of Carnegie

Mellon University, said, “I believe we do a far better job of strategic management than any company

I know.” Because MBA programs are struggling, universities are selling MBA courses piecemeal and

offering various types of business certifications comprised of one to three online courses. For exam-

ple, Wharton offers a professional certificate in digital marketing comprised of several $600 courses,

as compared to their 900 MBA students who pay about $250,000 for their degrees.26 Harvard

Business School charges up to $1,500 for online 8-week classes like “Becoming a Better Manager.”

Ivy League schools in the Northeast are recruiting more heavily in the Southeast and West.

This trend represents a significant change in the competitive climate for attracting the best high

school graduates each year. Online degrees are a threat to traditional colleges and universities. “You

can put the kids to bed and go to law school,” says Andrew Rosen, chief operating officer of Kaplan

Education Centers, a subsidiary of the Washington Post Company. Reduced state and federal fund-

ing for higher education has resulted in more aggressive fundraising by colleges and universities.

Governmental Agencies and Departments

Federal, state, county, and municipal agencies and departments, such as police departments, cham-

bers of commerce, forestry associations, and health departments, are responsible for formulating,

implementing, and evaluating strategies that use taxpayers’ dollars in the most cost-effective way

to provide services and programs. Strategic-management concepts are generally required and thus

widely used to enable governmental organizations to be more effective and efficient.

Strategists in governmental organizations operate with less strategic autonomy than their

counterparts in private firms. Public enterprises generally cannot diversify into unrelated busi-

nesses or merge with other firms. Governmental strategists usually enjoy little freedom in alter-

ing the organization’s mission or redirecting objectives. Legislators and politicians often have

direct or indirect control over major decisions and resources. Strategic issues get discussed and

debated in the media and legislatures. Issues become politicized, resulting in fewer strategic

choice alternatives. However, government agencies and departments are finding that their em-

ployees get excited about the opportunity to participate in the strategic-management process and

thereby have an effect on the organization’s core value, vision, mission, objectives, strategies,

and policies. In addition, government agencies are using a strategic-management approach to

develop and substantiate formal requests for additional funding.

Small Firms

“Becoming your own boss” is a dream for millions of people and a reality for millions more.

Almost everyone wants to own a business—from teens and college students, who are signing

up for entrepreneurial courses in record numbers, to those older than age 65, who are forming

more companies every year. However, the percentage of people younger than age 30 who own

private businesses has reached a 24-year low in the United States, to about 3.6 percent, down

from 10.6 percent in 1989. The stereotype that 20-somethings are entrepreneurial risk-takers

is simply false, as millions of young adults struggle in underpaid jobs to maintain their own

household, rather than living with their parents. Reasons for the decline vary, but reduced bank

lending for small business startups, more indebtedness among young people, and increasing

numbers of competitors because of the Internet, all contribute to a more risk-averse, younger-

than-30 age group.

The strategic-management process is just as vital for small companies as it is for large firms.

From their inception, all organizations have a strategy, even if the strategy just evolves from day-

to-day operations. Even if conducted informally or by a single owner or entrepreneur, the strategic-

management process can significantly enhance small firms’ growth and prosperity. However, a lack

of strategic-management knowledge is a serious obstacle for many small business owners, as is a lack

of sufficient capital to exploit external opportunities and a day-to-day cognitive frame of reference.

Research indicates that strategic management in small firms is more informal than in large firms, but

small firms that engage in strategic management generally outperform those that do not.

180 PART 2 • STRATEGY FORMuLATION

IMPLICATIONS FOR STRATEGISTS

Figure 5-6 reveals that to gain and sustain competitive advantages,

firms must collect, analyze, and prioritize large amounts of informa-

tion to make excellent decisions. A “strategic plan” is very much

akin to an athletic team’s “game plan” in the sense that both a

strategic plan and a game plan are developed after carefully study-

ing rival firms (teams); success of the firm (or team) depends greatly

on that plan being a better plan than the rival’s plan. Any strategist,

much like any coach, puts his or her firm in great jeopardy of failure

if the opposing strategist (coach) has a better strategic plan.

Value chain analysis and benchmarking are required to create,

identify, nurture, and exploit sustained competitive advantages that

can lead to success. Parity (and commoditization) is becoming com-

monplace in both business and athletics; as parity increases, the

intrinsic value of the overarching strategic plan, or game plan, in-

creases exponentially. For example, in college football, great parity

Establish A Clear
Vision & Mission

Evaluate & Monitor
Results:

Take Corrective
Actions; Adapt

To Change

Gain & Sustain
Competitive
Advantages

Formulate Strategies:
Collect, Analyze, &

Prioritize Data Using
Matrices; Establish A
Clear Strategic Plan

Implement Strategies:
Establish Structure;
Allocate Resources;
Motivate & Reward;
Attract Customers;
Manage Finances

FIGURE 5-6

How to Gain and Sustain Competitive Advantages

exists among teams such as Auburn, Alabama, Ohio State, Florida

State, Kansas State, Oregon, Arizona State, Michigan State, and

Michigan, so the game plan can make the difference between win-

ning and losing.

Most of the strategies described in this chapter would separately

yield substantial benefits for firms, but no firm has sufficient re-

sources to pursue more than a few basic strategies. Thus, strategists

must select from a number of excellent alternatives, eliminate other

excellent options, and consider risks, tradeoffs, costs, and other key

factors. Any strategist, or coach, that gets “outstrategized” by his

or her opposing strategist (or coach) puts his or her firm (or team) at

a major disadvantage. Being outcoached can doom even a superior

team (or firm). Therefore, in Chapter 6 we examine six additional

analytical tools being widely used by strategists to help develop a

winning strategic plan.

CHAPTER 5 • STRATEGIES IN ACTION 181

Chapter Summary
The main appeal of any managerial approach is the expectation that it will enhance organiza-

tional performance. This is especially true of strategic management. Through involvement in

strategic-management activities, managers and employees achieve a better understanding of an

organization’s priorities and operations. Strategic management allows organizations to be effi-

cient, but more importantly, it allows them to be effective. Although strategic management does

not guarantee organizational success, the process allows proactive rather than reactive decision

making. Strategic management may represent a radical change in philosophy for some organi-

zations, so strategists must be trained to anticipate and constructively respond to questions and

issues as they arise. The strategies discussed in this chapter can represent a new beginning for

many firms, especially if managers and employees in the organization understand and support

the plan for action.

This chapter reveals that firms can “grow” internally (organically) or by acquiring or coop-

erating with other firms. Guidelines are given in this chapter for when firms have been most suc-

cessful historically pursuing which strategies by what means. Companies and industries change,

but the material presented in this chapter should be relevant and useful for decades to come as

companies strive to gain and sustain competitive advantage. In a nutshell, this chapter empha-

sizes that companies need to continuously manage and improve their value chain activities rang-

ing from raw material securement to end product marketing to be successful.

IMPLICATIONS FOR STUDENTS

Numerous alternative strategies and means to achieve those strat-

egies, as described in this chapter, could benefit any firm, but your

strategic-management case analysis should result in specific rec-

ommendations whereby you decide what actions will best pro-

vide the firm with competitive advantages. Ultimately you will be

transforming some of the general strategies and actions defined in

this chapter into specific recommendations with projected costs.

Because your recommendations with costs comprise the most im-

portant pages or slides in your case project, Chapter 6 will go into

further detail on this topic. However, in giving an oral written pre-

sentation or paper, introduce bits of your recommendations early

to “pave the way” for costs shown later on your recommendations

page. Your recommendations page(s) itself should, therefore, be

a summary of suggestions mentioned throughout your paper or

presentation, rather than being a surprise shock to your reader

or audience. You may even want to include with your recommen-

dations insight as to why certain other strategies and means to

achieve those actions were not chosen for implementation. That

information, too, should be anchored in the notion of competitive

advantage and disadvantage with respect to perceived costs and

benefits. You may ask: “What is the difference between recom-

mendations and strategies?” The answer is: “Recommendations

are strategies generated and selected for implementation.”

Key Terms and Concepts
acquisition (p. 176)

backward integration (p. 161)

bankruptcy (p. 167)

benchmarking (p. 171)

blue ocean strategy (p. 174)

combination strategy (p. 158)

core competence (p. 170)

cost leadership (p. 172)

de-integration (p. 162)

differentiation (p. 172)

diversification strategies (p. 165)

divestiture (p. 167)

financial objectives (p. 157)

first-mover advantages (p. 177)

forward integration (p. 160)

franchising (p. 161)

friendly merger (p. 176)

generic strategies (p. 172)

horizontal integration (p. 160)

hostile takeover (p. 176)

integration strategies (p. 160)

intensive strategies (p. 163)

joint venture (p. 174)

leveraged buyout (LBO) (p. 176)

liquidation (p. 168)

long-term objectives (p. 156)

market development (p. 163)

market penetration (p. 163)

merger (p. 176)

organic growth (p. 174)

product development (p. 164)

related diversification (p. 165)

retrenchment (p. 166)

strategic objectives (p. 157)

turnaround strategy (p. 166)

unrelated diversification (p. 165)

value chain (p. 169)

value chain analysis (VCA) (p. 169)

vertical integration (p. 160)

Issues for Review and Discussion
5-1. Define and discuss vertical integration.

5-2. Identify the advantages and disadvantages of vertical

integration.

5-3. Define and give an example of a “blue ocean strategy.”

5-4. Identify and discuss three common ways to build capa-

bilities internally.

5-5. What are the advantages of being a first mover in a par-

ticular industry?

5-6. What are the two key differences between for-profit and

not-for-profit organizations, besides one type seeks to

make a profit and the other does not.

5-7. Define and discuss whether it is best for a small firm to

BUILD, BORROW, or BUY to grow.

5-8. Give reasons why so many companies are divesting

(spinning off) key segments or divisions of the firm.

5-9. When is a leveraged buyout an appropriate strategy to

pursue?

5-10. Give actual examples of how Amazon is forward inte-

grating and diversifying at the same time.

5-11. Explain the following statement: Unlike with cost lead-

ership where a firm examines how to reduce costs along

its value chain, with differentiation one looks to maxi-

mize value along each level of the value chain.

5-12. Define and explain benchmarking.

5-13. The number and dollar value of hostile takeovers are on

the rise. Give two reasons for this trend.

5-14. How are for-profit firms different from nonprofit firms

in terms of business? What are the implications for stra-

tegic planning?

5-15. If the CEO of a beverage company such as Dr Pepper

Snapple asked you whether backward or forward in-

tegration would be better for the firm, how would you

respond?

5-16. In order of importance, list the characteristics of objectives.

5-17. In order of importance, list the benefits of objectives.

5-18. Called de-integration, there appears to be a growing

trend for firms to become less forward integrated.

Discuss why.

5-19. Called de-integration, there appears to be a growing

trend for firms to become less backward integrated.

Discuss why.

5-20. What conditions, externally and internally, would be

desired or necessary for a firm to diversify?

5-21. There is a growing trend of increased collaboration

among competitors. List the benefits and drawbacks of

this practice.

5-22. List major benefits of forming a joint venture to achieve

desired objectives.

182 PART 2 • STRATEGY FORMuLATION

CHAPTER 5 • STRATEGIES IN ACTION 183

5-23. List major benefits of acquiring another firm to achieve

desired objectives.

5-24. List reasons why many mergers or acquisitions histori-

cally have failed.

5-25. Can you think of any reasons why not-for-profit firms

would benefit less from doing strategic planning than

for-profit companies?

5-26. Discuss how important it is for a college football or bas-

ketball team to have a good game plan for the big rival

game this coming weekend. How much time and effort

do you feel the coaching staff puts into developing that

game plan? Why is such time and effort essential?

5-27. How does strategy formulation differ for a small versus

a large organization? How does it differ for a for-profit

versus a nonprofit organization?

5-28. Give hypothetical examples of market penetration, mar-

ket development, and product development.

5-29. Give hypothetical examples of forward integration,

backward integration, and horizontal integration.

5-30. Give hypothetical examples of related and unrelated

diversification.

5-31. Give hypothetical examples of joint venture, retrench-

ment, divestiture, and liquidation.

5-32. Are hostile takeovers unethical? Why or why not?

5-33. What are the major advantages and disadvantages of

diversification?

5-34. What are the major advantages and disadvantages of an

integrative strategy?

5-35. How does strategic management differ in for-profit and

nonprofit organizations?

5-36. Why is it not advisable to pursue too many strategies at once?

5-37. Compare and contrast financial objectives with strategic

objectives. Which type is more important in your opin-

ion? Why?

5-38. How do the levels of strategy differ in a large firm ver-

sus a small firm?

5-39. List 11 types of strategies. Give a hypothetical example

of each strategy listed.

5-40. Define and explain first-mover advantages.

5-41. Give some advantages and disadvantages of cooperative

versus competitive strategies.

5-42. What are the two major differences between for-profit

and not-for-profit organizations?

5-43. Give some guidelines when forward integration is an

excellent strategy to pursue.

5-44. Give some guidelines when backward integration is an

excellent strategy to pursue.

5-45. Give some guidelines when horizontal integration is an

excellent strategy to pursue.

5-46. Give some guidelines when market penetration is an

excellent strategy to pursue.

5-47. Give some guidelines when market development is an

excellent strategy to pursue.

5-48. Give some guidelines when product development is an

excellent strategy to pursue.

5-49. Give some guidelines when divestiture is an excellent

strategy to pursue.

5-50. Give some guidelines when retrenchment is an excellent

strategy to pursue.

5-51. Give some guidelines when liquidation is an excellent

strategy to pursue.

5-52. Give some guidelines when unrelated diversification is

an excellent strategy to pursue.

5-53. Give some guidelines when related diversification is an

excellent strategy to pursue.

5-54. What is the difference between recommendations and

strategies?

5-55. Why do Annual Reports often state objectives in re-

ally vague terms, such as to “hire good people” or to

“stay ahead of trends”; why should strategists avoid

including such vagueness in preparing a strategic

plan?

ASSURANCE-OF-LEARNING EXERCISES

SET 1: STRATEGIC PLANNING FOR COCA-COLA

EXERCISE 5A

Develop Hypothetical Coca-Cola Company
Strategies

Purpose

Chapter 5 identifies, defines, and exemplifies 11 key types of strategies available to firms. This exer-

cise will give you practice formulating possible strategies within each broad category.

Instructions

Step 1 Review the Cohesion Case and your answers to the prior end-of-chapter assurance-of-learn-

ing exercises.

Step 2 For the 11 strategies given in Table 5-3, identify a feasible alternative strategy that could

reasonably benefit the Coca-Cola Company.

EXERCISE 5B

Should Coca-Cola Build, Borrow, or Buy
in 2020–2021?

Purpose

Comparing what is planned versus what you recommend is an important part of case analysis. Do not

recommend what the firm actually plans, unless in-depth analysis of the situation reveals those strate-

gies to be best among all feasible alternatives. This exercise gives you experience conducting research

to determine what a firm is doing in 2018–2019 and should do in 2020–2021.

Instructions

Step 1 Go to the Coca-Cola corporate website and click on Press Center. Read through the most

recent ten press releases.

Step 2 Determine two strategies that Coca-Cola is actually pursuing. Give some pros and cons of

those two strategies in light of the guidelines presented in this chapter.

Step 3 Determine two strategies that Coca-Cola is not pursuing. Give some pros and cons of those

two strategies in light of the guidelines presented in this chapter.

SET 2: STRATEGIC PLANNING FOR MY UNIVERSITY

EXERCISE 5C

Develop Alternative Strategies for Your University

Purpose

It is important for representatives from all areas of a college or university to identify and discuss al-

ternative strategies that could benefit faculty, students, alumni, staff, and other constituencies. As you

complete this exercise, notice the learning and understanding that occurs as people express differences

of opinion. Recall that the process of planning is more important than the document.

Instructions

Step 1 Recall or locate the external opportunity and threat and internal strength and weakness fac-

tors that you identified as part of Exercise 1A (p. 65). If you did not do that exercise, discuss

now as a class important external and internal factors facing your college or university.

Step 2 Identify and put on the screen 10 alternative strategies that you feel could benefit your col-

lege or university. Your proposed actions should allow the institution to capitalize on par-

ticular strengths, improve on certain weaknesses, avoid external threats, or take advantage

of particular external opportunities. Number the strategies as they are written on the screen

from 1 to 10. State each strategy in specific terms, such as “Build two new dormitories,”

rather than in vague terms, such as “Do market penetration.”

Step 3 On a separate sheet of paper, number from 1 to 10. Everyone in class individually should

rate the strategies identified, using a 1 to 3 scale, where 1 = I do not support implementation,

2 = I am neutral about implementation, and 3 = I strongly support implementation. In rating

the strategies, recognize that no institution has sufficient funds to do everything desired or

potentially beneficial.

Step 4 Your professor will now pick up the rating sheets and have a student add up the scores for each

strategy. That is, sum the ratings for each strategy, so that a prioritized list of recommended

strategies is obtained. The higher the sum, the more attractive the strategy. This prioritized list

reflects the collective wisdom of your class. Strategies with the highest score are deemed best.

Step 5 Discuss how this process could enable organizations to achieve understanding and commit-

ment from individuals.

184 PART 2 • STRATEGY FORMuLATION

CHAPTER 5 • STRATEGIES IN ACTION 185

SET 3: STRATEGIC PLANNING FOR MYSELF

EXERCISE 5D

The Key to Personal Strategic Planning: Simultaneously
Build and Borrow
Purpose

As a means to achieve various strategies, companies usually choose between “build, borrow, and buy”

to grow. However, individuals must build and borrow. This exercise gives you insight on how to build

and borrow to launch a successful career.

Instructions

Step 1 List four ways you can BUILD (i.e., grow internally) to advance your career opportunities.

Step 2 List four ways you can BORROW (i.e., grow using others) to advance your career

opportunities.

Step 3 Compare and contrast your lists with those of other students. Collectively decide on the four

best BUILD and four best BORROW means to achieve your objectives.

SET 4: INDIVIDUAL VERSUS GROUP STRATEGIC PLANNING

EXERCISE 5E

What Is the Best Mix of Strategies for Coca-Cola
Company?
Purpose

Strategic-management classes are usually composed of team of students who perform case analysis.

The purpose of this exercise is to examine whether individual decision making is better than group de-

cision making. Academic research suggests that groups make better decisions than individuals about

80 percent of the time. No company has sufficient resources to implement all strategies that would

benefit the firm. Thus, tough choices have to be made. Ranking strategies as to their relative attrac-

tiveness (1 = most attractive, 2 = next most attractive, etc.) is a commonly used procedure to help

determine which actions to actually fund. Often, a group of managers will jointly rank strategies and

compare their ranking to other groups. This ranking process may be used to determine the relative at-

tractiveness of feasible alternative strategies.

The purpose of this exercise is to examine how well students understand the advantages and dis-

advantages of a firm pursuing the strategic options described in Chapter 5. This is a fun exercise that

also gives you experience selecting among feasible alternative strategies for a company.

Situation

Coca-Cola is doing really well, but wants to do better. Coca-Cola is trying to decide what strategies

would be best for the company going forward. Seven strategies discussed in Chapter 5 are being seri-

ously considered, as listed.

Strategies

Production operations

1. Forward integration: Build 100 Coca-Cola stores.

2. Backward integration: Purchase a 10,000-acre sugarcane farm to gain better control over sup-

plies needed for Coca-Cola retail stores globally.

3. Horizontal integration: Acquire four beverage brands from Dr Pepper Snapple.

4. Market development: Build a manufacturing plant in Africa to better serve that continent.

5. Market penetration: Launch an advertising, promotion, and publicity campaign globally to shift

public perception of Coca-Cola from unhealthy to healthy.

6. Product development: Develop, produce, and launch a full line of organic juices.

7. Unrelated diversification: Acquire a construction company to handle building new stores and

manufacturing plants and distribution centers globally.

Task

Rank the seven strategies listed in terms of their relative attractiveness for Coca-Cola, where 1 = the most

attractive strategy to pursue, 2 = the next most attractive strategy, etc. to 7 = the least attractive strategy

to pursue. Rank the strategies first as an individual, and then as part a group. Then, listen to the EXPERT

ranking and rationale. In this manner, this exercise enables you to determine what individual(s) and what

group(s) in class make the best strategic decisions (i.e., that come closest to the expert ranking).

Steps

1. Fill in Column 1 in Table 5-9 to reveal your individual ranking of the relative attractiveness of

the proposed strategies. For example, if you feel backward integration is the seventh-best op-

tion, then in Table 5-9, enter a 7 in Column 1 beside Backward Integration.

2. Fill in Column 2 in Table 5-9 to reveal your group’s ranking of the relative attractiveness of the

proposed strategies. For example, if your group feels backward integration is the third-best op-

tion, then enter 3 into Column 2 beside backward integration.

3. Fill in Column 3 in Table 5-9 to reveal the expert’s ranking of the relative attractiveness of the

proposed strategies.

4. Fill in Column 4 in Table 5-9 to reveal the absolute difference between Column 1 and Column

3 to reveal how well you performed as an individual in this exercise. (Note: Absolute difference

disregards negative numbers.)

5. Fill in Column 5 in Table 5-9 to reveal the absolute difference between Column 2 and Column 3

to reveal how well your group performed in this exercise.

6. Sum Column 4. Sum Column 5.

7. Compare the Column 4 sum with the Column 5 sum. If your Column 4 sum is less than your

Column 5 sum, then you performed better as an individual than as a group. If you did better

than your group, you did excellent.

8. The Individual Winner(s): The individual(s) with the lowest Column 4 sum is the WINNER.

9. The Group Winners(s): The group(s) with the lowest Column 5 score is the WINNER.

TABLE 5-9 Strategic Planning for Coca-Cola: Individual versus Group
Decision Making

Column Number

The Strategies
(1) My

Rank
(2) Group

Rank
(3) ExPERT

Rank
(4) Absolute

Value 1-3
(5) Absolute

Value 2-3

1. Backward integration

Purchase sugarcane farm

2. Forward integration

Build 100 stores

3. Horizontal integration

Acquire four Dr Pepper brands

4. Market development

Build manufacturing plant

in Africa

5. Market penetration

Launch marketing campaign

6. Product development

Launch a full line of organic

candy juices

7. Unrelated diversification

Acquire a construction company

186 PART 2 • STRATEGY FORMuLATION

CHAPTER 5 • STRATEGIES IN ACTION 187

MINI-CASE ON FACEBOOK (FB)

Web Resources
1. The author website provides continuous updates to this chap-

ter from both an academic journal and newspaper/magazine

perspective.
www.strategyclub.com

SHOULD FACEBOOK ACQUIRE, COOPERATE,
OR JUST STAY FIERCE RIVALS WITH
LINKEDIN?
This chapter discussed rival firms merging, cooperating, or staying rivals. Headquartered in Menlo

Park, California, Facebook is by far the largest online social-networking company in the world.

Headquartered in Mountain View, California, LinkedIn is the largest online professional network de-

signed to help members find jobs, connect with other professionals, and locate business opportunities.

The two companies are becoming more and more rivals as their business model becomes more and

more similar. Both websites are free for members to join and both earn money through advertis-

ing spots. LinkedIn also earns revenue through its job-listing service. Companies post job openings

on LinkedIn and search for candidates on LinkedIn—particularly advantageous for students nearing

graduation. Facebook wants some of this action. Members of LinkedIn tend to be white collar and

highly educated; 45 percent of LinkedIn visitors earn more than $75,000 per year. Facebook has

nearly 3 billion members across the whole economic spectrum of income.

As evidence of the two firms gravitating toward each other in products and services, LinkedIn re-

cently rolled out its video uploading feature, trying to become more like Facebook. Facebook is testing

new professional (rather than social) features trying to take market share from LinkedIn. Both com-

panies’ primary strategy is product development. Both Facebook and LinkedIn continually develop

new and improved, visible and invisible, business analytics models to gather and assimilate data, and

then sell the data. LinkedIn has developed a big-data framework dubbed Gobblin that helps the social

network collect tons of data from a variety of sources so that it can be analyzed in its Hadoop-based

data warehouses. The company also houses a variety of internal data (information pertaining to mem-

ber profiles, user actions such as comments and clicking, and so on) in databases such as Espresso

and event-logging systems such as Kafka. Also, LinkedIn takes in data from outside sources—for

instance, Salesforce and Twitter. Facebook is testing a mentorship feature to help Facebook members

identify and spend time with professionals based on common interests. Facebook is also testing a

LinkedIn-like resume feature. Many people prefer to keep their social activities (Facebook) separate

from their professional activities (LinkedIn), but as these two firms become more and more similar,

separation becomes cloudier.

Questions

1. Should Facebook develop features to allow people to efficiently hunt for jobs on their website,

including posting their professional vita?

2. Should Facebook develop features to allow businesses to hunt for employees on their website,

including posting job descriptions and job vacancies?

3. Should LinkedIn develop features to allow people to post personal pictures and videos on their

website?

4. Should LinkedIn and Facebook merge? What are the pros and cons of merger for the two firms?

5. Should LinkedIn and Facebook cooperate rather than merge? Identify and describe three ways

the two rival firms could cooperate in mutually beneficial ways.

Source: Company documents and a variety of sources.

https://www.audible.com/pd/Business/Summary-of-Blue-Ocean-Strategy-by-W-Chan-Kim-and-Renee-A-Mauborgne-Audiobook/B01L06M29Y?gclid=Cj0KCQiA_5_QBRC9ARIsADVww15mWwiWvtZ5ci2wnBjmZlXczGUkKktkDjWHt9wQ7pzwDYIi_R3UxSkaAt7QEALw_wcB&pcrid=158258695641&cvo_pid=5075902449&mkwid=DSATitle_dc&pmt=b&cvosrc=ppc+dynamic+search.google.97175169&cvo_crid=158258695641&pkw=&source_code=GO1GB907OSH060513

Current Readings
Arkadiy, V. Sakhartov. “Economies of Scope, Resource

Relatedness, and the Dynamics of Corporate

Diversification.” Strategic Management Journal 38, no. 11

(November 2017): 2168–2188.
Greve, Henrich R., and Cyndi Man Zhang. “Institutional

Logics and Power Sources: Merger and Acquisition
Decisions.” Academy of Management Journal 60, no. 2
(April 2017): 671–694.

Huang, Zhi, Hong (Susan) Zhu, and Daniel J. Brass. “Cross-
Border Acquisitions and the Asymmetric Effect of Power
Distance Value Difference on Long-Term Post-Acquisition
Performance.” Strategic Management Journal 38, no. 4
(April 2017): 972–991.

Jap, Sandy, A. Noel Gould, and Annie H. Liu. “Managing
Mergers: Why People First Can Improve Brand and IT
Consolidations.” Business Horizons 60, no. 1 (January
2017): 123–134.

Jiang, Han, Jun Xia, Albert Cannella, and Ting Xiao. “Do
Ongoing Networks Block Out New Friends? Reconciling
the Embeddedness Constraint Dilemma on New Alliance
Partner Addition.” Strategic Management Journal 39,
Issue 1 (January 2018): 217–241.

Kistruck, Geoffrey M., Robert B. Lount Jr., Brett R Smith,
Brian J. Bergman Jr., and Todd W. Moss. “Cooperation vs.
Competition: Alternative Goal Structures for Motivating
Groups in a Resource Scarce Environment.” Academy
of Management Journal 59, no. 4 (August 2016):
1174–1198.

Kuusela, Pasi, Thomas Keil, and Markku Maula. “Driven
by Aspirations, But in What Direction? Performance
Shortfalls, Slack Resources, and Resource-Consuming
vs. Resource-Freeing Organizational Change.” Strategic
Management Journal 38, no. 5 (May 2017): 1101–1120.

Li, Jing, Jun Xia, and Zhouyu Lin. “Cross-Border
Acquisitions by State-Owned Firms: How do Legitimacy
Concerns Affect the Completion and Duration of Their
Acquisitions?” Strategic Management Journal 38, no. 9
(September 2017): 1915–1934.

Lieberman, Marvine B., Roberto Garcia-Castro, and Natarajan
Balasubramanian. “Measuring Value Creation and
Appropriation in Firms: The VCA Model.” Strategic
Management Journal 38, no. 6 (June 2017): 1193–1211.

Lyons, Elizabeth, and Laurina Zhang. “Who Does (Not)
Benefit from Entrepreneurship Programs?” Strategic
Management Journal 39, no. 1 (January 2018): 85–112.

Mackey, Tyson B., Jay B. Barney, and Jeffrey P. Dotson.
“Corporate Diversification and the Value of Individual
Firms: A Bayesian Approach.” Strategic Management
Journal 38, no. 2 (February 2017): 322–341.

Marks, Mitchell Lee, Philip Mirvis, and Ron Ashkenas.
“Surviving M&A.” Harvard Business Review 95, Issue 2
(March–April 2017): 145–149.

McCann, Brian T., and Mona Bahl. “The Influence of
Competition from Informal Firms on New Product
Development.” Strategic Management Journal 38, no. 7
(July 2017): 1518–1535.

Mellewigt, Thomas, Adeline Thomas, Ingo Weller, and Edward
Zajac. “Alliance or Acquisition? A Mechanisms-Based,
Policy-Capturing Analysis.” Strategic Management
Journal 38, no. 12 (December 2017): 235–2369.

Moeen, Mahka. “Entry into Nascent Industries: Disentangling
a Firm’s Capability Portfolio at the Time of Investment
Versus Market Entry.” Strategic Management Journal 38,
no. 10 (October 2017): 1986–2004.

Panico, Claudio. “Strategic Interaction in Alliances.” Strategic
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1646–1667.

Rabier, Maryiane. “Acquisition Motives and the Distribution of
Acquisition Performance.” Strategic Management Journal
38, no. 13 (December 2017): 2666–2681.

Vidal, Elena, and Will Mitchell. “Virtuous or Vicious Cycles?
The Role of Divestitures as a Complementary Penrose
Effect within Resource-Based Theory.” Strategic
Management Journal 39, no. 1 (January 2018): 131–154.

Wassmer, Ulrich, Sali Li, and Anoop Madhok. “Resource
Ambidexterity Through Alliance Portfolios and Firm
Performance.” Strategic Management Journal 38, no. 2
(February 2017): 384–394.

Zhou, Yue M., and Xiang Wan. “Product Variety, Sourcing
Complexity, and the Bottleneck of Coordination.” Strategic
Management Journal 38, no. 8 (August 2017): 1569–1587.

Zhou, Yue Maggie, and Xiang Wan. “Product Variety and
Vertical Integration.” Strategic Management Journal 38,
no. 5 (May 2017): 1134–1150.

Endnotes
1. John Byrne, “Strategic Planning—It’s Back,”

BusinessWeek (August 26, 1996): 46.

2. Steven C. Brandt, Strategic Planning in Emerging

Companies (Reading, MA: Addison-Wesley, 1981).

Reprinted with permission of the publisher.

3. F. Hansen and M. Smith, “Crisis in Corporate America:

The Role of Strategy,” Business Horizons (January–

February 2003): 9.

4. Based on F. R. David, “How Do We Choose among

Alternative Growth Strategies?” Managerial Planning 33,

no. 4 (January–February 1985): 14–17, 22.

5. Ibid.

6. Kenneth Davidson, “Do Megamergers Make Sense?”

Journal of Business Strategy 7, no. 3 (Winter 1987): 45.

7. David, “How Do We Choose.”

8. Ibid.

9. Ibid.

10. Ibid.

11. Arthur Thompson Jr., A. J. Strickland III, and John

Gamble, Crafting and Executing Strategy: Text and

Readings (New York: McGraw-Hill/Irwin, 2005), 241.

12. Michael E. Porter, Competitive Strategy: Techniques for

Analyzing Industries and Competitors (New York: Free

Press, 1980), 53–57, 318–319.

188 PART 2 • STRATEGY FORMuLATION

CHAPTER 5 • STRATEGIES IN ACTION 189

13. David, “How Do We Choose.”

14. Ibid.

15. Ibid.

16. Ibid.

17. Ibid

18. Porter, Competitive Advantage, 34-44.

19. Porter, Competitive Advantage, 160–162.

20. Porter, Competitive Advantage, 160–162.

21. https://www.audible.com/pd/Business/

Summary-of-Blue-Ocean-Strategy-by-W-Chan-

Kim-and-Renee-A-Mauborgne-Audiobook/

B01L06M29Y?gclid=Cj0KCQiA_5_QBRC9ARI

sADVww15mWwiWvtZ5ci2wnBjmZlXczGUkKktkDj

WHt9wQ7pzwDYIi_R3UxSkaAt7QEALw_wcB&

pcrid=158258695641&cvo_pid=5075902449

&mkwid=DSATitle_dc&pmt=b&cvosrc=ppc+dynamic+

search.google.97175169&cvo_crid=158258695641&

pkw=&source_code=GO1GB907OSH060513

22. Kathryn Rudie Harrigan, “Joint Ventures: Linking for a

Leap Forward,” Planning Review 14, no. 4 (July–August

1986): 10.

23. Matthew Schifrin, “Partner or Perish,” Forbes (May 21,

2001): 32.

24. David, “How Do We Choose.”

25. Gary Hamel, Yves Doz, and C. K. Prahalad, “Collaborate

with Your Competitors—and Win,” Harvard Business

Review 67, no. 1 (January–February 1989): 133.

26. Kelsey Gee, “Do Free Business Courses Pay Off?” Wall

Street Journal, September 7, 2017, B6.

190

Strategy
Formulation

Feedback Loop

Strategy
Implementation

Strategy
Evaluation

Chapter 10: Business Ethics, Environmental Sustainability, and Social Responsibility

Chapter 11: Global and International Issues

Strategy
Evaluation

and
Governance
Chapter 9

Implementing
Strategies:

Finance and
Accounting

Issues
Chapter 8

Implementing
Strategies:

Management
and Marketing

Issues
Chapter 7

Business
Vision and

Mission
Chapter 2

Strategies
in Action
Chapter 5

Strategy
Analysis and

Choice
Chapter 6

The
Internal

Assessment
Chapter 4

The External
Assessment
Chapter 3

FIGURE 6- 1

The Comprehensive, Integrative Strategic-Management Model

Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22,
no. 1 (February 1989): 91. See also Anik Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and
Putu Artama Wiguna, “Balance Scorecard of David’s Strategic Modeling at Industrial Business for
National Construction Contractor of Indonesia,” Journal of Mathematics and Technology , no. 4, (October 2010): 20.

191

LEARNING OBJECTIVES

After studying this chapter, you should be able to do the following:

6- 1. Describe the strategy analysis and choice process.

6- 2. Diagram and explain the three-stage strategy-formulation analytical framework.

6- 3. Construct and apply the Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix.

6- 4. Construct and apply the Strategic Position and Action Evaluation (SPACE) Matrix.

6- 5. Construct and apply the Boston Consulting Group (BCG) Matrix.

6- 6. Construct and apply the Internal-External (IE) Matrix.

6- 7. Construct and apply the Grand Strategy Matrix.

6- 8. Construct and apply the Quantitative Strategic Planning Matrix (QSPM).

6- 9. Explain how to estimate costs associated with recommendations.

6- 10. Discuss the role of organizational culture in strategic analysis and choice.

6- 11. Identify and discuss important political considerations in strategy analysis and choice.

ASSURANCE-OF-LEARNING EXERCISES

The following exercises are found at the end of this chapter:

SET 1: Strategic Planning for Coca-Cola

EXERCISE 6A: Perform a SWOT Analysis for Coca-Cola

EXERCISE 6B: Develop a SPACE Matrix for Coca-Cola

EXERCISE 6C: Develop a BCG Matrix for Coca-Cola

EXERCISE 6D: Develop a QSPM for Coca-Cola

SET 2: Strategic Planning for My University

EXERCISE 6E: Develop a BCG Matrix for My University

SET 3: Strategic Planning to Enhance My Employability

EXERCISE 6F: Perform QSPM Analysis on Myself

EXERCISE 6G: A Template Competency Test

SET 4: Individual versus Group Strategic Planning

EXERCISE 6H: How Severe Are Various Subjective Threats in Strategic Planning?

Strategy Analysis and
Choice

MyLab Management

Improve Your Grade!

If your instructor is using MyLab Management, visit www.pearson.com/mylab/management

for videos, simulations, and writing exercises.

192 PART 2 • STRATEGY FORMuLATION

S
trategy analysis and choice largely involve making subjective decisions based on objective

information. Prior chapters in this text focused on obtaining the objective information

needed in this chapter to formulate strategies and decide upon particular strategies to

implement. This chapter introduces important concepts that enable strategists to generate fea-

sible alternatives, evaluate those alternatives, and choose a specific course of action. Behavioral

aspects of strategy formulation are also covered in this chapter, including politics, culture,

ethics, and social responsibility considerations. Modern tools for formulating strategies are

described. Material in this chapter, as well as in prior chapters, largely follows the flow of the

Excel strategic-planning template at www.strategyclub.com that is available for students to

use freely, if desired.

The CEO of Hobby Lobby, David Green, is an exemplary strategist performing strategic

planning “right by the book.”

Strategy Analysis and Choice
As indicated by Figure 6-1 with white shading, this chapter focuses on generating and evaluat-

ing alternative strategies, as well as selecting strategies to pursue. Strategy analysis and choice

seek to determine alternative courses of action that could best enable the firm to achieve its mis-

sion and objectives. The firm’s present strategies, objectives, vision, and mission, coupled with

the external and internal audit information, provide a basis for generating and evaluating feasible

alternative strategies. This systematic approach is an effective way to avoid an organizational

crisis. Rudin’s Law states, “When a crisis forces choosing among alternatives, most people

choose the worst possible one.”

Unless underlying EFE, CPM, and IFE matrices produced really low total weighted scores,

alternative strategies will likely represent incremental steps that move the firm from its present

position to a desired future position. Alternative strategies should not come out of the wild blue

yonder; they are derived from the firm’s vision, mission, objectives, external audit, and internal

audit; they are consistent with, or build on, past strategies that have worked well.

LO 6.1

EXEMPLARY STRATEGIST SHOWCASED

David Green, CEO of Hobby
Lobby
The largest arts-and-crafts home décor company in the world, Hobby

Lobby is a privately held, U.S. firm with $4.3 billion in annual sales

from 750 stores. CEO David Green heads up Hobby Lobby and says

“the secret to being a great manager is to manage by the book.” The

book Mr. Green refers to is the Bible, as evidenced by his company

being closed on Sundays to allow employees to be with their families

and attend a house of worship. All Hobby Lobby employees earn

more than twice the federal minimum wage; the company offers

generous employee benefits; and all stores close at 8 pm. Mr. Green

says “The Bible has everything one needs to know about good lead-

ership.” Hobby Lobby employees are trained to always be positive;

there is very little employee turnover, even though turnover among

other retail company’s hourly employees is about 65 percent. Hobby

Lobby has zero long-term debt since Mr. Green says: “The Bible

warns against becoming a slave to debt.” About one-half of Hobby

Lobby’s pretax earnings are donated to charities as Mr. Green reveals

in his new book “Giving It All Away … And Getting It Back Again.”

Mr. Green’s leadership guides include to: “always put integrity at the

core of your business; never compromise principles to make more

money; and make sure you never stop thinking about the customer’s

perspective.” CEO Green is an American icon and an “exemplary

strategist.”

Source: Based on Scott Smith, “Why Retail’s David Green Manages By ‘The

Book,’ Investor’s Business Daily (May 22, 2017): A4.

A
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tt

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CHAPTER 6 • STRATEGY ANALYSIS AND CHOICE 193

The Process of Generating and Selecting Strategies

Strategists never consider all feasible strategies that could benefit the firm because there is an

infinite number of possible actions and an infinite number of ways to implement those actions.

Therefore, a manageable set of the most attractive alternative strategies must be developed, ex-

amined, prioritized, and selected. The advantages, disadvantages, trade-offs, costs, and benefits

of these strategies should be determined.

Identifying and evaluating strategies should involve many of the managers and employees

who previously assembled the organizational vision and mission statements, performed the

external audit, and conducted the internal audit. Representatives from each department and

division of the firm should be included in this process, as was the case in previous strategy-

formulation activities. Involvement provides the best opportunity for managers and employees

to gain an understanding of what the firm is doing and why and to become committed to helping

the firm accomplish its objectives.

All participants in the strategy analysis and choice activity should have the firm’s external

and internal audit information available. This information, coupled with the firm’s vision and

mission statements, will help participants crystallize in their own minds particular strategies

that they believe could benefit the firm most. Creativity should be encouraged in this thought

process. At a bare minimum, SWOT analysis should be performed by participants as described

in this chapter. Additionally, BCG, IE, SPACE, GRAND, and QSPM analyses are always im-

mensely helpful in strategic planning.

The Strategy-Formulation Analytical Framework
Important strategy-formulation techniques can be integrated into a three-stage decision-making

framework, as shown in Figure 6-2. The tools presented in this framework are applicable to all

sizes and types of organizations and can help strategists identify, evaluate, and select strategies.

The tools enable firms to break down complex data and ultimately establish an effective strategic

plan. The tools shown anchor the analytical strategic-planning process advocated by the authors

and this text.

All nine techniques included in the strategy-formulation analytical framework require

the integration of intuition and analysis. Autonomous divisions in an organization commonly use

strategy-formulation techniques to develop strategies and objectives. Divisional analyses provide

a basis for identifying, evaluating, and selecting among alternative corporate-level strategies.

Strategists themselves, not analytical tools, are always responsible and accountable for

strategic decisions. Lenz emphasized that the shift from a words-oriented to a numbers-

oriented planning process can give rise to a false sense of certainty; it can reduce dialogue,

LO 6.2

STAGE 1: THE INPUT STAGE

Competitive
Profile

Matrix (CPM)

External Factor
Evaluation (EFE)

Matrix

Internal Factor
Evaluation (IFE)

Matrix

STAGE 2: THE MATCHING STAGE

Strategic Position and
Action Evaluation
(SPACE) Matrix

Boston Consulting
Group (BCG)

Matrix

Internal-External
(IE) Matrix

Strengths-Weaknesses-
Opportunities-Threats

(SWOT) Matrix

Grand Strategy
Matrix

STAGE 3: THE DECISION STAGE

Quantitative Strategic Planning Matrix (QSPM)

FIGURE 6-2

The Strategy-Formulation Analytical Framework

194 PART 2 • STRATEGY FORMuLATION

discussion, and argument as a means for exploring understandings, testing assumptions, and

fostering organizational learning.1 Strategists, therefore, must be wary of this possibility and use

analytical tools wisely to facilitate, rather than to diminish, communication. Without objective

information and analysis, however, personal biases, politics, prejudices, emotions, personalities,

and halo error (the tendency to put too much weight on a single factor) often play too dominant

of a role in the strategy-formulation process, undermining effectiveness. Thus, an analytical ap-

proach is essential for achieving maximum effectiveness in strategic planning.

Stage 1: The Input Stage

Stage 1 of the strategy-formulation analytical framework consists of the External Factor

Evaluation (EFE) Matrix, the Internal Factor Evaluation (IFE) Matrix, and the Competitive

Profile Matrix (CPM). Called the input stage, Stage 1 summarizes the basic input information

needed to formulate strategies. Procedures for developing an EFE, CPM, and IFE Matrix were

presented in Chapters 3 and 4, respectively. Information derived from those analytical tools

provides basic input information for the matching and decision stage matrices described in this

chapter. The input tools require strategists to quantify subjectivity during early stages of the

strategy-formulation process. Making small decisions in the input matrices regarding the relative

importance of external and internal factors allows strategists to more effectively generate, priori-

tize, evaluate, and select among alternative strategies. Good intuitive judgment is always needed

in determining appropriate weights and ratings, but keep in mind that a rating of 3, for example,

is mathematically 50 percent larger than a rating of 2, so small differences matter.

Stage 2: The Matching Stage

Stage 2, called the matching stage, focuses on generating feasible alternative strategies by align-

ing key external and internal factors. Stage 2 techniques include the Strengths-Weaknesses-

Opportunities-Threats (SWOT) Matrix, the Strategic Position and Action Evaluation (SPACE)

Matrix, the Boston Consulting Group (BCG) Matrix, the Internal-External (IE) Matrix, and the

Grand Strategy Matrix.

Strategy is sometimes defined as the match an organization makes between its internal

resources and skills and the external opportunities and risks facing the firm.2 The matching

stage of the strategy-formulation framework consists of five techniques that can be used in

any sequence: the SWOT Matrix, the SPACE Matrix, the BCG Matrix, the IE Matrix, and the

Grand Strategy Matrix. These tools rely on information derived from the input stage to match

external opportunities and threats with internal strengths and weaknesses. Matching external

and internal key factors is essential for effectively generating feasible alternative strategies. In

most situations, external and internal relationships are complex, and matching requires multiple

alignments for each strategy generated. Successful matching of key external and internal factors

depends on those underlying key factors being actionable, quantitative, comparative, and divi-

sional (AQCD) to the extent possible. (Recall that the basic concept of matching was introduced

in Chapter 1).

Stage 3: The Decision Stage

Stage 3, called the decision stage, involves a single technique, the Quantitative Strategic

Planning Matrix (QSPM). A QSPM uses input information from Stage 1 to objectively evaluate

feasible alternative strategies identified in Stage 2. It reveals the relative attractiveness of alterna-

tive strategies and thus provides an objective basis for selecting specific strategies. The QSPM is

a more robust way to determine the relative attractiveness of strategies than the summed ranking

method described previously.

Alternative strategies proposed by SWOT, BCG, IE, SPACE, and GRAND analyses should

be considered and discussed in a meeting or series of meetings. Proposed strategies should be

listed in writing. When all feasible strategies identified by participants are stated in specific

terms and understood, the strategies should be individually rated in order of attractiveness by

each participant, with 1 = should not be implemented, 2 = possibly should be implemented,

3 = probably should be implemented, and 4 = definitely should be implemented. Then, collect

the participants’ rating sheets and sum the ratings given for each strategy to end up with a useful

CHAPTER 6 • STRATEGY ANALYSIS AND CHOICE 195

ranking of the strategies. Strategies with the highest sums are deemed the most attractive, so this

process results in a prioritized list of best strategies that reflects the collective wisdom of the

group. Rather than, or in conjunction with, this ranking method, the QSPM, described later in

this chapter, offers a more robust procedure to determine the relative attractiveness of alternative

strategies.

The SWOT Matrix
Recall that SWOT analysis was introduced in Chapter 1 (p. 42). There are four sets of strate-

gies developed in SWOT analysis: SO, WO, ST, and WT. SO strategies use a firm’s internal

strengths to take advantage of external opportunities. All managers would like their organization

to be in a position in which internal strengths can be used to take advantage of external trends

and events. Organizations generally will pursue WO, ST, or WT strategies to more effectively

position themselves into situations in which they can apply SO strategies.

WO strategies aim at improving internal weaknesses by taking advantage of external op-

portunities. Sometimes key external opportunities exist, but a firm has internal weaknesses that

prevent it from exploiting those opportunities. For example, for an auto parts manufacturer, the

rising demand for electric cars (external opportunity), coupled with the firm having limited bat-

teries to offer (internal weakness), suggests that the firm should consider developing and pro-

ducing a new line of batteries.

ST strategies use a firm’s strengths to avoid or reduce the impact of external threats. An

example ST strategy could be when a firm uses its excellent legal department (a strength) to col-

lect millions of dollars in damages from rival firms that infringe on its patents. Rival firms that

copy ideas, innovations, and patented products are a threat to many industries. When an organi-

zation faces major threats, it will seek to avoid them while concentrating on opportunities. For

example, when an organization has both the capital and human resources needed to distribute its

own products (internal strengths) and distributors are unreliable, costly, or incapable of meeting

the firm’s needs (external threats), forward integration (gaining control of distributors) can be an

attractive ST strategy.

WT strategies are defensive tactics directed at reducing internal weakness and avoiding

external threats. An organization faced with numerous external threats and internal weaknesses

may indeed be in a precarious position. In fact, such a firm may have to fight for its survival,

merge, retrench, declare bankruptcy, or choose to liquidate. For example, some restaurant chains

do business with suppliers that treat livestock inhumanely (internal weakness) and face grow-

ing customer awareness of the need to preserve wildlife and treat animals with respect (external

threat)—resulting in a WT strategy to cease using certain suppliers. As another example, when

a firm has excess production capacity (internal weakness) and its basic industry is experiencing

declining annual sales and profits (external threat), related diversification can be an effective WT

strategy.

Whatever strategies are ultimately chosen for implementation, ethics issues are a consider-

ation. For example, as indicated in Ethics Capsule 6 on the next page, consumers are more sensi-

tive to how animals are treated than ever before.

An example SWOT Matrix is illustrated in Figure 6-3, on the next page. As shown, there

are nine cells: four key factor cells, four strategy cells, and one cell that is always left blank

(the upper-left cell). The four strategy cells, labeled SO, WO, ST, and WT, are developed after

completing four key factor cells, labeled S, W, O, and T. (Author comment: The strategic-planning

template at www.strategyclub.com simply leaves a space to type in SO, WO, ST, and WT strategies.

The process of constructing a SWOT Matrix can be summarized in eight steps, as follows:

1. List the firm’s key internal strengths.

2. List the firm’s key internal weaknesses.

3. List the firm’s key external opportunities.

4. List the firm’s key external threats.

5. Match internal strengths with external opportunities to develop specific SO strategies.

6. Match internal weaknesses with external opportunities to develop specific WO strategies.

7. Match internal strengths with external threats to develop specific ST strategies.

8. Match internal weaknesses with external threats to develop specific WT strategies.

LO 6.3

http://www.aol.com/article/news/2016/10/27/were-on-track-to-lose-a-huge-chunk-of-the-worlds-animal-popula/21593252/

196 PART 2 • STRATEGY FORMuLATION

ETHICS CAPSULE 6

As We Strategize We Must Not Jeopardize Animal Welfare

Consumers are increasingly resentful of companies that harm wild-

life or treat animals inhumanely. According to the World Wildlife

Fund’s Living Planet Report, the world’s animal species are dying,

and humans are a big reason why. The Report reveals that global

populations of wild mammals, fish, birds, amphibians, and reptiles

declined 58 percent on average in the last 45 years. Specifically, land

animals declined by 38 percent, marine species incurred a 36 percent

drop, and the number of freshwater species decreased by 81 percent.

Using 1970 as a baseline, an estimated 66 percent of the world’s wild

animal population will be extinct by 2020. This fact has prompted

experts to call this time in history “the Anthropocene,” because these

declining numbers for species are uncharted territory. Species like

eastern and western gorillas are nearly extinct and poaching has deci-

mated both elephant and northern white rhino populations. Even

vulture populations are headed towards extinction as are certain spe-

cies of bees. Other causes of the mass extinction of wildlife include

urban development, over-hunting, pollution, disease, and climate

change—all of which are tied to humans. In many respects, the earth

is becoming inhospitable to animals and humans. SWOT factors and

strategies oftentimes address this business ethics issue.

Source: http://www.aol.com/article/news/2016/10/27/were-on-track-to-lose-

a-huge-chunk-of-the-worlds-animal-popula/21593252/

Are We Safe Here Mom?

Strengths Weaknesses

1. Inventory turnover up 5.8 to 6.7

2. Average customer purchase up $97 to $128

3. Employee morale is excellent

4. In-store promotions = 20 percent increase

in sales

5. Newspaper advertising expenditures down

10 percent

6. Revenues from repair and service in store

up 16 percent

7. In-store technical support persons have

MIS degrees

8. Store’s debt-to-total-assets ratio down

34 percent

1. Software revenues in store down

12 percent

2. Location of store hurt by new Hwy 34

3. Carpet and paint in store in disrepair

4. Bathroom in store needs refurbishing

5. Total store revenues down 8 percent

6. Store has no website

7. Supplier on-time-delivery up to

2.4 days

8. Customer checkout process too slow

9. Revenues per employee up 19 percent

Opportunities SO Strategies WO Strategies

1. Population of city growing 10 percent

2. Rival computer store opening 1 mile away

3. Vehicle traffic passing store up 12 percent

4. Vendors average 6 new products a year

5. Older adults’ use of computers up 8 percent

6. Small business growth in area up 10 percent

7. Desire for websites up 18 percent by realtors

8. Desire for websites up 12 percent by small firms

1. Add 4 new in-store promotions

monthly (S4, O3)

2. Add 2 new repair and service persons (S6,

O5)

3. Send flyer to all seniors over age

55 (S5, O5)

1. Purchase land to build new store

(W2, O2)

2. Install new carpet, paint, and bath

(W3, W4, O1)

3. Up website services by 50 percent

(W6, O7, O8)

4. Launch mailout to all realtors in city

(W5, O7)

Threats ST Strategies WT Strategies

1. Best Buy opening new store in 1 year nearby

2. Local university offers computer repair

3. New bypass Hwy 34 in 1 year will divert traffic

4. New mall being built nearby

5. Gas prices up 14 percent

6. Vendors raising prices 8 percent

1. Hire 2 more repair persons and market

these new services (S6, S7, T1)

2. Purchase land to build new store (S8, T3)

3. Raise out-of-store service calls from

$60 to $80 (S6, T5)

1. Hire 2 new cashiers (W8, T1, T4)

2. Install new carpet, paint, and bath

(W3, W4, T1)

FIGURE 6-3

A SWOT Matrix for a Retail Computer Store

T
ra

v
el

S
to

ck
/S

h
u
tt

er
st

o
ck

CHAPTER 6 • STRATEGY ANALYSIS AND CHOICE 197

Some important aspects of a SWOT Matrix are evidenced in Figure 6-3. For example, note

that both the internal and external factors and the SO, ST, WO, and WT strategies are stated in

specific terms. This is important! For example, regarding the second SO strategy (SO2), if the

analyst simply said, “Add new repair and service persons,” the reader may conclude that 20 new

repair and service persons are needed, when only 2 are needed. So, in stating strategies, be as

quantitative and divisional as possible. Furthermore, remember to consult the vision and mission

statements of the firm; and keep in mind what the firm considers its competitive advantages or

core competencies based on its value chain analysis. Take care to develop SO, WO, ST, and WT

strategies based on these considerations as well as the factors receiving the highest weights from

your EFE and IFE Matrices.

Regarding specificity, for each SWOT strategy included in the matrix, ask yourself this

question: “Is the strategy stated specifically enough to estimate the cost (or savings) if it is se-

lected for implementation?” If the answer is NO, then the strategy is too vague as stated. Thus,

whenever words such as “expand, increase, decrease, more, or reduce” are used in a SWOT

Matrix, clarify with a percent or number exactly what you are proposing. There is no need to

give estimated costs in a SWOT Matrix, but the information must be specific enough to generate

these numbers if the particular strategy is selected for implementation. Vagueness is disastrous

in strategic planning, especially in a SWOT Matrix.

As shown in Figure 6-3, it is important to include the “S1, O2” notation after each strategy

in a SWOT Matrix. This notation reveals the rationale for each alternative strategy in terms of

the internal and external factors that were “matched” to formulate desirable strategies. For ex-

ample, note that this retail computer store business may need to “purchase land to build a new

store” because a new Highway 34 will make the current location less desirable. The “S4, T5”

type of notation, given after each strategy in a SWOT Matrix, accents that “strategies do not

come out of the blue yonder.”

The purpose of SWOT analysis and each Stage 2 matching tool is to generate a list of

feasible, specific alternative strategies, not to select or determine which strategies are best.

Not all of the strategies developed in the SWOT Matrix will be selected for implementa-

tion. No firm has sufficient capital or resources to implement every strategy formulated.

As a rule of thumb, include at least four strategies in each SO, ST, WO and WT quadrant to

encompass all aspects of the business; usually a SWOT matrix, thus, will include 16 strate-

gies total.

Although the SWOT Matrix is widely used in strategic planning, the analysis does include

limitations.3 First, SWOT analysis does not reveal how to achieve a competitive advantage, so

it must not be an end in itself. The analysis should be the starting point for a discussion on

how proposed strategies could be implemented as well as cost-benefit, uniqueness, and trad-

eoff considerations that ultimately could lead to competitive advantage. Second, SWOT is a

static assessment (or snapshot) in time. As circumstances, capabilities, threats, and strategies

change, the dynamics of a competitive environment may not be revealed in a single matrix.

Third, there are interrelationships among the key internal and external factors that SWOT does

not reveal, but that may be important in devising strategies. Fourth, there are no weights or

ratings in a SWOT analysis. Finally, the relative attractiveness of alternative strategies is not

provided.

The Strategic Position and Action Evaluation (SPACE)
Matrix
The Strategic Position and Action Evaluation (SPACE) Matrix is another Stage 2 matching

tool that uses two axes and four quadrants to reveal whether aggressive, conservative, defensive,

or competitive strategies are most appropriate for a given organization. Axes of the SPACE

Matrix represent two internal dimensions (financial position [FP] and competitive position

[CP]) and two external dimensions (stability position [SP] and industry position [IP]). To

perform SPACE analysis, simply rate a company on each of the four dimensions (axes) named

above and revealed in Figure 6-4.4

Depending on the type of organization, numerous variables could make up each of the di-

mensions represented on the axes of the SPACE Matrix. Factors that were included in the firm’s

EFE and IFE Matrices should be considered in developing a SPACE Matrix. Other variables

LO 6.4

198 PART 2 • STRATEGY FORMuLATION

commonly included in a SPACE analysis are given in Table 6-1. For example, return on invest-

ment, leverage, liquidity, working capital, and cash flow are commonly considered to be deter-

mining factors of an organization’s financial position (FP).

Steps in Performing SPACE Analysis

The process of developing a SPACE Matrix can be summarized in six steps.

Step 1 Select a set of variables to define financial position (FP), competitive position (CP),

stability position (SP), and industry position (IP).

1. Let’s first elaborate on the difference between the SP and IP axes. The term SP

refers to the volatility of profits and revenues for firms in a given industry based

on the factors considered in the SPACE. Thus, SP volatility (stability) is based

on the expected impact of changes in profits by volatility in core external factors

such as technology, economy, demographic, seasonality, and so on. The higher

the frequency and magnitude of profitability changes in a given industry, the more

unstable the SP becomes. An industry can be stable or unstable on SP, yet high or

low on IP. The robotics industry, for instance, would be unstable (-7) on the SP

axis due to constant developments and upgrades, yet high growth on the IP axis

(+7), whereas the canned food industry would be stable (-1) on the SP axis, yet low

growth on the IP axis (+1).

Conservative

Market penetration
Market development
Product development
Related diversification

Defensive

Retrenchment
Divestiture
Liquidation

Backward, forward, horizontal
integration
Market penetration
Market development
Product development
Diversification (related or unrelated)

Backward, forward, horizontal
integration
Market penetration
Market development
Product development

Aggressive

Competitive

–1

–2

–3

–4

–5

–6

–7

–6 –5–7 –4 –3 –2 –1 +1 +2 +3 +4 +5 +6 +7

FIGURE 6-4

The SPACE Matrix

Source: Based on H. Rowe, R. Mason, and K. Dickel, Strategic Management and Business Policy: A
Methodological Approach (Reading, MA: Addison-Wesley Publishing Co. Inc., © 1982), 155.

CHAPTER 6 • STRATEGY ANALYSIS AND CHOICE 199

Regarding the FP axis, simply rate the firm on numerous financial variables where +7

is really strong and +1 is really weak. Similarly, on the CP axis, simply rate the firm

as per its relative position on numerous variables versus rival firms, where -7 is really

weak and -1 is really strong.

Step 2 Assign a numerical value ranging from +1 (worst) to +7 (best) to each of the variables

that make up the FP and IP dimensions. Assign a numerical value ranging from -1

(best) to -7 (worst) to each of the variables that make up the SP and CP dimensions.

On the FP and CP axes, make comparisons to competitors. For example, a +7 on any

FP or IP factor is outstanding, whereas a +1 is terrible. On the IP and SP axes, make

comparisons to other industries. On the SP axis, know that a -7 on any factor denotes

a highly unstable industry condition (unattractive), whereas -1 denotes a highly stable

industry condition (attractive).

Step 3 Compute an average score for FP, CP, IP, and SP by summing the values given to the

variables of each dimension and then by dividing by the number of variables included

in the respective dimension.

Step 4 Plot the average scores for FP, IP, SP, and CP on the appropriate axes in the SPACE Matrix.

Step 5 Add the two scores on the x-axis and plot the resultant point on X. Add the two scores on

the y-axis and plot the resultant point on Y. Plot the intersection of the new (x, y) coordinate.

Step 6 Draw a directional vector from the origin of the SPACE Matrix (0,0) through the new

(x, y) coordinate. That vector, being located in a particular quadrant, reveals particular

strategies the firm should consider. Author comment: The template plots the new (x, y)

coordinate, rather than drawing a vector; the template also lets you estimate (x, y)

coordinates for rival firms without averaging SP, CP, IP, and FP values.

SPACE Matrix Quadrants

Some example strategy profiles that can emerge from SPACE analysis are shown in Figure 6-5.

The directional vector associated with each profile suggests the type of strategies to pursue: ag-

gressive, conservative, defensive, or competitive. Specifically, when a firm’s directional vector

TABLE 6-1 Example Factors That Make Up the SPACE Matrix Axes

Internal Strategic Position External Strategic Position

Financial Position (FP) Stability Position (SP)

Return on investment Technological changes

Leverage Rate of inflation

Liquidity Demand variability

Working capital Price range of competing products

Cash flow Barriers to entry into market

Inventory turnover Competitive pressure

Earnings per share Ease of exit from market

Price earnings ratio Risk involved in business

Competitive Position (CP) Industry Position (IP)

Market share Growth potential

Product quality Profit potential

Product life cycle Financial stability

Customer loyalty Extent leveraged

Capacity utilization Resource utilization

Technological know-how Ease of entry into market

Control over suppliers and distributors Productivity, capacity utilization

Source: Based on H. Rowe, R. Mason, & K. Dickel, Strategic Management and Business Policy:
A Methodological Approach (Reading, MA: Addison-Wesley Publishing Co. Inc., 1982); 155-156.

200 PART 2 • STRATEGY FORMuLATION

Defensive Profiles

A financially strong firm that has achieved
major competitive advantages in a growing
and stable industry

Aggressive Profiles

Conservative Profiles

CP IP

(+4,+4)

A firm that has achieved financial strength
in a stable industry that is not growing; the
firm has few competitive advantages

CP IP

(–2,+4)

Competitive Profiles

A firm that has a very weak competitive
position in a negative growth, stable industry

A firm with major competitive advantages
in a high-growth industry

(+5,–1)

A firm whose financial strength is a
dominating factor in the industry

A firm that suffers from major competitive
disadvantages in an industry that is
technologically stable but declining in sales

An organization that is competing fairly
well in an unstable industry

A financially troubled firm in a very
unstable industry

(+1,–4)

CP IP

(+1,+5)

CP IP

(–5,+2)

(–5,–1)

(–1,–5)

FIGURE 6-5

Example Strategy Profiles

Source: Based on H. Rowe, R. Mason, and K. Dickel, Strategic Management and Business Policy: A Methodological Approach
(Reading, MA: Addison-Wesley Publishing Co. Inc., © 1982), 155.

CHAPTER 6 • STRATEGY ANALYSIS AND CHOICE 201

is located in the Aggressive Quadrant (upper right) of the SPACE Matrix, an organization is

in an excellent position to use its internal strengths to (1) take advantage of external opportuni-

ties, (2) overcome internal weaknesses, and (3) avoid external threats. Therefore, as indicated in

Figure 6-4, market penetration, market development, product development, backward integra-

tion, forward integration, horizontal integration, or diversification, can be feasible, depending on

the specific circumstances that face the firm.

When performing SPACE analysis for a particular firm, be specific in terms of recom-

mended strategies. For example, instead of saying market penetration is a recommended strat-

egy when a vector is located in the Aggressive Quadrant, say “adding 34 new stores in India

is the proposed strategy.” This is an important point for students doing case analyses because

whenever a particular company is known, then the terms learned in Chapter 5 on page 182,

such as market development, must be quantified to enable specific recommendations to be

proposed. The term “market development” could refer to adding a manufacturing plant in

Thailand or Mexico or Kenya. Thus, be specific to the extent possible regarding implications

of all the matrices presented in this chapter. Vagueness is disastrous in strategic management.

Avoid terms such as expand, increase, decrease, and grow, unless accompanying numbers are

provided.

The SPACE directional vector may appear in the Conservative Quadrant (upper left),

which implies staying close to the firm’s basic competencies and not taking excessive risks.

As indicated in Figure 6-4, conservative strategies most often include market penetra-

tion, market development, product development, and related diversification. The SPACE

directional vector may be located in the Defensive Quadrant (lower left), which suggests

the firm should focus on improving internal weaknesses and avoiding external threats.

Defensive strategies include retrenchment, divestiture, liquidation, and related diversifica-

tion. Finally, the SPACE directional vector may be located in the Competitive Quadrant

(lower right), indicating competitive strategies. Competitive strategies include backward,

forward, and horizontal integration; market penetration; market development; and product

development—as indicated in Figure 6-4.

Like the SWOT Matrix, the SPACE Matrix should be tailored to the particular organization

being studied and based on factual information to the extent possible. Include specific factors;

for example, Delta Airlines may include “volatility of oil prices” as a factor under SP with a rat-

ing of -6. To the degree factors are unique to a particular firm and industry, the more effective

the SPACE results will be in suggesting possible generic strategies to implement.

SPACE analysis is an excellent tool for transferring complex information into a manageable

list of strategies to consider for implementation. SPACE analysis can be helpful in deciding how

aggressive or defensive a firm should be—so it’s important to always include SPACE analysis in

doing strategic planning.

A SPACE Matrix analysis has some limitations as follows:

1. It is a snapshot in time.

2. There are more than four dimensions that firms could/should be rated on.

3. The directional vector could fall directly on an axis, or could even go nowhere if the

coordinate is (0,0). Whenever this happens, analysts usually add a few more evaluative

criteria that comprise the FP (and any other) axis to make the vector shift into a particular

quadrant.

4. Implications of the exact angle of the vector within a quadrant are unclear.

5. The relative attractiveness of alternative strategies generated is unclear.

The SPACE Matrix has been used to help identify Facebook’s overall strategic position as pro-

vided in Figure 6-6. As noted in Figure 6-6, Facebook falls in the Aggressive Quadrant. Note

the factors used to construct the SPACE Matrix are specific to Facebook and the social media

industry. An implication of the Facebook SPACE analysis is that the company should more ag-

gressively add professional networking services, similar to rival firm LinkedIn, or perhaps even

acquire LinkedIn.

202 PART 2 • STRATEGY FORMuLATION

SPACE Matrix

Conservative Aggressive

Defensive Competitive

1
21

X = 0.8
Y = 3.6

4 5 6 7
IP

Debt Ratio

Liquidity

Current Ratio

EPS

ROA

Cash Flow

Social Networking Market Share

Product Variety

Use of Technology

Professional Networking Market Share

Financial Position (FP) Average

Price Comparison

Product Demand

Number of Inactive Accounts

Stability Position (SP) Average

Diversity of Social Media Interest Served

Competitive Pressure

Growth Potential

Cyber Security Concerns

Ease of Entry into Market

Profit Potential

Alternative Products

4.0

22.8

23.2

6.4

Financial Position (FP)

Competitive Position (CP)

Competitive Position (CP) Average

Stability Position (SP)

Industry Position (IP)

Industry Position (IP) Average

Internal Analysis:

External Analysis:

FIGURE 6-6

A SPACE Matrix for Facebook

The Boston Consulting Group (BCG) Matrix
BCG is a private management consulting firm that specializes in strategic planning. Based in

Boston, Massachusetts and employing 6,200 consultants worldwide, BCG has approximately

90 offices in 45 countries, and annually ranks in the top five of Fortune’s list of the “100 Best

Companies to Work For.”

Autonomous divisions (also called segments or profit centers) of an organization make up

what is called a business portfolio. When a firm’s divisions compete in different industries,

LO 6.5

CHAPTER 6 • STRATEGY ANALYSIS AND CHOICE 203

a separate strategy must often be developed for each business. The BCG Matrix is designed

specifically to enhance a multidivisional firm’s efforts to formulate strategies. Allocating re-

sources across divisions is arguably the most important strategic decision facing multidivisional

firms. Multidivisional firms range in size from small, three-restaurant, mom-and-pop firms, to

huge conglomerates such as Walt Disney Company, to universities that have various schools or

colleges—and they all need to use portfolio analysis—a tool that compares divisions of a firm

to determine how best to allocate resources among those divisions.

In a Form 10K or Annual Report, and sometimes in quarterly reports, most companies

disclose revenues and sometimes operating profits by segment. BCG portfolio analysis can

be performed based on whatever information is provided, such as the location of all the firm’s

stores or branches. In the BCG matrices in this chapter, the size of circles correspond to seg-

ment revenues (or number of stores), and pie slices within circles correspond to segment operat-

ing profits. Let regions be the basis for BCG circles if needed. Reasons to disclose by-segment

financial information in a Form 10K more than offset the reasons not to disclose, as indicated in

Table 6-2.

TABLE 6-2 Reasons to (or Not to) Disclose Financial Information by Segment
(by Division)

Reasons to Disclose Reasons Not to Disclose

1. Stakeholders will better understand the firm,

which leads to greater support.

2. Managers and employees will better un-

derstand the firm, which leads to greater

commitment.

3. Disclosure enhances communication process

both within the firm and with outsiders.

1. To avoid rival firms obtaining free competitive

information.

2. To avoid performance failures being exposed.

3. To avoid rivalry among segments becoming too

intense.

4. To avoid lucrative markets being revealed to

rival firms.

Source: Based on Brian Blackstone and Annie Gasparro, “Nestle to Sell U.S. Candy Business,” Wall
Street Journal (June 16, 2017): A1 and A4.

TABLE 6-3 Market Share Data for the U.S. Candy Industry

Company Market Share (percent)
BCG: Relative Market Share

Position

Hershey 25.9 25.9/25.9 = 1.000

Mars 25.2 25.2/25.9 = 0.973

Ferrara 05.8 05.8/25.9 = 0.232

Mondelez 05.6 05.6/25.9 = 0.216

Nestlé 02.9 02.9/25.9 = 0.039

Lindt & Sprungli 02.0 02.0/25.9 = 0.077

Perfetti Van Melle 02.0 02.0/25.9 = 0.077

Russell Stover 01.6 01.6/25.9 = 0.062

The BCG Matrix graphically portrays differences among divisions based on two dimen-

sions: (1) relative market share position on the x-axis, and (2) industry growth rate on the y-axis.

The BCG Matrix allows a multidivisional organization to manage its portfolio of businesses by

examining these two dimensions for each division relative to other divisions in the organization.

Relative market share position (RMSP) is defined as the ratio of a division’s own market share

(or revenues or number of stores) in a particular industry to the market share (or revenues or

number of stores) held by the largest rival firm (leader) in that industry. In the U.S. candy indus-

try, for example, Russell Stover’s relative market share position is Russell Stover’s market share

divided by Hershey’s market share, or 1.6/25.9 = 0.062; similarly, Mars’ relative market share

position is 25.2/25.9 = 0.973, as indicated in Table 6-3.

204 PART 2 • STRATEGY FORMuLATION

Relative market share position is given on the x-axis of the BCG Matrix. The midpoint

on the x-axis usually is set at 0.50, corresponding to a division that has half the market share

of the leading firm in the industry. The y-axis represents the industry growth rate (IGR) in

sales, measured in percentage terms—that is, the average annual increase in revenue for all

firms in an industry. The growth rate percentages on the y-axis could range from −20 to +20

(or -10 to +10) percent, with 0.0 being the midpoint. The average annual increase in revenues

for several leading firms in the industry would be a good estimate for the IGR value. Also,

various sources, such as the S&P Industry Surveys and www.finance.yahoo.com would pro-

vide this value.

Based on each division’s respective (x, y) coordinate, each segment can be properly po-

sitioned in a BCG Matrix. Divisions located in Quadrant I (upper right) of the BCG Matrix

are called “Question Marks,” those located in Quadrant II (upper left) are called “Stars,”

those located in Quadrant III (lower left) are called “Cash Cows,” and those divisions lo-

cated in Quadrant IV (lower right) are called “Dogs.” The four BCG quadrants are described

below:

• Question Marks—Divisions in Quadrant I (upper right) have a low relative market share

position, yet they compete in a high-growth industry. Generally, these firms’ cash needs are

high and their cash generation is low. These businesses are called question marks because

the organization must decide whether to strengthen them by pursuing an intensive strategy

(market penetration, market development, or product development) or to sell them. An ex-

ample question mark could be Snap’s portfolio of virtual reality technology devices; virtual

reality is a high-growth industry, but Snap has a low relative market share.
• Stars—Divisions in Quadrant II (upper left) represent the organizations’ best long-run op-

portunities for growth and profitability, and are therefore called stars. Divisions with a high

relative market share and a high industry growth rate should receive substantial investment

to maintain or strengthen their dominant positions. Forward, backward, and horizontal inte-

gration; market penetration; market development; and product development are appropriate

strategies for these divisions to consider, as indicated in Figure 6-7. A star example could

be Facebook’s portfolio of virtual reality devices; Facebook is one of the leaders in the in-

dustry in revenues in these devices.
• Cash Cows—Divisions in Quadrant III (lower left) have a high relative market share posi-

tion but compete in a low-growth industry; they are called cash cows. Because they gener-

ate cash in excess of their needs, they are often milked. Many of today’s cash cows were

yesterday’s stars. Cash cow divisions should be managed to maintain their strong position

for as long as possible. Product development, or diversification, may be an attractive strat-

egy for strong cash cows. However, as a cash cow division becomes weak, retrenchment

or divestiture can become more appropriate. A cash cow example is Hewlett-Packard (HP)

with its desktop computers; HP is a market leader in terms of revenues, but desktop com-

puters are a low-growth industry.
• Dogs—Divisions in Quadrant IV (lower right) have a low relative market share position

and compete in a slow- or no-market-growth industry; they are dogs in the firm’s portfolio.

Because of their weak internal and external position, these businesses are often liquidated,

divested, or trimmed down through retrenchment. When a division first becomes a dog, re-

trenchment can be the best strategy to pursue because many dogs have bounced back after

strenuous asset and cost reduction to become viable, profitable divisions.

The basic BCG Matrix appears in Figure 6-7. Each circle represents a separate division. The

size of the circle corresponds to the proportion of corporate revenue generated by that business

unit, and the pie slice indicates the proportion of corporate profits generated by that division.

The major benefit of the BCG Matrix is that it draws attention to the cash flow, investment

characteristics, and needs of an organization’s various divisions. The divisions of many firms

evolve over time: dogs become question marks, question marks become stars, stars become cash

cows, and cash cows become dogs in an ongoing counterclockwise motion. Less frequently,

stars become question marks, question marks become dogs, dogs become cash cows, and cash

cows become stars (in a clockwise motion). In some organizations, no cyclical motion is appar-

ent. Over time, organizations should strive to achieve a portfolio of divisions that are stars.

http://www.finance.yahoo.com

CHAPTER 6 • STRATEGY ANALYSIS AND CHOICE 205

An example of a BCG Matrix is provided in Figure 6-8, which illustrates an organization

composed of five divisions with annual sales ranging from $5,000 to $60,000. Division 1 has

the greatest sales volume, so the circle representing that division is the largest one in the matrix.

The circle corresponding to Division 5 is the smallest because its sales volume ($5,000) is least

among all the divisions. The pie slices within the circles reveal the percent of corporate profits

contributed by each division. As shown, Division 1 contributes the highest profit percentage,

39 percent, as indicated by 39 percent of the area within circle 1 being shaded. Notice in the

diagram that Division 1 is considered a star, Division 2 is a question mark, Division 3 is also a

question mark, Division 4 is a cash cow, and Division 5 is a dog.

RELATIVE MARKET SHARE POSITION

High Medium Low

1.0 .50 0.0

High

Medium

Low

+20

–20

IN
D

U
S

T
R

Y
S

A
L

E
S

G
R

O
W

T
H

R
A

T
E

(P
er

ce
n
ta

g
e)

Stars

Question Marks

Dogs

Cash Cows

III

Backward, Forward, or Horizontal Integration

Market Penetration

Market Development

Product Development

Market Penetration

Market Development

Product Development

Divestiture

Product Development

Diversification

Retrenchment

Divestiture

Retrenchment

Divestiture

Liquidation

FIGURE 6-7

The BCG Matrix

High
1.0

High

Division

1
2
3
4
5

Total

Revenues

$60,000
40,000
40,000
20,000
5,000

$165,000

Percent Revenues

37
24
24
12
3

100

Profits

$10,000
5,000
2,000
8,000
–500
$24,500

Percent Profits

40
20
8
32
0

100

Relative Market Share

.80

.40

.10

.60
.05
—

Industry Growth Rate (%)

+15
+10
+1
–20
–10
—

Medium

Low

Medium
.50

Low
0.0

+20

–20

40%1

4 32%

RELATIVE MARKET SHARE POSITION IN THE INDUSTRY

INDUSTRY
SALES
GROWTH
RATE
(Percentage)

20%

FIGURE 6-8

An Example BCG Matrix

206 PART 2 • STRATEGY FORMuLATION

The Internal-External (IE) Matrix
The Internal-External (IE) Matrix positions an organization’s various divisions (segments)

in a nine-cell display, as illustrated in Figure 6-10. The IE Matrix is similar to the BCG Matrix

in that both tools involve plotting a firm’s divisions in a schematic diagram; this is why both

tools are forms of portfolio analysis. In both the BCG and IE Matrices, the size of each circle

represents the percentage of revenues or number of stores each division contributes, and pie

slices reveal the percentage of operating profits contributed by each division. But there are

four important differences between the BCG Matrix and the IE Matrix, as follows:

1. The x- and y-axes are different.

2. The IE Matrix requires more information about the divisions than does the BCG Matrix.

3. The strategic implications of each matrix are different.

4. The IE Matrix has nine quadrants versus four in a BCG Matrix.

For the above reasons, strategists in multidivisional firms often develop both the BCG

Matrix and the IE Matrix in formulating alternative strategies. A common practice is to develop

LO 6.6

High
1.0

$ Sales (millions) % Profits IG Rate %% SalesDivision

1
2
3
4
5

Total

$ Profits (millions) RMSP

Medium
.50

Low
0.0

+20

–20

78%

RELATIVE MARKET SHARE POSITION (RMSP)

INDUSTRY
SALES
GROWTH
RATE %

39.0%
1.2%

18.3%
4 0.1%

2 3

400
12
4

–188
$1,027

0.8
0.4
0.2
0.5
0.02

10
05
00

–05
–10

78.0
39.0
1.2
0.1

(18.3)
100.0

51.5
25.6
17.5
4.9
0.5

100.0

$5,139
2,556
1,749

493
42

$9,979

$799

High

Medium

Low

FIGURE 6-9

An Example BCG Matrix

The BCG Matrix, like all analytical techniques, has some limitations. For example, viewing

every business as a star, cash cow, dog, or question mark is an oversimplification; many busi-

nesses fall right in the middle of the BCG Matrix and thus are not easily classified. Furthermore,

the BCG Matrix does not reflect if various divisions or their industries are growing over time;

that is, the matrix has no temporal qualities, but rather it is a snapshot of an organization at a

given point in time. Finally, other variables besides relative market share position and industry

growth rate in sales, such as the size of the market and competitive advantages, are important in

making strategic decisions about various divisions.

Another example BCG Matrix is provided in Figure 6-9. As you can see, Division 5 had an

operating loss of $188 million as indicated by its red shading. The remaining pie slices add up to

over 100 percent profits to account for negative net income associated with Division 5 (This is a

different way to portray divisional losses in a BCG matrix analysis).

CHAPTER 6 • STRATEGY ANALYSIS AND CHOICE 207

a BCG Matrix and an IE Matrix for the present, and then develop projected matrices to reflect

expectations of the future. This before-and-after analysis can be quite effective in an oral pre-

sentation, enabling students (or strategists) to pave the way for (justify or give some rationale

for) their recommendations across divisions of the firm. Also, commonly a BCG Matrix will be

developed by region and an IE Matrix by product, or vice versa.

The IE Matrix is based on two key dimensions: (1) the IFE total weighted scores on the

x-axis and (2) the EFE total weighted scores on the y-axis. Recall that each division of an or-

ganization should construct an IFE Matrix and an EFE Matrix for its part of the organization,

but usually in performing case analysis, strategic-management students simply estimate divi-

sional IFE and EFE scores, rather than prepare those underlying matrices for every division.

Regardless, it is the total weighted scores derived from the divisions that allow construction of

the corporate-level IE Matrix. On the x-axis of the IE Matrix, an IFE total weighted score of 1.0

to 1.99 represents a weak internal position; a score of 2.0 to 2.99 is considered average; and a

score of 3.0 to 4.0 is strong. Similarly, on the y-axis, an EFE total weighted score of 1.0 to 1.99

is considered weak; a score of 2.0 to 2.99 is average; and a score of 3.0 to 4.0 is strong. Circles,

representing divisions, are positioned in an IE Matrix based on their (x, y) coordinate.

Despite having nine cells (or quadrants), the IE Matrix has three major regions that have dif-

ferent strategy implications, as follows:

• Region 1—The prescription for divisions that fall into cells I, II, or IV can be described as

grow and build. Intensive (market penetration, market development, and product develop-

ment) or integrative (backward integration, forward integration, and horizontal integration)

strategies can be most appropriate for these divisions. This is the best region for divisions,

given their high IFE and EFE scores. Successful organizations are able to achieve a portfo-

lio of businesses positioned in Region 1.
• Region 2—The prescription for divisions that fall into cells III, V, or VII can be described

as hold and maintain strategies; market penetration and product development are two com-

monly employed strategies for these types of divisions.
• Region 3—The prescription for divisions that fall into cells VI, VIII, or IX can be described

as harvest or divest.

Strong
3.0 to 4.0

High
3.0 to 4.0

Medium
2.0 to 2.99

Low
1.0 to 1.99

Average
2.0 to 2.99

Weak
1.0 to 1.99

3.0
4.0

3.0

2.0

1.0

Hold and Maintain

Grow and Build

Harvest or Divest

2.0 1.0

THE IFE TOTAL WEIGHTED SCORES

THE
EFE
TOTAL
WEIGHTED
SCORES

I II III

VIV

VII VIII IX

Backward, Forward, or Horizontal Integration
Market Penetration
Market Development
Product Development

Market Penetration
Product Development

Retrenchment
Divestiture

FIGURE 6-10

The Internal-External (IE) Matrix

Source: Based on: The IE Matrix was developed from the General Electric (GE) Business Screen Matrix. For a description of the
GE Matrix, see Michael Allen, “Diagramming GE’s Planning for What’s WATT,” in R. Allio and M. Pennington, eds., Corporate
Planning: Techniques and Applications l par; New York: AMACOM, 1979.

208 PART 2 • STRATEGY FORMuLATION

An example four-division IE Matrix is given in Figure 6-11. As indicated by the position-

ing of the four circles, grow and build strategies are appropriate for Divisions 1, 2, and 3. But

Division 4 is a candidate for harvest or divest. Division 2 contributes the greatest percentage of

company sales and thus is represented by the largest circle. Division 1 contributes the greatest

proportion of total profits; it has the largest-percentage pie slice.

An example five-division IE Matrix is given in Figure 6-12. Note that Division 1 has the

largest revenues (as indicated by the largest circle) and the largest profits (as indicated by the

largest pie slice) in the matrix. It is common for organizations to develop both geographic and

product-based IE Matrices to more effectively formulate strategies and allocate resources among

divisions. This latter idea minimizes the limitation of these matrices being a “snapshot in time.”

Important Note: Whenever a particular company is known, such as in doing case analysis or

in the real world, be more specific with proposed strategies rather than using generic terms in re-

gards to resultant IE Matrix strategies. Couch your strategies in quantitative and divisional terms

to the extent possible. (This is true also with strategies derived from the BCG, SPACE, GRAND,

and even SWOT analyses; specificity is golden—avoid vagueness)

The Grand Strategy Matrix
In addition to the SWOT Matrix, SPACE Matrix, BCG Matrix, and IE Matrix, the Grand

Strategy Matrix is a popular tool for formulating alternative strategies. All organizations can

be positioned in one of the Grand Strategy Matrix’s four strategy quadrants. A firm’s divisions

likewise could be positioned. As illustrated in Figure 6-13, the Grand Strategy Matrix is based

on two evaluative dimensions: (1) competitive position on the x-axis and (2) market (industry)

growth on the y-axis. Any industry whose annual growth in sales exceeds 5 percent could be

considered to have rapid growth. Appropriate strategies for an organization to consider are listed

in sequential order of attractiveness in each quadrant of the Grand Strategy Matrix.

LO 6.7

Strong
3.0 to 4.0

High
3.0 to 4.0

Division

1
2
3
4

Total

Sales

$100
200
50
50

$400

Percent Sales Profits

$10
5
4
1

$20

Percent Profits

50
25
20
5

100

IFE Scores

3.6
2.1
3.1
1.8

EFE Scores

3.2
3.5
2.1
2.5

Medium
2.0 to 2.99

Low
1.0 to 1.99

Average
2.0 to 2.99

Weak
1.0 to 1.99

1 2

3.0
4.0

3.0

2.0

1.0

2.0 1.0

50%

25%

5%3
20%

THE IFE TOTAL WEIGHTED SCORES

THE
EFE
TOTAL
WEIGHTED
SCORES

25.0
50.0
12.5
12.5

100.0

FIGURE 6-11

An Example IE Matrix

CHAPTER 6 • STRATEGY ANALYSIS AND CHOICE 209

Strong
3.0 to 4.0

High
3.0 to 4.0

Grow and Build

Division

1
2
3
4
5

Total

Percent

Revenue$ Revenue

Percent

ProfitsProfits IFE ScoresEFE Scores

Medium
2.0 to 2.99

Low
1.0 to 1.99

Average
2.0 to 2.99

Weak
1.0 to 1.99

I II

III

VII VIII IX

IV VI

4.0

3.0

2.0

1.0

16%

59%

19%

THE IFE TOTAL WEIGHTED SCORES

THE
EFE
TOTAL
WEIGHTED
SCORES

2.0 1.0

71.5
11.3
14.3
0.8
2.1

100

$7,868
1,241
1,578

90
223

$11,000

59
19
16
2
4

100

$3,000
1,000

800
100
200

$5,100

3
2
3

2.5
2

—

2.5
2
3

2.5
3

—

FIGURE 6-12

The IE Matrix

RAPID MARKET GROWTH

SLOW MARKET GROWTH

STRONG
COMPETITIVE

POSITION

WEAK
COMPETITIVE

POSITION

Quadrant II

1. Market development
2. Market penetration
3. Product development
4. Horizontal integration
5. Divestiture
6. Liquidation

Quadrant I

1. Market development
2. Market penetration
3. Product development
4. Forward integration
5. Backward integration
6. Horizontal integration
7. Related diversification

Quadrant III

1. Retrenchment
2. Related diversification
3. Unrelated diversification
4. Divestiture
5. Liquidation

Quadrant IV

1. Related diversification
2. Unrelated diversification
3. Joint ventures

FIGURE 6-13

The Grand Strategy Matrix

Source: Based on Roland Christensen, Norman Berg, and Malcolm Salter, Policy Formulation and Administration (Homewood, IL:
Richard D. Irwin, 1976), 16-18.

210 PART 2 • STRATEGY FORMuLATION

Firms located in Quadrant I of the Grand Strategy Matrix are in an excellent strategic posi-

tion. For these companies, continued concentration on current markets (market penetration and

market development) and products (product development) is an appropriate strategy. It is unwise

for a Quadrant I firm to shift notably from its established competitive advantages, yet all firms

seek continual improvement. Thus, when a Quadrant I organization has excessive resources,

then backward, forward, or horizontal integration may be considered. When a Quadrant I firm

is too heavily committed to a single product, then related diversification may reduce the risks

associated with a narrow product line. Quadrant I firms can afford to take advantage of external

opportunities in several areas. They can take risks aggressively when necessary.

Firms positioned in Quadrant II need to evaluate their present approach to the marketplace

seriously. Although their industry is growing, they are unable to compete effectively; they need

to determine why the firm’s current approach is ineffective and how the company can best

change to improve its competitiveness. Because Quadrant II organizations are in a rapid market

growth industry, an intensive strategy (as opposed to integrative or diversification) is usually the

first option that should be considered. However, if the firm is lacking a distinctive competence

or competitive advantage, then horizontal integration is often a desirable alternative. As a last

resort, divestiture or liquidation should be considered. Divestiture can provide funds needed to

acquire other businesses or buy back shares of stock.

Quadrant III organizations compete in slow-growth industries and have weak competitive

positions. These firms must make drastic changes quickly to avoid further decline and possible

liquidation. Extensive cost and asset reduction (retrenchment) should be pursued first. An alter-

native strategy is to shift resources away from the current business into different areas (diversify).

If all else fails, the final options for Quadrant III businesses are divestiture or liquidation.

Finally, Quadrant IV businesses have a strong competitive position but are in a slow-growth

industry. These firms have the strength to launch diversified programs into more promising

growth areas: Quadrant IV businesses have characteristically high cash-flow levels and limited

internal growth needs and often can pursue related or unrelated diversification successfully.

Quadrant IV firms also may pursue joint ventures.

Even with the Grand Strategy Matrix, be certain that you always, whenever possible, state

your alternative strategies in specific terms to the extent possible. For example, avoid using

terms such as divestiture. Rather, specify the exact division to be sold. Also, be sure to use the

free Excel student template at www.strategyclub.com that facilitates construction of all strategic

planning matrices.

If using the strategic planning template at www.strategyclub.com to perform GRAND analy-

sis, you may use the 1 to 9 scale offered on the template, where 1 = the weakest competitive posi-

tion and also the slowest industry growth rate, and 9 = the strongest competitive position and the

fastest industry growth rate. Also, the template enables up to six points (coordinates) to be plotted

in a Grand Strategy Matrix, analogous to various divisions of a firm, or rival firms, or even years

to depict expected results of proposed recommendations. You may be creative in this regard.

The Decision Stage: The QSPM
Other than ranking strategies to achieve the prioritized list, as mentioned on page 194 near the

start of this chapter, there is only one analytical technique in the literature designed to determine

the relative attractiveness of feasible alternative plans or actions. The Quantitative Strategic

Planning Matrix (QSPM), which comprises Stage 3 of the strategy-formulation analytical

framework, objectively indicates which alternative strategies are best.5 The QSPM uses input

from Stage 1 analyses and matching results from Stage 2 analyses to decide objectively among

alternative strategies. That is, the EFE Matrix, IFE Matrix, and CPM that comprise Stage 1,

coupled with the SWOT Matrix, SPACE Matrix, BCG Matrix, IE Matrix, and Grand Strategy

Matrix that comprise Stage 2, provide the needed information for setting up the QSPM (Stage 3).

The QSPM is a tool that allows strategists to evaluate alternative strategies objectively, based on

previously identified external and internal key success factors. Like other strategy-formulation

analytical tools, the QSPM requires the assignment of ratings (called attractiveness scores), but

making “small” rating decisions enables strategists to make effective “big” decisions, such as

which country to spend a billion dollars in to sell a product.

LO 6.8

CHAPTER 6 • STRATEGY ANALYSIS AND CHOICE 211

The basic format of the QSPM is illustrated in Table 6-4. Note that the left column of a

QSPM consists of key external and internal factors (from Stage 1), and the top row consists of

feasible alternative strategies (from Stage 2). Specifically, the left column of a QSPM consists

of information obtained directly from the EFE Matrix and IFE Matrix. In a column adjacent to

the key success factors, the respective weights received by each factor in the EFE Matrix and the

IFE Matrix are recorded.

The top row of a QSPM consists of alternative strategies derived from the SWOT Matrix,

SPACE Matrix, BCG Matrix, IE Matrix, and Grand Strategy Matrix. These matching tools

usually generate similar feasible alternatives. However, not every strategy suggested by the

matching techniques has to be evaluated in a QSPM. Strategists should compare several viable

alternative strategies in a QSPM, perhaps including two or more SWOT strategies, so you could

designate your QSPM strategies using SWOT notation such as SO4 versus WT3. Make sure

your strategies are stated in specific terms, such as “Open 275 new stores in Indonesia” rather

than “Expand globally” or “Open new stores in Africa.” Specificity is vital because ultimately

a dollar value must be established for each recommended strategy; it would be impossible to

establish a dollar value for “expand globally.” If you cannot reasonably assign a dollar value to

a QSPM (or SWOT) strategy, then the strategy is too vague. Vagueness is disastrous in strategic

planning because no one knows what you really are suggesting/saying, and a $1 billion invest-

ment may be on the line.

Conceptually, the QSPM determines the relative attractiveness of various strategies based

on the extent that key external and internal factors are capitalized on or improved. The relative

attractiveness of each strategy is computed by determining the cumulative impact of each exter-

nal and internal factor. Any number of strategies can be included in the QSPM.

A QSPM for a retail computer store is provided in Table 6-5. This example illustrates all the

components of the QSPM: strategic alternatives, key factors, weights, attractiveness scores (AS),

total attractiveness scores (TAS), and the sum total attractiveness score. The three new terms

just introduced—(1) attractiveness score, (2) total attractiveness score, and (3) the sum total at-

tractiveness score—are defined and explained as the six steps required to develop a QSPM are

discussed:

Step 1 Make a list of the firm’s key external opportunities and threats and internal

strengths and weaknesses in the left column of the QSPM. This information

should be taken directly from the EFE Matrix and IFE Matrix. (The Excel template at

www.strategyclub.com can facilitate this process.)

TABLE 6-4 The Quantitative Strategic Planning Matrix (QSPM)

Strategic Alternatives

Key Factors Weight Strategy 1 Strategy 2 Strategy 3

Key External Factors

Economy

Political/Legal/Governmental

Social/Cultural/Demographic/

Environmental

Technological

Competitive

Key Internal Factors

Management

Marketing

Finance/Accounting

Production/Operations

Research and Development

Management Information Systems

https://www.nytimes.com/2017/10/11/world/asita/india-child-marriage-rape.html?rref=collection%2Ftimestopic%2FIndia&action=click&contentCollection=world&region=stream&module=stream_unit&version=latest&contentPlacement=4&pgtype=collection

212 PART 2 • STRATEGY FORMuLATION

TABLE 6-5 A QSPM for a Retail Computer Store

STRATEGIC ALTERNATIVES

1 2
Buy New Land and Build New,

Larger Store Fully Renovate Existing Store

Key Factors Weight AS TAS AS TAS

Opportunities

1. Population of a city growing 10% 0.10 4 0.40 2 0.20

2. Rival computer store opening one mile away 0.10 2 0.20 4 0.40

3. Vehicle traffic passing store up 12% 0.08 1 0.08 4 0.32

4. Vendors average six new products/year 0.05 — —

5. Senior citizen use of computers up 8% 0.05 — —

6. Small business growth in an area up 10% 0.05 — —

7. Desire for websites up 18% by realtors 0.04 — —

8. Desire for websites up 12% by small firms 0.03 — —

Threats

1. Best Buy opening new store nearby in one year 0.15 4 0.60 3 0.45

2. New bypass for Highway 34 in one year will divert traffic 0.12 4 0.48 1 0.12

3. Local university offers computer repair 0.08 — —

4. New mall being built nearby 0.08 2 0.16 4 0.32

5. Gas prices up 14% 0.04 — —

6. Vendors raising prices 8% 0.03 — —

Total 1.00

Strengths

1. Revenues from repair/service segment of a store up 16% 0.15 4 0.60 3 0.45

2. Employee morale is excellent 0.10 — —

3. Average customer purchase increased from $97 to $128 0.07 2 0.14 4 0.28

4. Inventory turnover increased from 5.8 to 6.7 0.05 — —

5. In-store promotions resulted in 20% increase in sales 0.05 — —

6. In-store technical support personnel have MIS college

degrees

0.05 — —

7. Store’s debt-to-total-assets ratio declined to 34% 0.03 4 0.12 2 0.06

8. Newspaper advertising expenditures increased 10% 0.02 — —

9. Revenues per employee up 19% 0.02 — —

Weaknesses

1. Location of store negatively impacted by new Highway 34 0.15 4 0.60 1 0.15

2. Revenues from software segment of a store down 12% 0.10 — —

3. Often customers have to wait to check out 0.05 2 0.10 4 0.20

4. Store has no website 0.05 — —

5. Revenues from businesses down 8% 0.04 3 0.12 4 0.16

6. Supplier on-time delivery increased to 2.4 days 0.03 — —

7. Carpet and paint in store somewhat in disrepair 0.02 1 0.02 4 0.08

8. Bathroom in store needs refurbishing 0.02 1 0.02 4 0.08

Total 1.00 3.64 3.27

CHAPTER 6 • STRATEGY ANALYSIS AND CHOICE 213

Step 2 Assign weights to each key external and internal factor. These weights are identi-

cal to those in the EFE Matrix and IFE Matrix. The weights are presented in a straight

column just to the right of the external and internal factors.

Step 3 Examine the Stage 2 (matching) matrices, and identify alternative strategies that the

organization should consider implementing. Record these strategies in the top row of

the QSPM, perhaps selecting two or more of your SO, WO, ST, and/or WT strategies.

Step 4 Determine the Attractiveness Scores (AS), defined as numerical values that indicate

the relative attractiveness of each strategy considering a single external or internal

factor. Attractiveness Scores (AS) are determined by examining each key external

or internal factor, one at a time, and asking the question, “Does this factor affect the

choice of strategies being made?” If the answer to this question is yes, then the strate-

gies should be compared relative to that key factor. Specifically, AS should be assigned

to each strategy to indicate the relative attractiveness of one strategy over others,

considering the particular factor. The range for AS is 1 = not attractive, 2 = somewhat

attractive, 3 = reasonably attractive, and 4 = highly attractive. By “attractive,” we

mean the extent that one strategy, compared to others, enables the firm to either capi-

talize on the strength, improve on the weakness, exploit the opportunity, or avoid the

threat. Work row by row in developing a QSPM. If the answer to the previous question

is no, indicating the respective key factor has no effect on the specific choice being

made, then do not assign AS to the strategies in that set. Use a dash (or 0 if using the

template) to indicate that the key factor does not affect the choice being made. Note:

If you assign an AS score to one strategy, then assign an AS score(s) to the other—in

other words, if one strategy receives a dash (or 0)—then all others must receive a dash

(or 0) in a given row.

Step 5 Compute the Total Attractiveness Scores. Total Attractiveness Scores (TAS) are

defined as the product of multiplying the weights (Step 2) by the AS (Step 4) in each

row. The TAS indicate the relative attractiveness of each alternative strategy, consid-

ering only the impact of the adjacent external or internal critical success factor. The

higher the TAS, the more attractive the strategic alternative (considering only the

adjacent critical success factor).

Step 6 Compute the Sum Total Attractiveness Score. Add TAS in each strategy column

of the QSPM. The Sum Total Attractiveness Scores (STAS) reveal which strategy

is most attractive in each set of alternatives. Higher scores indicate more attractive

strategies, considering all the relevant external and internal factors that could affect the

strategic decisions. The magnitude of the difference between the STAS in a given set

of strategic alternatives indicates the relative desirability of one strategy over another.

In Table 6-5, two alternative strategies—(1) buy new land and build new larger store and

(2) fully renovate existing store—are being considered by a computer retail store. Note by the

STAS’s of 3.64 versus 3.27 that the analysis indicates the business should buy new land and

build a new larger store. Note the use of dashes to indicate which factors do not affect the strat-

egy choice being considered. If a particular factor affects one strategy, but not the other, it affects

the choice being made, so AS scores should be recorded for both strategies. Never rate one strat-

egy and not the other. Note also in Table 6-5 that there are no consecutive 1s, 2s, 3s, or 4s across

any row in a QSPM; never assign the same AS score across a row. Always prepare a QSPM

working row by row. Also, if you have more than four strategies in the QSPM, then let the AS

scores range from 1 to “the number of strategies being evaluated.” This will enable you to have a

different AS score for each strategy. These are all important guidelines to follow in developing a

QSPM. In actual practice, the store did purchase the new land and build a new store; the business

also did some minor refurbishing until the new store was operational.

There should be a rationale for each AS score assigned. Note in the first row of Table 6-5 that

the “Population of city growing 10 percent” opportunity could be capitalized on best by Strategy

1, “Buy New Land and Build New, Larger Store,” so an AS score of 4 was assigned to Strategy

1. Attractiveness Scores, therefore, are not mere guesses; they should be rational, defensible, and

reasonable. Mathematically, the AS score of 4 in row 1 suggests Strategy 1 is 100 percent more at-

tractive than Strategy 2, whose AS score was 2 (since 4 – 2 = 2 and 2 divided by 2 = 100 percent).

214 PART 2 • STRATEGY FORMuLATION

Positive Features and Limitations of the QSPM

A positive feature of the QSPM is that sets of strategies can be examined sequentially or simul-

taneously. For example, corporate-level strategies could be evaluated first, followed by division-

level strategies, and then function-level strategies. There is no limit to the number of strategies that

can be evaluated or the number of sets of strategies that can be examined at once using the QSPM.

Another positive feature of the QSPM is that it requires strategists to integrate pertinent ex-

ternal and internal factors into the decision process. Developing a QSPM makes it less likely that

key factors will be overlooked or weighted inappropriately. It draws attention to important re-

lationships that affect strategic decisions. Although developing a QSPM requires Attractiveness

Scores (AS) decisions, those small decisions enhance the probability that the final strategic deci-

sions will be best for the organization. A QSPM can be used by small and large, for-profit and

nonprofit organizations, and even can be used by individuals in making career choices.6

The QSPM has two limitations. First, it always requires informed judgments regarding AS

scores, but quantification is helpful throughout the strategic-planning process to minimize halo

error and various biases. Attractiveness Scores are not mere guesses. Be reminded that a 4 is

33 percent more important than a 3; making informed small decisions is important for mak-

ing effective big decisions, such as deciding among various strategies to implement. Second, a

limitation of the QSPM is that its factors and strategy choices are based on underlying input and

matching matrices/analysis.

How to Estimate Costs Associated
with Recommendations
The SWOT, BCG, IE, SPACE, and GRAND matrices are used in strategic planning to generate

feasible alternative strategies that could benefit the firm. The term recommendation is used to re-

fer to “any alternative strategy that is selected for implementation.” Due to monetary and/or non-

monetary constraints, no firm can implement all alternative strategies proposed in the matching

matrices, so firms utilize the QSPM and expert judgment to select particular strategies. Perhaps the

LO 6.9

GLOBAL CAPSULE 6

India’s Economy Is Booming
For fiscal 2017-2018, India’s gross

domestic product (GDP) grew to 7.2

percent, one of the highest national

growth rates on the planet. India

has recently implemented many

business-friendly reforms such as

the Goods and Services Tax (GST) on

July 1, 2017, that merged nearly all

existing taxes into a single system of

taxation. India’s population of 1.324

billion (versus 295.5 million in the

United States) is mostly a middle

class willing to spend money in the

most populated democratic country

in the world. India’s economy is

flourishing, unemployment is at

4.02 percent (August 2017), and more than 51 million small and

medium size businesses are doing well—almost twice the number

of small companies in the United States. Scores of companies are

building manufacturing plants in India. FedEx has more than 6,000

employees, 1,000 vehicles, and 22 daily incoming flights in India.

Some women in India experience significant challenges to achiev-

ing financial security. India is making progress to achieve gender

equality and protect women from sexual violence such as the India

Supreme Court ruling on October

18, 2017, that “sexual intercourse

with a girl below 18 years of age

is rape regardless of whether she is

married or not.” This legal change

is intended to prevent thousands of

older men marrying 13- to 16-year-

old girls that heretofore had com-

monly occurred in India. The num-

ber of female employees in Indian

companies increased by 5 percent

in 2017, compared to the previous

year, moving the overall percentage

representation of women in Indian

companies to 30.55 percent.

Source: Based on Philip Cheng, “Opportunities Abound in India’s

Booming Economy,” Fortune (October 1, 2017): 30. Also, https://www.

nytimes.com/2017/10/11/world/asita/india-child-marriage-rape.html?

rref=collection%2Ftimestopic%2FIndia&action=click&contentCollection=

world&region=stream&module=stream_unit&version=latest&content

Placement=4&pgtype=collection Also, http://www.hindustantimes.com/

business-news/ women-representation-in-india-inc-up-5-this-year-study/story-

6hx60yoKBAfCNorGWKzuiI.html

Should Your Firm Be Doing Business in India?

H
y

w
ar

d
s/

S
h

u
tt

er
st

o
ck

http://www.hindustantimes.com/business-news/women-representation-in-india-inc-up-5-this-year-study/story-6hx60yoKBAfCNorGWKzuiI.html

CHAPTER 6 • STRATEGY ANALYSIS AND CHOICE 215

most important page in a student’s strategic planning case project is his/her Recommendations

Page—a page where recommendations are listed along with an estimated dollar amount for the

expected cost (or savings) of each recommendation over the next three years. The dollar amounts

should all be added to reveal a total amount of new capital needed over the three years.

As indicated in Global Capsule 6, India is a country where many companies are building a

new manufacturing plant due to that country’s flourishing economy. So, how much does it cost

to build a manufacturing plant? Guidance is given in Table 6.6 for determining the estimated

cost (or savings) of various recommendations. Table 6.6 gives six example actions that could be

recommendations for a firm, along with a rationale and author comment for how dollar values

can be estimated on a recommendations page. As indicated, a cost per square foot approach may

be used to estimate the total cost of building manufacturing plants, retail stores, distribution cen-

ters, or warehouses. Another way to estimate various costs is to find costs incurred for similar

expenditures by other firms. Also, look in the firm’s Form 10K because costs are often given for

previous expenditures, and these dollar values can give guidance for estimating costs associated

with new recommendations. Avoid wild cost guesses; ask “experts” in the field if needed.

TABLE 6-6 Recommendations and Associated Costs with Rationale

Recommendation with Total Cost Rationale

1. Build one new manufacturing plant. $40M = $400 per sq. ft. : 100K sq. ft. = $40M

Author Comment – Depending on the size of the plant, cost of the land, and complex-

ity of the plant, the dollar amount could be higher or lower. Oftentimes a Form 10K will

reveal the actual cost of a similar plant recently built. Another way to estimate this cost

is to divide the firm’s total property, plant, and equipment on their balance sheet by the

number of manufacturing plants to get an average for one and use this as a basis for the

cost of building a new plant. A good rule of thumb is to spread the cost of building a new

manufacturing plant over two years.

2. Open 200 new retail stores. $300M = 200 stores : 10K sq. ft. per store : $150 per sq.

ft = $300M.

Author Comment – Depending on the average store size and cost of land, the dollar

amount could be higher or lower. Another way to estimate this cost is to divide the firm’s

total property, plant, and equipment on their balance sheet by the number of existing

stores to get an average for one store and use this as a basis for opening 200 new stores.

Be mindful that many firms use a franchise instead of a company-owned business model,

whereby most costs are borne by the franchisee; also, many firms lease instead of own

retail space. If the 200 new stores are to come online over 3 years, spread the total cost

over 3 years.

3. Hire 100 new salespersons. $7.5M = 100 : $75K annual pay = $7.5M

Author Comment – The cost could be higher or lower depending on the average salary

plus commission and amenities to be paid to salespersons in a given industry.

4. Divest our fragrance division. $59.4M fragrance segment comprises 27% of firm’s rev-

enues; total corporate value of firm is $640M. So 27% : $640M = $59.4M (revenue).

Author Comment – Besides going into debt, issuing stock, or using net income, a way to

raise needed funds is to divest of a segment. Divestiture may be needed if the segment is

performing poorly, or if the firm desires to become less diversified, or if the firm needs

to realign its portfolio of businesses with its new or existing mission statement.

5. Increase R&D expenditures. $66.2M current R&D annual expenditures10% annually.

($200M) : 10% increase annually = $20M + $22M + $24.2M = $66.2M

Author Comment – As a percent of revenue, R&D expenditures can range from zero for

low-tech firms to upwards of 20% of revenue for hi-tech firms.

6. Acquire the jewelry segment. $225M jewelry segment comprises 15% of XYZ com-

pany. Rival firm’s revenues; total value of rival firm is $1.5B. So 15% of $1.5B =

$225M estimate.

Author Comment – Firms need to show 5+ percent annual growth in revenues to keep

shareholders pleased. An acquisition is widely used to achieve this need, especially if

internal (organic) growth is not sufficient.

216 PART 2 • STRATEGY FORMuLATION

Cultural Aspects of Strategy Analysis and Choice
As defined in Chapter 4, organizational culture includes the set of shared values, beliefs, at-

titudes, customs, norms, rites, rituals, personalities, heroes, and heroines that describe a firm.

Culture is the unique way an organization does business. It is the human dimension that creates

solidarity and meaning, and it inspires commitment and productivity in an organization when

strategy changes are made. All human beings have a basic need to make sense of the world, to

feel in control, and to make meaning. When events threaten meaning, individuals react defen-

sively. Managers and employees may even sabotage new strategies in an effort to recapture the

status quo. For these reasons, it is beneficial to view strategy analysis and choice from a cultural

perspective, because success often rests on the degree of support that strategies receive from a

firm’s culture. If a firm’s strategies are supported by an organization’s culture, then managers

often can implement changes swiftly and easily. However, if a supportive culture does not exist

and is not cultivated, then strategy changes may be difficult to implement.

Strategies that require fewer cultural changes may be more attractive because extensive

changes can take considerable time and effort. Whenever two firms merge, it becomes especially

important to evaluate and consider culture-strategy linkages. Organizational culture can be the

primary reason for difficulties a firm encounters when it attempts to shift its strategic direction,

as the following statement explains:

Not only has the “right” corporate culture become the essence and foundation of corporate

excellence, but success or failure of needed corporate reforms hinges on management’s

sagacity and ability to change the firm’s driving culture in time and in tune with required

changes in strategies.7

The Politics of Strategy Analysis and Choice
All organizations are political. Unless managed, political maneuvering consumes valuable

time, subverts organizational objectives, diverts human energy, and results in the loss of some

valuable employees. Sometimes political biases and personal preferences get unduly embedded

in strategy choice decisions. Internal politics affect the choice of strategies in all organizations.

The hierarchy of command in an organization, combined with the career aspirations of different

people and the need to allocate scarce resources, guarantees the formation of coalitions of indi-

viduals who strive to take care of themselves first and the organization second, third, or fourth.

Coalitions of individuals often form around key strategic issues that face an enterprise. A major

responsibility of strategists is to guide the development of coalitions, to nurture an overall team

concept, and to gain the support of key individuals and groups of individuals.

In the absence of objective analyses, strategy decisions too often are based on the politics

of the moment. With the development of improved strategy-formation analytical tools, political

factors become less important in making strategic decisions. In the absence of objectivity, politi-

cal factors sometimes dictate strategies, and this is unfortunate. Managing political relationships

is an integral part of building enthusiasm and esprit de corps in an organization.

A classic study of strategic management in nine large corporations examined the political

tactics of successful strategists and found that these persons let weakly supported ideas and

proposals die through inaction and to establish additional hurdles or tests for strongly supported

ideas considered unacceptable, but not openly opposed.8 Successful strategists keep a low politi-

cal profile on unacceptable proposals and strive to let most negative decisions come from subor-

dinates or a group consensus, thereby reserving their personal vetoes for big issues and crucial

moments. Successful strategists do a lot of chatting and informal questioning to stay abreast of

how things were progressing and to know when to intervene. Successful strategists lead strategy

but do not dictate it. They give few orders, announce few decisions, depend heavily on informal

questioning, and seek to probe and clarify until a consensus emerged.

Successful strategists generously and visibly reward key thrusts that succeeded. They assign

responsibility for major new thrusts to champions, the individuals most strongly identified with

the idea or product and whose futures were linked to its success. They stay alert to the symbolic

impact of their own actions and statements so as not to send false signals that could stimulate

movements in unwanted directions.

LO 6.10

LO 6.11

CHAPTER 6 • STRATEGY ANALYSIS AND CHOICE 217

Because strategies must be effective in the marketplace and capable of gaining internal

commitment, the following tactics used by politicians for centuries can aid strategists:

1. Achieving desired results is more important than imposing a particular method; therefore,

consider various methods and choose, whenever possible, the one(s) that will afford the

greatest commitment from employees/managers.

2. Achieving satisfactory results with a popular strategy is generally better than trying to

achieve optimal results with an unpopular strategy.

IMPLICATIONS FOR STRATEGISTS

This chapter has revealed six new matrices widely used by strate-

gists to gain and sustain a firm’s competitive advantages, the

core purpose of strategic planning, as illustrated in Figure 6-14.

Five of the six are matching tools, SWOT, SPACE, BCG, IE, and

GRAND, coupled with the single decision-making tool, QSPM.

Whereas some consulting firms and some textbooks advocate us-

ing only one or two matrices in strategic planning, our experience

is that all six tools introduced in this chapter are uniquely valu-

able. Coupled with the EFE Matrix, the CPM, and the IFE Matrix

from earlier chapters, the nine tools together give strategists the

appropriate means for leading a firm down the narrow path to

success. Rarely is the path to success wide or easy, due to par-

ity, commoditization, imitation, duplication, substitute products,

global competitors, and the willingness and ability of consumers

to switch allegiances and loyalties. Employees expect strategists to

formulate a superior “game plan,” so their hard work implement-

ing the strategic plan will yield job security, good compensation,

and ultimately happiness for employees.

Establish A Clear
Vision & Mission

Evaluate & Monitor
Results:

Take Corrective
Actions; Adapt

To Change

Gain & Sustain
Competitive
Advantages

Formulate Strategies:
Collect, Analyze, &

Prioritize Data Using
Matrices; Establish A
Clear Strategic Plan

Implement Strategies:
Establish Structure;
Allocate Resources;
Motivate & Reward;
Attract Customers;
Manage Finances

FIGURE 6-14

How to Gain and Sustain Competitive Advantages

218 PART 2 • STRATEGY FORMuLATION

IMPLICATIONS FOR STUDENTS

In preparing the strategy-formulation matrices, avoid “wild

guesses,” but become comfortable with “excellent estimates,”

as needed, based on research, to move forward with appropriate

matrices. Sometimes students are so accustomed (due to their ac-

counting and finance classes especially) to being counted wrong if

their answer is off at the third decimal place, it takes a while in a

strategic-management class to realize that businesses make “excel-

lent estimates based on research” all the time, because no business

is sure what tomorrow will bring. So, if you can make reasonable

estimates, move forward with particular matrices. For example,

with the BCG Matrix, if segment information is not provided, en-

ter only a single circle in the matrix to represent the overall firm,

rather than two or more circles for the divisions. But be mindful
that multiple circles could be included based on the number of
stores, or the number of customers, rather than traditional dollar

revenue information; so do not rush to the conclusion that portfolio

information is not available. Also, prepare all matrices based on the

point in time of your analysis rather than a desired future point in

time—but seriously consider performing a before and after analysis

whereby you show for example the existing BCG placement of seg-

ments versus your expected future placement.

To generate and decide on alternative strategies that will best

gain and sustain competitive advantages, your SWOT, SPACE, BCG,

IE, Grand, and QSPM need to be developed accurately. However, in

covering those matrices in an oral presentation, focus more on the

implications of those analyses than the nuts-and-bolts calculations.

In other words, as you go through those matrices in a presentation,

your goal is not to prove to the class that you did the calculations

correctly. They expect accuracy and clarity, and certainly you should

have that covered. It is the implications of each matrix that your au-

dience will be most interested in, so use these matrices to pave the

way for your recommendations with costs, which generally come

just a page or two deeper into the project. A good rule of thumb is

to spend at least an equal amount of time on the implications as the

actual calculations of each matrix when presented. This approach

will improve the delivery aspect of your presentation or paper by

maintaining the high-interest level of your audience. Focusing on

implications rather than calculations will also encourage questions

from the audience when you finish. Silence from an audience is not

good because silence means your audience either fell asleep or was

disinterested, unconvinced, or unimpressed. Use the free Excel stu-

dent template at www.strategyclub.com as needed.

3. Often, an effective way to gain commitment and achieve desired results is to shift from

short-term to long-term issues and concerns.

4. Middle-level managers must be genuinely involved in and supportive of strategic decisions,

because successful implementation will hinge on their support.9

Chapter Summary
The essence of strategy formulation is an assessment of whether an organization is doing the

right things and how it can be more effective in what it does. Every organization should be wary

of becoming a prisoner of its own strategy, for even the best strategies become obsolete sooner

or later. Regular reappraisal of strategy helps management avoid complacency. Objectives and

strategies should be consciously developed and coordinated and should not merely evolve out of

day-to-day operating decisions.

An organization with no sense of direction and no coherent strategy precipitates its own

demise. When an organization does not know where it wants to go, it usually ends up someplace

it does not want to be. Every organization needs to consciously establish and communicate clear

objectives and strategies. Any organization, whether military, product-oriented, service-oriented,

governmental, or even athletic, must develop and execute effective strategies to win. An excel-

lent offense without an excellent defense, or vice versa, usually leads to defeat. Developing

strategies that use strengths to capitalize on opportunities could be considered offensive, whereas

strategies designed to improve on weaknesses while avoiding threats could be termed defensive.

Every organization has numerous external opportunities and threats and internal strengths and

weaknesses that can be aligned to formulate feasible alternative strategies.

Modern strategy-formulation tools and concepts described in this chapter are integrated

into a practical three-stage framework. Tools such as the SWOT Matrix, SPACE Matrix, BCG

Matrix, IE Matrix, and QSPM can significantly enhance the quality of strategic decisions, but

they should never be used to dictate the choice of strategies. Behavioral, cultural, and politi-

cal aspects of strategy generation and selection are always important to consider and manage.

Because of increased legal pressure from outside groups, boards of directors are assuming a

more active role in strategy analysis and choice. This is a positive trend for organizations.

CHAPTER 6 • STRATEGY ANALYSIS AND CHOICE 219

Key Terms and Concepts
Aggressive Quadrant (p. 201)

Attractiveness Scores (AS) (p. 213)

Boston Consulting Group (BCG) Matrix (p. 203)

business portfolio (p. 202)

cash cows (p. 204)

champions (p. 216)

competitive position (CP) (p. 197)

Competitive Quadrant (p. 201)

Conservative Quadrant (p. 201)

decision stage (p. 194)

Defensive Quadrant (p. 201)

directional vector (p. 199)

dogs (p. 204)

financial position (FP) (p. 197)

Grand Strategy Matrix (p. 208)

halo error (p. 224)

industry growth rate (p. 204)

industry position (IP) (p. 197)

input stage (p. 194)

Internal-External (IE) Matrix (p. 206)

matching (p. 194)

matching stage (p. 194)

portfolio analysis (p. 203)

Quantitative Strategic Planning Matrix (QSPM) (p. 210)

question marks (p. 204)

recommendation (p. 214)

Recommendations Page (p. 215)

relative market share position (RMSP) (p. 203)

SO strategies (p. 195)

stability position (SP) (p. 197)

stars (p. 204)

Strategic Position and Action Evaluation (SPACE) Matrix (p. 197)

strategy-formulation analytical framework (p. 193)

Strengths-Weaknesses-Opportunities-Threats (SWOT)

Matrix (p. 194)

ST strategies (p. 195)

Sum Total Attractiveness Scores (STAS) (p. 213)

Total Attractiveness Scores (TAS) (p. 213)

WO strategies (p. 195)

WT strategies (p. 195)

Issues for Review and Discussion
6-1. Explain the difference between strategies and

recommendations.

6-2. Explain how to estimate costs associated with

recommendations.

6-3. Why is it essential for a SWOT strategy to be

stated specifically enough to estimate the cost (or

savings)?

6-4. Why is it important to treat all animals, even cattle,

pigs, and chickens, with care and respect?

6-5. A Wall Street Journal article (July 12, 2014, p. B3)

said Apple’s smartphone market share in China is 6.0

percent, behind the two leaders Samsung (17.8%) and

Lenovo (11.4%). With regard to a BCG Matrix, what

are the three firms’ relative market share position?

6-6. List five limitations of a SPACE Matrix.

6-7. List the pros and cons of a firm disclosing by-segment

corporate information in a Form 10K.

6-8. What are some key differences between the BCG and

the IE portfolio matrices?

6-9. In developing a QSPM, if 10 strategies are being com-

pared simultaneously, what would be a good scale for

the AS scores? Why?

6-10. In developing a BCG Matrix or an IE Matrix, what

would be a good surrogate for revenues for Target

Corp., Burger King, Bank of America, and Spirit

Airlines?

6-11. In developing a SPACE Matrix, what would you

expect the SP average to be for Apple, Heinz, Verizon,

Amazon, and Kroger? Diagram and explain.

6-12. Rather than developing a QSPM, what is an alternative

procedure for prioritizing the relative attractiveness of

alternative strategies?

6-13. Overlay a BCG Matrix with a Grand Strategy Matrix

and discuss similarities in terms of format and implica-

tions. Diagram and explain.

6-14. Define halo error. How can halo error inhibit selecting

the best strategies to pursue?

6-15. List six drawbacks of using only subjective information

in formulating strategies.

6-16. For a firm that you know well, give an example of SO

strategy showing how an internal strength can be matched

with an external opportunity to formulate a strategy.

6-17. For a firm that you know well, give an example WT

strategy, showing how an internal weakness can be

matched with an external threat to formulate a strategy.

6-18. List three limitations of the SWOT Matrix and analysis.

6-19. For the following three firms using the given factors,

calculate a reasonable stability position (SP) coordinate

to go on their SPACE Matrix axis, given what you know

about the nature of those industries.

Factors Winnebago Apple u.S. Postal Service

Barriers to entry into

market

Seasonal nature of

business

Technological

changes SP Score

220 PART 2 • STRATEGY FORMuLATION

6-20. Would the angle or degrees of the vector in a SPACE

Matrix be important in generating alternative strate-

gies? Diagram and explain.

6-21. On the competitive position (CP) axis of a SPACE

Matrix, what level of capacity utilization would

be necessary for you to give the firm a negative 1?

Negative 7? Why? Diagram and explain.

6-22. If a firm has weak financial position and competes

in an unstable industry, in which quadrant will the

SPACE vector lie? Diagram and explain.

6-23. Describe a situation where the SPACE analysis would

have no vector. In other words, describe a situation

where the SPACE analysis coordinate would be (0,0).

What should an analyst do in this situation?

6-24. Develop a BCG Matrix for your university. Because

your college does not generate profits, what would be

a good surrogate for the pie slice values? How many

circles do you have and how large are they? Explain.

6-25. In a BCG Matrix, would the question mark quadrant

or the cash cow quadrant be more desirable? Diagram

and explain.

6-26. Would a BCG Matrix and analysis be worth performing

if you do not know the profits of each segment? Why?

6-27. What major limitations of the BCG Matrix does the IE

Matrix overcome? Diagram and explain.

6-28. In an IE Matrix, do you believe it is more advanta-

geous for a division to be located in quadrant II or IV?

Why? Diagram and explain.

6-29. Develop a 2 • 2 • 2 • 2 • 2 QSPM for an organization of

your choice (i.e., two strengths, two weaknesses, two

opportunities, two threats, and two strategies). Follow

all the QSPM guidelines presented in the chapter.

6-30. How would application of the strategy-formulation

analytical framework differ from a small to a large

organization?

6-31. What types of strategies would you recommend for

an organization that achieves total weighted scores

of 3.6 on the IFE Matrix and 1.2 on the EFE Matrix?

Diagram and explain.

6-32. Given the following information, develop a SPACE

Matrix for the XYZ Corporation: FP = +2; SP = − 6;

CP = −2; IP = +4. Diagram and explain.

6-33. Given the information in the following table, develop

a BCG Matrix and an IE Matrix:

Divisions 1 2 3

Profits $10 $15 $25

Sales $100 $50 $100

Relative Market Share 0.2 0.5 0.8

Industry Growth Rate +.20 +.10 −.10

IFE Total Weighted

Scores

1.6 3.1 2.2

EFE Total Weighted

Scores

2.5 1.8 3.3

6-34. How would you develop a portfolio matrix for your

school of business?

6-35. Explain how to estimate the cost of building one new

manufacturing plant for a company.

6-36. Discuss the limitations of various strategy-formulation

analytical techniques.

6-37. Explain why cultural factors should be an important

consideration in analyzing and choosing among alter-

native strategies.

6-38. How would for-profit and nonprofit organizations dif-

fer in their applications of the strategy-formulation

analytical framework?

6-39. Develop a SPACE Matrix for a company that is finan-

cially weak and is a weak competitor. The industry

for this company is pretty stable, but the industry’s

projected growth in revenues and profits is not good.

Label all axes and quadrants.

6-40. List four limitations of a BCG Matrix. Diagram and

explain.

6-41. Make up an example to show clearly and completely

that you can develop an IE Matrix for a three-division

company, where each division has $10, $20, and $40

in revenues and $2, $4, and $1 in profits. State other

assumptions needed. Label axes and quadrants.

6-42. What procedures could be necessary if the SPACE

vector falls right on the axis between the competitive

and defensive quadrants? Diagram and explain.

6-43. In a BCG Matrix or the Grand Strategy Matrix, what

would you consider to be a rapid market (or industry)

growth rate?

6-44. Why is it important to work row by row instead of

column by column in preparing a QSPM?

6-45. Why should one avoid putting double 4s in a row in

preparing a QSPM?

6-46. Envision a QSPM with no weight column. Would that

still be a useful analysis? Why or why not? What do

you lose by deleting the weight column?

6-47. Prepare a BCG Matrix for a two-division firm with

sales of $5 and $8 versus profits of $3 and $1, respec-

tively. State assumptions for the RMSP and IGR axes

to enable you to construct the diagram.

6-48. Consider developing a before and after BCG or IE

Matrix to reveal the expected results of your proposed

strategies. What limitation of the analysis would this

procedure overcome somewhat?

6-49. If a firm has the leading market share in its indus-

try, where on the BCG Matrix would the circle lie?

Diagram and explain.

6-50. If a firm competes in an unstable industry, such as

telecommunications, where on the SP axis of the

SPACE Matrix would you plot the appropriate point?

Diagram and explain.

6-51. Why do you think the SWOT Matrix is the most

widely used of all strategy matrices?

6-52. What are two limitations of the QSPM discussed in

the chapter?

6-53. The number of people in millions that visited

various finance-focused information websites in

September 2017 are as follows: Yahoo! Finance

CHAPTER 6 • STRATEGY ANALYSIS AND CHOICE 221

(59.7), Business Insider (53.4), CNBC (49.2),

Forbes Digital (48.6), Bloomberg (36.6), CNN

Money (36.2), Dow Jones (34.7), Reuters sites

(24.7), and Fortune.com sites (19.2). What would

the RMSP values be for the nine firms if you were

going to develop a BCG Matrix?

6-54. AT&T and Time Warner are perhaps merging. The fol-

lowing data table gives the 9-month 2017 revenue and

operating income by segment for both AT&T and its

rival Time Warner. This type of information for firms

can enable construction of circles (based on revenues)

and pie slices (based on profits) in portfolio matrices.

Develop a BCG Matrix based on the information

given.

Company
Revenue in
billions

Operating
income in billions

AT&T Segments

1. Business Solutions $51.0 $13.3

2. Entertainment 38.0 4.6

3. Consumer Mobility 23.2 7.1

4. International 6.1 -0.3

Time Warner Segments

1. Turner 9.0 3.5

2. HBO 4.7 1.7

3. Warner Bros. 9.8 1.3

ASSURANCE-OF-LEARNING EXERCISES

SET 1: STRATEGIC PLANNING FOR COCA-COLA

EXERCISE 6A

Perform a SWOT Analysis for Coca-Cola

Purpose

The SWOT Matrix is the most widely used of all strategic planning tools and techniques because

it is conceptually simple and lends itself readily to discussion among executives and managers.

The SWOT Matrix is effective in formulating strategies because it clearly matches a firm’s internal

strengths and weaknesses with the firm’s external opportunities and threats to generate feasible strate-

gies that should be considered. This exercise gives you practice in performing SWOT analysis for a

large corporation.

Instructions

Step 1 Join with two other students in class. Together, develop a SWOT Matrix for Coca-Cola.

Follow guidelines provided in the chapter, including notation (for example, S4, T3) at the

end of each strategy. Include two strategies in each of the four (SO, ST, WT, WO) quadrants.

Be specific regarding your strategies, avoiding generic terms such as forward integration.

Use the Cohesion Case, your answers to Assurance-of-Learning Exercise 1B on page 66,

and the company’s most recent quarterly report as given at the corporate website.

Step 2 Turn in your team-developed SWOT Matrix to your professor for a classwork grade. Note:

Feel free to list factors and strategies vertically on a page rather than necessarily fitting ev-

erything into a nine-cell array.

EXERCISE 6B

Develop a SPACE Matrix for Coca-Cola

Purpose

The SPACE Matrix is one of five matching strategic management tools widely used to formulate

feasible strategies. Used in conjunction with the SWOT, BCG, IE, and GRAND, the SPACE can be

helpful in devising a strategic plan because hard choices normally must be made between attractive

strategic options. This exercise gives you practice in developing a SPACE Matrix.

Instructions

Step 1 Review Coca-Cola’s business as described in the Cohesion Case as well as the company’s

most recent Form 10K and quarterly report.

Step 2 Review industry and competitive information pertaining to Coca-Cola.

Step 3 Develop a SPACE Matrix for Coca-Cola. What strategies do you recommend for Coca-Cola

given your SPACE analysis? Avoid generic, vague terms such as market development.

222 PART 2 • STRATEGY FORMuLATION

EXERCISE 6C

Develop a BCG Matrix for Coca-Cola

Purpose

Portfolio matrices are widely used by multidivisional organizations to help identify and select strate-

gies to pursue. A BCG analysis identifies particular divisions that should receive fewer resources than

others. It may identify some divisions that need to be divested. This exercise can give you practice in

developing a BCG Matrix.

Instructions

Step 1 Place the following five column headings at the top of a separate sheet of paper: Divisions,

Revenues, Profits, Relative Market Share Position, Industry Growth Rate. Down the far

left of your page, list Coca-Cola’s divisions/segments as given on pages 58–59. Now turn

back to the Cohesion Case and find information to fill in all the cells in your data table from

page 59.

Step 2 Based on Coca-Cola’s year-end 2017 segment data given in the Cohesion Case, complete a

BCG Matrix for the company.

Step 3 Compare your BCG Matrix to other students’ matrices. Discuss any major differences.

EXERCISE 6D

Develop a QSPM for Coca-Cola

Purpose

This exercise can give you practice in developing a QSPM to determine the relative attractiveness of

various strategic alternatives.

Instructions

Step 1 Join with two other students in class to develop a joint QSPM for Coca-Cola.

Step 2 Compare your team’s QSPM to those of other teams.

Step 3 Discuss any major differences.

SET 2: STRATEGIC PLANNING FOR MY UNIVERSITY

EXERCISE 6E

Develop a BCG Matrix for My University

Purpose

Developing a BCG Matrix for many nonprofit organizations, including colleges and universities,

is a useful exercise. Of course, there are no profits for each division or department—and in some

cases no revenues. However, be creative in performing a BCG Matrix. For example, the pie slice

in the circles can represent the number of majors receiving jobs on graduation, or the number

of faculty teaching in that area, or some other variable that you believe is important to consider.

The size of the circles can represent the number of students majoring in particular departments or

areas.

Instructions

Step 1 Develop a BCG Matrix for your university. Include all academic schools, departments, or

colleges.

Step 2 Diagram your BCG Matrix on paper.

Step 3 Discuss differences among the BCG Matrices developed in class.

CHAPTER 6 • STRATEGY ANALYSIS AND CHOICE 223

SET 3: STRATEGIC PLANNING TO ENHANCE MY EMPLOYABILITY

EXERCISE 6F

Perform QSPM Analysis on Myself

Purpose

QSPM analysis is designed to determine the relative attractiveness of feasible alternative actions.

Although primarily used in a business setting, QSPM analysis can enable individuals to objectively

determine which alternative strategies are best to pursue. The purpose of this exercise is to showcase

how individuals can use QSPM analysis to make career choices.

Instructions

Step 1 Follow the steps provided in Chapter 6 for developing a QSPM analysis, but do so for your-

self rather than a company. Use the external and internal factor information about yourself

that you earlier developed in Exercise 1D (p. 67) to get started.

Step 2 Across the top row of your QSPM, consider two strategies as follows:

1) Go to graduate school or 2) Go to work full-time.

Step 3 To keep this example simple, do not include a weight column, as some firms also prefer;

simply add the AS scores to obtain your recommended best strategy, rather than multiplying

across rows and summing TAS scores.

Step 4 Share with the class what strategy, More School or More Work, yields the highest TAS score

in your personal analysis.

EXERCISE 6G

A Template Competency Test

Purpose

The free Excel strategic planning template at www.strategyclub.com is widely used for strategic

planning by students and small businesses; this exercise aims to enhance your familiarity with the

template. Developing competence with the template will enable you to place this skill appropriately

on your resume, in addition to facilitating your development of a comprehensive strategic plan for an

assigned case company.

Instructions

Answer the following Chapter 6 related questions about the template. Discuss your answers with

classmates to determine any issues or concerns.

1. In performing SPACE analysis, does the template allow you to show your firm and rival firms?

If yes, would a legend be nice to create to organize information? Why?

2. In performing BCG analysis, how does the template address firms competing in markets with

over or under 20% IGR?

3. Using the template, what is a good way to show a before and after (your recommendations)

BCG?

4. In performing IE portfolio analysis using the template, are your EFE and IFE Matrix total

weighted scores automatically plotted after you finish those matrices? For divisions, does the

template call for all “divisional” EFE and IFE matrices?

5. Why is it best to label divisions 1, 2, 3 etc. on BCG and IE matrices and thereby create a legend,

rather than let division names plot in the matrix?

6. In performing GRAND analysis, how many firms/divisions/scenarios does the template allow

to be considered/placed in the matrix? Why is this a nice feature? What are some scenarios you

could examine?

7. Why is there no need to reenter weights when performing QSPM analysis using the template?

http://www.differentiateyourbusiness.co.uk/competitive-advantage-matrix

224 PART 2 • STRATEGY FORMuLATION

SET 4: INDIVIDUAL VERSUS GROUP STRATEGIC PLANNING

EXERCISE 6H

How Severe Are Various Subjective Threats in
Strategic Planning?

Purpose

As discussed in Chapter 6, without objective information and analysis, six subjective threats (per-

sonal biases, politics, prejudices, emotions, personalities, and halo error) oftentimes play a dominant

role in the strategy-formulation process, undermining effectiveness. Halo error is the tendency to put

too much weight on a single factor.

The purpose of this exercise is to examine more closely various threats of relying too heavily on

subjectivity in formulating strategies. A secondary purpose of this exercise is to examine whether

individual decision making is better than group decision making. Academic research suggests that

groups make better decisions than individuals about 80 percent of the time.

Instructions

Rank the six subjective threats as to their relative severity (1 = most severe, 9 = least important). First,

rank the threats as an individual. Next, rank the threats as part of a group of three. Thus, determine what

person(s) and what group(s) here today can come closest to the expert ranking. This exercise enables

examination of the relative effectiveness of individual versus group decision making in strategic planning.

The Steps

1. Fill in Column 1 in Table 6-7 to reveal your individual ranking of the relative severity of the six

subjective threats (1= most severe to 6 = least severe). For example, if you think Personal Biases

is the third-most severe threat, then enter a 3 in Table 6-7 in Column 1 beside Personal Biases.

2. Fill in Column 2 in Table 6-7 to reveal your group’s ranking of the relative severity of the six

threats (1 = most severe to 6 = least severe).

3. Fill in Column 3 in Table 6-7 to reveal the expert’s ranking of the six threats. To be provided by

your professor, the expert rankings are based on the authors’ experience, rather than on findings

from empirical research.

4. Fill in Column 4 in Table 6-7 to reveal the absolute difference between Column 1 and Column 3

to reveal how well you performed as an individual in this exercise. (Note: Absolute difference

disregards negative numbers.)

5. Fill in Column 5 in Table 6-7 to reveal the absolute difference between Column 2 and Column 3

to reveal how well your group performed in this exercise.

6. Sum Column 4. Sum Column 5.

7. Compare the Column 4 sum with the Column 5 sum. If your Column 4 sum is less than your

Column 5 sum, then you performed better as an individual than as a group. Normally, group

decision making is superior to individual decision making, so if you did better than your group,

you did excellent.

8. The Individual Winner(s): The individual(s) with the lowest Column 4 sum is the WINNER.

9. The Group Winners(s): The group(s) with the lowest Column 5 score is the WINNER.

TABLE 6-7 Assessing Severity of Being Too Subjective in Making Strategic
Decisions: Comparing Individual versus Group Decision Making

Threats of Being Column 1 Column 2 Column 3 Column 4 Column 5

Too Subjective

1. Personal Biases

2. Politics

3. Prejudices

4. Emotions

5. Personalities

6. Halo error

Sums

CHAPTER 6 • STRATEGY ANALYSIS AND CHOICE 225

MINI-CASE ON THE BOSTON CONSULTING GROUP

WHAT AMERICAN FIRM HELPS THE
MOST COMPANIES DO STRATEGIC
PLANNING?
The answer to the question posed above might be the Boston Consulting Group (BCG) headquartered

in Boston, Massachusetts. A worldwide management-consulting firm founded in 1963, BCG had rev-

enues of $6.3 billion in 2017 and more than 16,000 employees. BCG’s President and CEO is Rich

Lesser. BCG was ranked third among Fortune ’s “100 Best Companies to Work For” in 2017 and was

ranked first among Consulting Magazine’s 2016 “Best Firms to Work For.”

In formulating strategies, some firms use BCG’s Advantage Matrix to portray on the x-axis the

“size of a firm’s competitive advantage (Low versus High)” and on the y-axis “the number of ap-

proaches a firm can use to achieve competitive advantage (Low versus High).” Based on these two

axes, strategic implications for firms located in one of four quadrants can be labeled, according to

BCG, as: Fragmented, Specialization, Volume, and Stalemate, as illustrated below:

Fragmented

High

Low

Stalemate

Size of a Firm’s Competitive Advantage

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it
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A

d
v
a
n

ta
g
e

Volume

Specialization

High Low

Do some online research to answer the following questions about BCG’s Advantage Matrix.

Questions

1. In a sentence or two for each quadrant, how would you describe implications for a firm based on

their position in the Advantage Matrix? Do you like the four words proposed for “quadrant im-

plications?” Can you think of a better word or words?

2. What do you think are the primary benefits of using the Advantage Matrix?

3. What are the primary limitations of using the Advantage Matrix in your view?

4. How could the Advantage Matrix be improved?

Source: Based on information at http://www.differentiateyourbusiness.co.uk/competitive-advantage-matrix

What Are Your Thoughts on
This Idea?

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st

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ck

Current Readings
Asgari, Navid, Kulwant Singh, and Will Mitchell. “Alliance

Portfolio Reconfiguration Following a Technological

Discontinuity.” Strategic Management Journal 38, no. 5

(May 2017): 1062-1081.
Aversa, Paolo, Stefan Haefliger, and Danielle Giuliana Reza.

“Building a Winning Business Model Portfolio.” MIT
Sloan Management Review 58, no. 4 (Summer 2017):
49-54.

Blake, Daniel J. and Caterina Moschieri. “Policy Risk,
Strategic Decisions and Contagion Effects: Firm-Specific
Considerations.” Strategic Management Journal 38, no. 3
(March 2017): 732-750.

Chatterjee, Joydeep. “Strategy, Human Capital Investments,
Business-Domain Capabilities, and Performance: a Study
in the Global Software Services Industry.” Strategic
Management Journal 38, no. 3 (March 2017): 588-608.

David, Meredith E., Fred R. David, and Forest R. David. “The
Quantitative Strategic Planning Matrix: A New Marketing
Tool.” Journal of Strategic Marketing, no. 3, (April 2016):
1-11.

Kim, Ji Youn (Rose) and H. Kevin Steensma. “Employee
Mobility, Spin-Outs, and Knowledge Spill-In: How
Incumbent Firms Can Learn From New Ventures.”
Strategic Management Journal 38, no. 8 (August 2017):
1626-1645.

Ozmel, Umit, Jeffrey Reuer, and Cheng-Wei Wu.
“Interorganizational Imitation and Acquisitions of High-
tech Ventures.” Strategic Management Journal 38, no. 13,
(December 2017): 2647-2665.

Ross, Jeanne W., Ina M. Sebastian, and Cynthia M. Beath.
“How to Develop a Great Digital Strategy.” MIT Sloan
Management Review 58, no. 2 (Winter 2017): 7-9.

226 PART 2 • STRATEGY FORMuLATION

Web Resources

1. BCG Matrix Images This website provides more than

100 jpeg images of BCG matrices that can be used in a

case project or strategic planning report.
https://www.google.com/search?source=hp&q=bcg+matr
ix+images&oq=bcg+matrix+im&gs_l=psy-ab.1.0.0l2j0i2
2i30k1l2.94589.100985.0.103449.15.13.0.0.0.0.109.1230.
9j4.13.0.foo%2Ccfro%3D1%2Cnso-ehuqi%3D1%2Cnso-
ehuui%3D1%2Cewh%3D0%2
Cnso-mplt%3D2%2Cnso-enksa%3D0%2Cnso-
enfk%3D1%2Cnso-usnt%3D1%2Cnso-qnt-npqp%3
D0-1633%2Cnso-qnt-npdq%3D0-5608%2Cnso-qnt-
npt%3D0-1229%2Cnso-qnt-ndc%3D2051%2Ccspa-dspm-
nm-mnp%3D0-06145%2Ccspa-dspm-nm-mxp%3D0-
153625%2Cnso-unt-npqp%3D0-1506%2Cnso-unt-
npdq%3D0-4694%2Cnso-unt-npt%3D0-061%2Cnso-
unt-ndc%3D300%2Ccspa-uipm-nm-mnp%3D0-

007625%2Ccspa-uipm-nm-mxp%3D0-053375…0…1.1.64.
psy-ab..2.13.1229.0..35i39k1j0i131k1j0i20k1.pk-zD4sqIjQ

2. The QSPM Matrix This website provides numerous

PDF files that discuss and exemplify the QSPM Matrix in

further detail.
https://scholar.google.com/scholar?q=quantitative+strate
gic+planning+matrix&hl=en&as_sdt=0&as_vis=1&oi=s
cholart&sa=X&ved=0ahUKEwihptaiwonWAhWK5yYK
HYYMBZ4QgQMINDAA

3. Strategic Planning Template This website offers the

best strategic planning template available for developing

a three-year strategic plan, and it is free. All six new ma-

trices introduced in Chapter 6 (SWOT, SPACE, BCG, IE,

GRAND, QSPM) are included in the template.

Home

https://www.google.com/search?source=hp&q=bcg+matr ix+images&oq=bcg+matrix+im&gs_l=psy-ab.1.0.0l2j0i22i30k1l2.94589.100985.0.103449.15.13.0.0.0.0.109.1230.9j4.13.0.foo%2Ccfro%3D1%2Cnso-ehuqi%3D1%2Cnsoehuui%3D1%2Cewh%3D0%2Cnso-mplt%3D2%2Cnso-enksa%3D0%2Cnsoenfk%3D1%2Cnso-usnt%3D1%2Cnso-qnt-npqp%3D0-1633%2Cnso-qnt-npdq%3D0-5608%2Cnso-qntnpt%3D0-1229%2Cnso-qnt-ndc%3D2051%2Ccspa-dspmnm-mnp%3D0-06145%2Ccspa-dspm-nm-mxp%3D0-153625%2Cnso-unt-npqp%3D0-1506%2Cnso-untnpdq%3D0-4694%2Cnso-unt-npt%3D0-061%2Cnsount-ndc%3D300%2Ccspa-uipm-nm-mnp%3D0-007625%2Ccspa-uipm-nm-mxp%3D0-053375…0…1.1.64.psy-ab..2.13.1229.0..35i39k1j0i131k1j0i20k1.pk-zD4sqIjQ

https://scholar.google.com/scholar?q=quantitative+strategic+planning+matrix&hl=en&as_sdt=0&as_vis=1&oi=scholart&sa=X&ved=0ahUKEwihptaiwonWAhWK5yYKHYYMBZ4QgQMINDAA

https://scholar.google.com/scholar?q=quantitative+strategic+planning+matrix&hl=en&as_sdt=0&as_vis=1&oi=scholart&sa=X&ved=0ahUKEwihptaiwonWAhWK5yYKHYYMBZ4QgQMINDAA

CHAPTER 6 • STRATEGY ANALYSIS AND CHOICE 227

Endnotes
1. R. T. Lenz, “Managing the Evolution of the Strategic

Planning Process,” Business Horizons 30, no. 1 (January-

February 1987): 37.

2. Robert Grant, “The Resource-Based Theory of

Competitive Advantage: Implications for Strategy

Formulation,” California Management Review (Spring

1991): 114.

3. Greg Dess, G. T. Lumpkin, and Alan Eisner, Strategic

Management: Text and Cases (New York: McGraw-Hill/

Irwin, 2006), 72.

4. Adapted from H. Rowe, R. Mason, and K. Dickel,

Strategic Management and Business Policy: A

Methodological Approach (Reading, MA: Addison-

Wesley, 1982), 155-156.

5. Fred David, “The Strategic Planning Matrix—A

Quantitative Approach,” Long Range Planning 19, no. 5

(October 1986): 102; Andre Gib and Robert Margulies,

“Making Competitive Intelligence Relevant to the User,”

Planning Review 19, no. 3 (May-June1991): 21.

6. Meredith E. David, Forest R. David, and Fred R. David,

“The QSPM: A New Marketing Tool,” Presented at

the International Academy of Business and Public

Administration Disciplines (IABPAD) Meeting in Dallas,

Texas, April 2015. Also, Meredith E. David, & Fred R.

David. “Strategic Planning for Individuals: A Proposed

Framework and Method?” 2017 Academy of Business

Research (ABR) Conference in Atlantic City, New Jersey,

September 20, 2017.

7. Y. Allarie and M. Firsirotu, “How to Implement Radical

Strategies in Large Organizations,” Sloan Management

Review 26, no. 3 (Spring 1985): 19. Another excellent

article is P. Shrivastava, “Integrating Strategy Formulation

with Organizational Culture,” Journal of Business Strategy

5, no. 3 (Winter 1985): 103-111.

8. James Brian Quinn, Strategies for Changes: Logical

Incrementalism (Homewood, IL: Irwin, 1980), 128-145.

These political tactics are listed in A. Thompson and

A. Strickland, Strategic Management: Concepts and Cases

(Plano, TX: Business Publications, 1984), 261.

9. William Guth and Ian Macmillan, “Strategy

Implementation versus Middle Management Self-Interest,”

Strategic Management Journal 7, no. 4 (July-August

1986): 321.

228

PART 3

STRATEGY IMPLEMENTATION

Strategy
Formulation

Feedback Loop

Strategy
Implementation

Strategy
Evaluation

Chapter 10: Business Ethics, Environmental Sustainability, and Social Responsibility

Chapter 11: Global and International Issues

Strategy
Evaluation

and
Governance
Chapter 9

Implementing
Strategies:

Finance and
Accounting

Issues
Chapter 8

Implementing
Strategies:

Management
and Marketing

Issues
Chapter 7

Business
Vision and

Mission
Chapter 2

Strategies
in Action
Chapter 5

Strategy
Analysis and

Choice
Chapter 6

The
Internal

Assessment
Chapter 4

The External
Assessment
Chapter 3

FIGURE 7- 1

The Comprehensive, Integrative Strategic-Management Model

Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 1
(February 1989): 91. See also Anik Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and Putu Artama
Wiguna, “Balance Scorecard of David’s Strategic Modeling at Industrial Business for National Construction
Contractor of Indonesia,” Journal of Mathematics and Technology , no. 4 (October 2010): 20.

229

Implementing Strategies:
Management and
Marketing Issues

ASSURANCE-OF-LEARNING EXERCISES

The following exercises are found at the end of this chapter:

SET 1: Strategic Planning for Coca-Cola

EXERCISE 7A: Compare and Contrast Coca-Cola’s Marketing Expenses versus Rival Firms

EXERCISE 7B: Diagram an Existing and Proposed Organizational Chart for Coca-Cola

SET 2: Strategic Planning for My University

EXERCISE 7C: Develop a Perceptual Map for My University

SET 3: Strategic Planning to Enhance My Employability

EXERCISE 7D: Marketing Yourself to Best Achieve Your Career Objectives

SET 4: Individual versus Group Strategic Planning

EXERCISE 7E: What Are the Most Important Benefits of Having a Diverse Workforce?

LEARNING OBJECTIVES

After studying this chapter, you should be able to do the following:

7- 1. Describe the transition from formulating to implementing strategies.

7- 2. Discuss reasons why annual objectives are essential for effective strategy
implementation.

7- 3. Identify and discuss the nature and role of policies in strategy implementation.

7- 4. Explain the roles of resource allocation and managing conflict in strategy
implementation.

7- 5. Discuss the need to match a firm’s structure with its strategy.

7- 6. Identify, diagram, and discuss different types of organizational structure.

7- 7. Identify and discuss 15 do’s and don’ts in constructing organizational charts.

7- 8. Discuss four strategic production/operations issues vital for strategy implementation.

7- 9. Discuss seven strategic human resource issues vital for strategy implementation.

7- 10. Describe key strategic marketing issues vital for implementing strategies.

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