Analysis the specified company‘s strengths and Weaknesses.

Herbalife Nutrition Ltd.

For this assignment, you will analyze this company’s (Internal) Strengths and Weaknesses.You will use the text chapters 1 through 3 as your framework for the analysis, and will incorporate information from external sources including the company and other credible sites. www.herbalife.com

1
Strategic Management
and Strategic
Competitiveness
Studying this chapter should provide
you with the strategic management
knowledge needed to:
Define strategic competitiveness,
strategy, competitive advantage,
above-average returns, and the
strategic management process.
1-2
Describe the competitive landscape
and explain how globalization and
technological changes shape it.
1-3
Use the industrial organization (I/O)
model to explain how firms can
earn above-average returns.
1-4
Use the resource-based model
to explain how firms can earn
above-average returns.
1-5
Describe vision and mission and
discuss their value.
1-6
Define stakeholders and
describe their ability to influence
organizations.
1-7
Describe the work of strategic
leaders.
1-8
Explain the strategic management
process.
© RomanOkopny/Getty Images
1-1
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ALIBABA: AN ONLINE COLOSSUS IN CHINA GOES GLOBAL
Alibaba Drone.PNG
China now has the world’s largest number of internet users and Alibaba is China’s largest
ecommerce company (23 percent owned by Yahoo and 36 percent owned by Japan’s
SoftBank). In 2014, when Alibaba completed its initial public offering (IPO) on the New York
Stock Exchange, it immediately became worth more than Amazon and eBay combined and
has a larger market capitalization than Walmart. Transactions of goods on Alibaba’s websites
account for more than 2 percent of China’s GDP in 2012. Comparatively, Walmart’s sales
account for 0.03 percent of U.S. GDP in 2012. Alibaba’s presence has turned China into the
world’s second largest ecommerce market after the United States. Chinese consumers
purchase products on Tmall, a consumer shopping site on Alibaba analogous to a department
store and similar to Amazon. Because of China’s vast size and underdeveloped consumer
market, it has few national mainland malls or brick and mortar department store chains.
As such, the presence of
Alibaba is stimulating
consumption that would
not otherwise take place
in China. Furthermore,
Alibaba’s presence
changed consumer
buying habits, especially
in third- and fourth-tier
(e.g., smaller and more
geographically remote)
cities because it gives
consumers access to
items that they could
not previously obtain
locally.
Taobao is another
website owned by
Alibaba and is comparable to eBay in the United States. On Taobao, Alibaba does not stock or sell its own goods
but rather provides platforms where manufacturers, resellers, and other middle-men open
online storefronts. Larger consumer branded products prefer Tmall because Alibaba’s policies
promote this site more heavily and fraudulent brands are less likely to be found on this site.
For instance, popular brands such as Prada handbags must provide evidence that they are a
licensed distributor before they are allowed to sell on Tmall. Taobao is more focused on small
sellers; it has 6 million registered sellers with a vast range in size.
Given these two websites, Alibaba is the easiest way for foreign retailers to enter the
Chinese market because it has such reach. Online sales account for 90 percent of marketplace
sales in China, compared with 24 percent for the United States in 2014. Accordingly, Alibaba
provides the easiest way to enter the Chinese market for foreign retailers due the large access
to consumers available through Alibaba’s websites. Alibaba’s websites also give smaller
Chinese manufacturers the opportunity to increase domestic sales because of Alibaba’s reach.
For example, Weighing Apparatus Group, originally a supplier of household and industrial
scales for Bed Bath & Beyond, set up a website on Taobao in 2009. In 2014, one-fifth of its
domestic sales now flow through its Taobao online storefront, allowing it to move beyond
being only a supplier for other firm’s branded products.
Alibaba through its Alipay system is working on a joint venture with Apple to provide
back-end services for the Apple Pay payment system allowing iPhone users in China to pay
for goods with Apple Pay using their Alipay accounts. This approach is fostering an improved
mobile online strategy for Alibaba. It also facilitates better service for online Apple iPhone
users who desire to browse and purchase on Alibaba websites.
Fraudulent goods can be an important strategic issue in China because of previous
product liability suits from banned or recalled goods sold to U.S. consumers.
Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
4
As such, Alibaba is collaborating with the United States Consumer Product Safety Commission
to improve its credibility among U.S. consumers by helping to ban sale of fake and fraudulently
branded or recalled goods. This is also facilitating Alibaba’s global access strategy.
Alibaba is also moving into online media content and streaming video services. In 2014,
it announced its acquisition of ChinaVision Media, producers or co-producers of films including “Crouching Tiger, Hidden Dragon” and “Breaking the Silence.” Just as Amazon and Netflix
are producing their own media content, Alibaba is moving in this direction as well, as it
competes with other service providers such as Tencent and Baidu in web communications and
broadcasting in China. Getting its strategies right in the local domestic Chines market as well
as internationally is key to Alibaba’s success.
Sources: D. Tsuruoka, 2015, Alibaba blocks sale of unsafe goods to U.S. shoppers, Investor’s Business Daily
Daily,
www.investorsbusinessdaily.com, Jan 13; S. Cendrowski, 2014, Alibaba’s Maggie Wu and Lucy Peng: The dynamic duo
behind the IPO, Fortune, www.fortune.com, September 17; R. Flannery, 2014, China media entrepreneur’s fortune
soars on Alibaba investment, Forbes, www.forbes.com, March 12; C. Larson, 2014, In China its meet me at Tmall,
Bloomberg Businessweek
Businessweek, www.bloombergbusinessweek.com, September 11.
A
Strategic competitiveness
is achieved when a firm
successfully formulates and
implements a value creating
strategy.
A strategy is an integrated
and coordinated set of
commitments and actions
designed to exploit core
competencies and gain a
competitive advantage.
A firm has a competitive
advantage when it
implements a strategy
that creates superior value
for customers and that
competitors are unable to
duplicate or find it too costly
to try to imitate.
s we see from the Opening Case, Alibaba is highly successful because its strategy in
China has allowed it to have a massive impact in regard to online sales in a large
emerging economy. It is now seeking to grow globally and gain widespread name/brand
recognition through its 2014 IPO in New York. These attributes have enhanced its ability to compete in global online markets. Therefore, we can conclude that Alibaba has
achieved strategic competitiveness. It clearly has been able to earn above-average returns,
at least, domestically. Yet Alibaba has received its share of criticism because of its perceived contribution to the sale of fraudulent goods. However, it is addressing this issue
through its collaboration with the United States Consumer Product Safety Commission. The top management of Alibaba has used the strategic management process (see
Figure 1.1) as the foundation for the commitments, decisions, and actions they took to
pursue strategic competitiveness and above-average returns. The strategic management
process is fully explained in this book. We introduce you to this process in the next few
paragraphs.
Strategic competitiveness is achieved when a firm successfully formulates and
implements a value-creating strategy. A strategy is an integrated and coordinated set
of commitments and actions designed to exploit core competencies and gain a competitive advantage. When choosing a strategy, firms make choices among competing
alternatives as the pathway for deciding how they will pursue strategic competitiveness.
In this sense, the chosen strategy indicates what the firm will do as well as what the
firm will not do.
As explained in the Opening Case, Alibaba has been a leader in its industry as one
of the most successful facilitators of online sales in China and is now seeking to become
a successful global business. However, in doing so it must respond to its changing environment. In fact, to adapt to local environments, it sometimes makes major changes.
For example, it is coordinating with Apple Pay to improve access for the high number
iPhones that Apple is now selling in China.
A firm has a competitive advantage “when it implements a strategy that creates
superior value for customers and that its competitors are unable to duplicate or find too
costly to imitate.”1 An organization can be confident that its strategy has resulted in one
or more useful competitive advantages only after competitors’ efforts to duplicate its
strategy have ceased or failed. In addition, firms must understand that no competitive
advantage is permanent.2 The speed with which competitors are able to acquire the skills
Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
5
Chapter 1: Strategic Management and Strategic Competitiveness
Figure 1.1 The Strategic Management Process
Analysis
Chapter 2
The External
Environment
Vision
Mission
Chapter 3
The Internal
Organization
Performance
Strategy
Strategy Formulation
Strategy Implementation
Chapter 4
Business-Level
Strategy
Chapter 5
Competitive
Rivalry and
Competitive
Dynamics
Chapter 6
CorporateLevel Strategy
Chapter 10
Corporate
Governance
Chapter 11
Organizational
Structure and
Controls
Chapter 7
Merger and
Acquisition
Strategies
Chapter 8
International
Strategy
Chapter 9
Cooperative
Strategy
Chapter 12
Strategic
Leadership
Chapter 13
Strategic
Entrepreneurship
Strategic
Competitiveness
Above-A
Above-Average
Returns
needed to duplicate the benefits of a firm’s value-creating strategy determines how long
the competitive advantage will last.3
Above-average returns are returns in excess of what an investor expects to earn
from other investments with a similar amount of risk. Risk is an investor’s uncertainty
about the economic gains or losses that will result from a particular investment. The
most successful companies learn how to effectively manage risk.4 Effectively managing
risks reduces investors’ uncertainty about the results of their investment.5 Returns are
often measured in terms of accounting figures, such as return on assets, return on equity,
or return on sales. Alternatively, returns can be measured on the basis of stock market
returns, such as monthly returns (the end-of-the-period stock price minus the beginning stock price divided by the beginning stock price, yielding a percentage return). 6
Above-average returns
are returns in excess of what
an investor expects to earn
from other investments with
a similar amount of risk
Risk is an investor’s
uncertainty about the
economic gains or losses that
will result from a particular
investment.
Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
6
Part 1: Strategic Management Inputs
Average returns are returns
equal to those an investor
expects to earn from other
investments with a similar
amount of risk.
The strategic management
process is the full set of
commitments, decisions,
and actions required for a
firm to achieve strategic
competitiveness and earn
above-average returns.
In smaller, new venture firms, returns are sometimes measured in terms of the amount
and speed of growth (e.g., in annual sales) rather than more traditional profitability measures7 because new ventures require time to earn acceptable returns (in the form of return
on assets and so forth) on investors’ investments.8
Understanding how to exploit a competitive advantage is important for firms seeking
to earn above-average returns.9 Firms without a competitive advantage or that are not
competing in an attractive industry earn, at best, average returns. Average returns are
returns equal to those an investor expects to earn from other investments with a similar
amount of risk. In the long run, an inability to earn at least average returns results first in
decline and, eventually, failure.10 Failure occurs because investors withdraw their investments from those firms earning less-than-average returns.
As previously noted, there are no guarantees of permanent success. Companies that
are prospering must not become overconfident. Research suggests that overconfidence
can lead to excessive risk taking.11 Even considering Apple’s excellent current performance, it still must be careful not to become overconfident and continue its quest to be
the leader for its markets.
The strategic management process is the full set of commitments, decisions, and
actions required for a firm to achieve strategic competitiveness and earn above-average
returns (see Figure 1.1)12. The process involves analysis, strategy and performance (the
A-S-P model—see Figure 1.1). The firm’s first step in the process is to analyze its external environment and internal organization to determine its resources, capabilities, and
core-competencies—on which its strategy likely will be based. Alibaba has established its
dominant position because it has excelled in using this process. The strategy portion of
the model entails strategy formulation and strategy implementation.
With the information gained from external and internal analyses, the firm develops
its vision and mission and formulates one or more strategies. To implement its strategies, the firm takes actions to enact each strategy with the intent of achieving strategic
competitiveness and above-average returns ((performance). Effective strategic actions that
take place in the context of carefully integrated strategy formulation and implementation
efforts result in positive performance. This dynamic strategic management process must
be maintained as ever-changing markets and competitive structures are coordinated with
a firm’s continuously evolving strategic inputs.13
In the remaining chapters of this book, we use the strategic management process
to explain what firms do to achieve strategic competitiveness and earn above-average
returns. We demonstrate why some firms consistently achieve competitive success while
others fail to do so.14 As you will see, the reality of global competition is a critical part
of the strategic management process and significantly influences firms’ performances.15
Indeed, learning how to successfully compete in the globalized world is one of the most
significant challenges for firms competing in the current century.16
Several topics will be discussed in this chapter. First, we describe the current competitive landscape. This challenging landscape is being created primarily by the emergence
of a global economy, globalization resulting from that economy, and rapid technological changes. Next, we examine two models that firms use to gather the information
and knowledge required to choose and then effectively implement their strategies. The
insights gained from these models also serve as the foundation for forming the firm’s
vision and mission. The first model (industrial organization or I/O) suggests that the
external environment is the primary determinant of a firm’s strategic actions. According
to this model, identifying and then operating effectively in an attractive (i.e., profitable)
industry or segment of an industry are the keys to competitive success.17 The second
model (resource-based) suggests that a firm’s unique resources and capabilities are the
critical link to strategic competitiveness.18 Thus, the first model is concerned primarily
Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
7
Chapter 1: Strategic Management and Strategic Competitiveness
with the firm’s external environment, while the second model is concerned primarily
with the firm’s internal organization. After discussing vision and mission, directionsetting statements that influence the choice and use of strategies, we describe the stakeholders that organizations serve. The degree to which stakeholders’ needs can be met
increases when firms achieve strategic competitiveness and earn above-average returns.
Closing the chapter are introductions to strategic leaders and the elements of the strategic
management process.
1-1 The Competitive Landscape
The fundamental nature of competition in many of the world’s industries is changing.
Although financial capital is no longer scarce due to the deep recession, markets are
increasingly volatile.19 Because of this, the pace of change is relentless and ever-increasing.
Even determining the boundaries of an industry has become challenging. Consider, for
example, how advances in interactive computer networks and telecommunications have
blurred the boundaries of the entertainment industry. Today, not only do cable companies
and satellite networks compete for entertainment revenue from television, but telecommunication companies are moving into the entertainment business through significant
improvements in fiber-optic lines.20 More recently, internet only streaming services have
started to compete with cable, satellite, and telecommunication offerings. “Sling TV is
part of a growing wave of offerings expected from tech, telecom and media companies in
the coming year, posing a threat to the established television business, which takes in $170
billion a year. Meanwhile, the streaming outlets of Amazon, Hulu and Netflix continue
to pour resources into developing more robust offerings. Sony, CBS, HBO and others are
starting Internet-only subscription offerings.”21 Interestingly, Netflix and other streaming
content providers such as Amazon are producing their own content; Netflix is producing
repeat series such as “House of Cards,” “Orange Is the New Black,” and “Marco Polo”.22 As
noted in the opening case, Alibaba intends to enter the entertainment business as Netflix
and other content distributors and producers enter international markets.
Other characteristics of the current competitive landscape are noteworthy.
Conventional sources of competitive advantage such as economies of scale and huge
advertising budgets are not as effective as they once were (e.g., due to social media
advertising) in terms of helping firms earn above-average returns. Moreover, the traditional managerial mind-set is unlikely to lead a firm to strategic competitiveness.
Managers must adopt a new mind-set that values flexibility, speed, innovation, integration, and the challenges that evolve from constantly changing conditions.23 The conditions of the competitive landscape result in a perilous business world, one in which
the investments that are required to compete on a global scale are enormous and the
consequences of failure are severe.24 Effective use of the strategic management process
reduces the likelihood of failure for firms as they encounter the conditions of today’s
competitive landscape.
Hypercompetition describes competition that is excessive such that it creates inherent instability and necessitates constant disruptive change for firms in the competitive
landscape.25 Hypercompetition results from the dynamics of strategic maneuvering
among global and innovative combatants.26 It is a condition of rapidly escalating competition based on price-quality positioning, competition to create new know-how and
establish first-mover advantage, and competition to protect or invade established product
or geographic markets.27 In a hypercompetitive market, firms often aggressively challenge
their competitors in the hopes of improving their competitive position and ultimately
their performance.28
Hypercompetition
describes competition that
is excessive such that it
creates inherent instability
and necessitates constant
disruptive change for firms in
the competitive landscape.
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8
Part 1: Strategic Management Inputs
Several factors create hypercompetitive environments and influence the nature of
the current competitive landscape. The emergence of a global economy and technology,
specifically rapid technological change, are the two primary drivers of hypercompetitive
environments and the nature of today’s competitive landscape.
1-1a
A global economy is one
in which goods, services,
people, skills, and ideas move
freely across geographic
borders.
The Global Economy
A global economy is one in which goods, services, people, skills, and ideas move freely
across geographic borders. Relatively unfettered by artificial constraints, such as tariffs, the
global economy significantly expands and complicates a firm’s competitive environment.29
Interesting opportunities and challenges are associated with the emergence of the
global economy.30 For example, the European Union (a group of European countries that
participates in the world economy as one economic unit and operates under one official
currency, the euro) has become one of the world’s largest markets, with 700 million
potential customers. “In the past, China was generally seen as a low-competition market
and a low-cost producer. Today, China is an extremely competitive market in which
local market-seeking multinational corporations (MNCs) must fiercely compete against
other MNCs and against those local companies that are more cost effective and faster in
product development. While China has been viewed as a country from which to source
low-cost goods, lately, many MNCs such as Procter & Gamble (P&G), are actually net
exporters of local management talent; they have been dispatching more Chinese abroad
than bringing foreign expatriates to China.”31 China has become the second-largest
economy in the world, surpassing Japan. India, the world’s largest democracy, has an
economy that also is growing rapidly and now ranks as the fourth largest in the world.32
Simultaneously, many firms in these emerging economies are moving into international
markets and are now regarded as MNCs. This fact is demonstrated by the case of Huawei
Technologies Co. Ltd., a Chinese company that has entered the U.S. market. Barriers
to entering foreign markets still exist and Huawei has encountered several, such as the
inability to gain the U.S. government’s approval for acquisition of U.S. firms. Essentially,
Huawei must build credibility in the U.S. market, and especially build a positive
relationship with stakeholders such as the U.S. government.
The nature of the global economy reflects the realities of a hypercompetitive business environment and challenges individual firms to seriously evaluate the markets in
which they will compete. This is reflected in General Motor’s actions and outcomes.
General Motors sold 3.54 million vehicles in China while selling less in North America,
3.4 million.33 One result of China being the largest domestic sales market is the increased
competition GM now experiences in China from other competitors.
Consider the case of General Electric (GE). Although headquartered in the United
States, GE expects that as much as 60 percent of its revenue growth through 2015 will be
generated by competing in rapidly developing economies (e.g., China and India). The
decision to count on revenue growth in emerging economies instead of in developed
countries such as the United States and in Europe seems quite reasonable in the global
economy. GE achieved significant growth in 2010 partly because of signing contracts for
large infrastructure projects in China and Russia. GE’s Chief Executive Officer (CEO),
Jeffrey Immelt, argues that we have entered a new economic era in which the global economy will be more volatile and that most of the growth will come from emerging economies such as Brazil, China, and India.34 Therefore, GE is investing significantly in these
emerging economies, in order to improve its competitive position in vital geographic
sources of revenue and profitability.
For example, Netflix, a subscription media streaming-video service provider, has
seen its growth slow domestically. In the fourth quarter of 2014, Netflix added 1.9 million
domestic U.S. streaming subscribers, which was down from 2.3 million in the fourth
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9
Chapter 1: Strategic Management and Strategic Competitiveness
M4OS Photos / Alamy
period a year earlier. However, Netflix was
able to add 4.3 streaming customers overall
because foreign markets grew faster than
expected. When this was announced, its
stock price increased 16 percent in afterhours trading. Netflix plans to expand to
over 200 countries by 2017, up from its current 50 countries, while likewise seeking
to stay profitable. Reed Hastings, Netflix’s
CEO, was encouraged by profitable results
in Canada, Nordic countries, and Latin
American countries. This group turned
profitable notwithstanding the significant
investment necessary to bring streaming
Along with its international push, Netflix has expanded its ability to
services to these countries. In the first
allow content to be viewed on many devices (including mobile devices)
part of 2015, the company expects to add
beside regular TVs, as is shown in the photo.
Australia and New Zealand and is exploring entering the Chinese market as well.
Overall, Netflix added over 2.43 million
subscribers outside of the United States, which exceed its expectation of 2.15 million
subscribers. Besides international expansion, Netflix is adding a significant number of
original shows including “House of Cards,” “Orange Is the New Black,” and “Marco Polo.”
It finds that this original content costs less given viewer support compared to licensed
content from major studios. This proprietary content as well as its expansion of licensing
has lured customers away from cable and satellite TV providers. Its superior technology
in providing precisely what consumers want and when they want it provides a domestic
advantage which will carry over into its international expansion push (see Chapter 8
Opening Case for an expansion on Netflix’s international strategy).35
The March of Globalization
Globalization is the increasing economic interdependence among countries and their
organizations as reflected in the flow of goods and services, financial capital, and
knowledge across country borders.36 Globalization is a product of a large number of firms
competing against one another in an increasing number of global economies.
In globalized markets and industries, financial capital might be obtained in one
national market and used to buy raw materials in another. Manufacturing equipment
bought from a third national market can then be used to produce products that are sold
in yet a fourth market. Thus, globalization increases the range of opportunities for companies competing in the current competitive landscape.37
Firms engaging in globalization of their operations must make culturally sensitive
decisions when using the strategic management process, as is the case in Starbucks’
operations in European countries. Additionally, highly globalized firms must anticipate
ever-increasing complexity in their operations as goods, services, people, and so forth
move freely across geographic borders and throughout different economic markets.
Overall, it is important to note that globalization has led to higher performance standards in many competitive dimensions, including those of quality, cost, productivity,
product introduction time, and operational efficiency. In addition to firms competing in
the global economy, these standards affect firms competing on a domestic-only basis. The
reason that customers will purchase from a global competitor rather than a domestic firm
is that the global company’s good or service is superior. Workers now flow rather freely
among global economies, and employees are a key source of competitive advantage.38
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10
Part 1: Strategic Management Inputs
Thus, managers have to learn how to operate effectively in a “multi-polar” world with
many important countries having unique interests and environments.39 Firms must learn
how to deal with the reality that in the competitive landscape of the twenty-first century,
only companies capable of meeting, if not exceeding, global standards typically have the
capability to earn above-average returns.
Although globalization offers potential benefits to firms, it is not without risks.
Collectively, the risks of participating outside of a firm’s domestic markets in the global
economy are labeled a “liability of foreignness.”40 One risk of entering the global market
is the amount of time typically required for firms to learn how to compete in markets that
are new to them. A firm’s performance can suffer until this knowledge is either developed
locally or transferred from the home market to the newly established global location.41
Additionally, a firm’s performance may suffer with substantial amounts of globalization.
In this instance, firms may over diversify internationally beyond their ability to manage
these extended operations.42 Over diversification can have strong negative effects on a
firm’s overall performance.
A major factor in the global economy in recent years has been the growth in
the influence of emerging economies. The important emerging economies include
not only the BRIC countries (Brazil, Russia, India, and China) but also the VISTA
countries (Vietnam, Indonesia, South Africa, Turkey, and Argentina). Mexico and
Thailand have also become increasingly important markets.43 Obviously, as these economies have grown, their markets have become targets for entry by large multinational
firms. Emerging economy firms have also began to compete in global markets, some
with increasing success.44 For example, there are now more than 1,000 multinational
firms home-based in emerging economies with more than $1 billion in annual sales.45
In fact, the emergence of emerging-market MNCs in international markets has forced
large MNCs based in developed markets to enrich their own capabilities to compete
effectively in global markets.46
Thus, entry into international markets, even for firms with substantial experience in
the global economy, requires effective use of the strategic management process. It is also
important to note that even though global markets are an attractive strategic option for
some companies, they are not the only source of strategic competitiveness. In fact, for
most companies, even for those capable of competing successfully in global markets, it is
critical to remain committed to and strategically competitive in both domestic and international markets by staying attuned to technological opportunities and potential competitive disruptions that innovations create.47 As illustrated in the Strategic Focus, Starbucks
has increased its revenue per store through an emphasis on innovation in addition to its
international expansion.
1-1b Technology and Technological Changes
Technology-related trends and conditions can be placed into three categories: technology
diffusion and disruptive technologies, the information age, and increasing knowledge
intensity. These categories are significantly altering the nature of competition and as a
result contributing to highly dynamic competitive environments.
Technology Diffusion and Disruptive Technologies
The rate of technology diffusion, which is the speed at which new technologies become
available and are used, has increased substantially over the past 15 to 20 years. Consider
the following rates of technology diffusion:
It took the telephone 35 years to get into 25 percent of all homes in the United States. It took
TV 26 years. It took radio 22 years. It took PCs 16 years. It took the Internet 7 years.48
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Chapter 1: Strategic Management and Strategic Competitiveness
Strategic Focus
Starbucks Is “Juicing” Its Earnings per Store through Technological Innovations
coffee roasting facility and also a consumer retail outlet. According
to Schultz, it’s a retail theater where “you can watch beans being
roasted, talk to master grinders, have your drink brewed in front of
you in multiple ways, lounge in a coffee library, order a selection
of gourmet brews and locally prepared foods.” Schultz calls this
store in New York the “Willie Wonka Factory of coffee.” Based on
this concept, Starbucks will open small “reserve” stores inspired by
this flagship roastery concept across New York in 2015.
These technology advances and different store offerings
are also taking place internationally. For example, Starbucks is
expanding a new store concept in India and it’s debuting this
new concept store in smaller towns and suburbs. These new
outlets are about half the size of existing Starbuck cafes in India.
Kevin Schafer/Getty Images
An important signal for a company is who is chosen as the
new CEO. Howard Schultz of Starbucks has led the company
through successful strategic execution over much of its history.
In 2015, Kevin Johnson, a former CEO of Juniper Networks and
16 year veteran of Microsoft took over as CEO of Starbucks,
succeeding Schultz. Johnson has engaged with the company’s
digital operations and will supervise information technology
and supply chain operations.
Many brick and mortar stores have experienced decreasing sales in the United States as online traffic has increased.
Interestingly, 2014 Starbuck sales store operations have risen
5 percent in the fourth quarter; this 5 percent came from
increased traffic (2 percent from growth in sales and 3 percent
in increased ticket size). The driver of this increase in sales is
mainly an increase in technology applications.
To facilitate this increase in sales per store, Starbucks is
ramping up its digital tools such as mobile-payment platforms.
Furthermore, it has ramped up online sales of gift cards as a
way to drive revenue. In December 2014, it allowed customers to place online orders and pick them up in about 150
Starbucks outlets in the Portland, Oregon area. Besides leadership and a focus on technology, Starbucks receives suggestions, ideas, and experimentation from its employees. Starbucks
employees, called baristas, are seen as partners who blend,
steam, and brew the brand’s specialty coffee in over 21,000
stores worldwide. Schultz credits the employees as a dominant
force in helping it to build its revenue gains.
To further incentivize employees, Starbucks was one of
the first to provide comprehensive health benefits and stock
option ownership to part-time employees. Currently, employees have received more than $1 billion worth of financial gain
through the stock option program. As an additional perk for
U.S. employees, Schultz created a program to pay 100 percent
of workers’ tuition to finish their degrees through Arizona State
University. To date, 1,000 workers have enrolled in this program.
Starbucks is also known for its innovations in new types of
stores. For instance, it is testing smaller express stores in New York
City that reduce client wait times. As noted earlier, Starbucks has
emphasized online payment in its approaches which facilitates the
speed of transaction. It now gives Starbucks rewards for mobile
payment applications to its 12 million active users. Interestingly,
this puts it ahead of iTunes and American Express Serve with
its Starbucks mobile payment app in regard to number of users.
To put its innovation on display, Starbucks opened its first
“Reserve Roastery and Tasting Room.” This is a 15,000 square foot
The photo illustrates the Starbuck’s app that allows customers to pre-order and speed service and payment.
Sources: I. Brat & T. Stynes, 2015, Earnings: Starbucks picks a president from
technology industry, Wall Street Journal, www.wsj.com, January 23; A. Adamczyk,
2014, The next big caffeine craze? Starbucks testing cold-brewed coffee, Forbes,
www.forbes.com, August 18; R. Foroohr, 2014, Go inside Starbucks’ wild new “Willie
Wonka Factory of coffee”, Time, www.time.com, December 8; FRPT-Retail Snapshot,
2014, Starbucks’ strategy of expansion with profitability: to debut in towns and
suburbs with half the size of the new stores, FRPT-Retail Snapshot
Snapshot, September 28,
9–10; L. Lorenzetti, 2014, Fortune’s world most admired companies: Starbucks where
innovation is always brewing, Fortune, www.fortune.com, October 30; P. Wahba,
2014, Starbucks to offer delivery in 2015 in some key markets, Fortune, www.fortune.
com, November 4; V. Wong, 2014, Your boss will love the new Starbucks delivery
service, Bloomberg Businessweek
Businessweek, www.businessweek.com, November 3.
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Part 1: Strategic Management Inputs
The impact of technological changes on individual firms and industries has been
broad and significant. For example, in the not-too-distant past, people rented movies on
videotapes at retail stores. Now, movie rentals are almost entirely electronic. The publishing industry (books, journals, magazines, newspapers) is moving rapidly from hard copy
to electronic format. Many firms in these industries, operating with a more traditional
business model, are suffering. These changes are also affecting other industries, from
trucking to mail services (public and private).
Perpetual innovation is a term used to describe how rapidly and consistently new,
information-intensive technologies replace older ones. The shorter product life cycles
resulting from these rapid diffusions of new technologies place a competitive premium on being able to quickly introduce new, innovative goods and services into the
marketplace.49
In fact, when products become somewhat indistinguishable because of the widespread and rapid diffusion of technologies, speed to market with innovative products may
be the primary source of competitive advantage (see Chapter 5).50 Indeed, some argue
that the global economy is increasingly driven by constant innovations. Not surprisingly,
such innovations must be derived from an understanding of global standards and expectations of product functionality. Although some argue that large established firms may
have trouble innovating, evidence suggests that today these firms are developing radically
new technologies that transform old industries or create new ones.51 Apple is an excellent
example of a large established firm capable of radical innovation. Also, in order to diffuse
the technology and enhance the value of an innovation, firms need to be innovative in
their use of the new technology, building it into their products.52
Another indicator of rapid technology diffusion is that it now may take only 12 to
18 months for firms to gather information about their competitors’ research and development (R&D) and product decisions.53 In the global economy, competitors can sometimes imitate a firm’s successful competitive actions within a few days. In this sense, the
rate of technological diffusion has reduced the competitive benefits of patents.54 Today,
patents may be an effective way of protecting proprietary technology in a small number
of industries such as pharmaceuticals. Indeed, many firms competing in the electronics
industry often do not apply for patents to prevent competitors from gaining access to
the technological knowledge included in the patent application.
Disruptive technologies—technologies that destroy the value of an existing technology and create new markets55—surface frequently in today’s competitive markets. Think
of the new markets created by the technologies underlying the development of products
such as iPods, iPads, Wi-Fi, and the web browser. These types of products are thought by
some to represent radical or breakthrough innovations (we discuss more about radical
innovations in Chapter 13.).56 A disruptive or radical technology can create what is essentially a new industry or can harm industry incumbents. However, some incumbents are
able to adapt based on their superior resources, experience, and ability to gain access to
the new technology through multiple sources (e.g., alliances, acquisitions, and ongoing
internal research).57
Clearly, Apple has developed and introduced “disruptive technologies” such as the
iPhone and iPod, and in so doing changed several industries. For example, the iPhone
dramatically changed the cell phone industry, and the iPod and its complementary iTunes
revolutionized how music is sold to and used by consumers. In conjunction with other
complementary and competitive products (e.g., Amazon’s Kindle), Apple’s iPad is contributing to and speeding major changes in the publishing industry, moving from hard
copies to electronic books. Apple’s new technologies and products are also contributing
to the new “information age.” Thus, Apple provides an example of entrepreneurship
through technology emergence across multiple industries.58
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Chapter 1: Strategic Management and Strategic Competitiveness
The Information Age
Dramatic changes in information technology (IT) have occurred in recent years. Personal
computers, cellular phones, artificial intelligence, virtual reality, massive databases (“big
data”), and multiple social networking sites are only a few examples of how information
is used differently as a result of technological developments. An important outcome of
these changes is that the ability to effectively and efficiently access and use information.
IT has become an important source of competitive advantage in virtually all industries.
The Internet and IT advances have given small firms more flexibility in competing with
large firms, if the technology is used efficiently.59
Both the pace of change in IT and its diffusion will continue to increase. For instance,
the number of personal computers in use globally is expected to surpass 2.3 billion by 2015.
More than 372 million were sold globally in 2011. This number is expected to increase to
about 518 million in 2015.60 The declining costs of IT and the increased accessibility to
them are also evident in the current competitive landscape. The global proliferation of
relatively inexpensive computing power and its linkage on a global scale via computer
networks combine to increase the speed and diffusion of IT. Thus, the competitive potential of IT is now available to companies of all sizes throughout the world, including those
in emerging economies.61
Increasing Knowledge Intensity
Knowledge (information, intelligence, and expertise) is the basis of technology and its
application. In the competitive landscape of the twenty-first century, knowledge is a critical organizational resource and an increasingly valuable source of competitive advantage.62
Indeed, starting in the 1980s, the basis of competition shifted from hard assets to
intangible resources. For example, “Walmart transformed retailing through its proprietary approach to supply chain management and its information-rich relationships with
customers and suppliers.”63 Relationships with customers and suppliers are an example of
an intangible resource which needs to be managed.64
Knowledge is gained through experience, observation, and inference and is an intangible resource (tangible and intangible resources are fully described in Chapter 3). The
value of intangible resources, including knowledge, is growing as a proportion of total
shareholder value in today’s competitive landscape.65 In fact, the Brookings Institution
estimates that intangible resources contribute approximately 85 percent of total shareholder value.66 The probability of achieving strategic competitiveness is enhanced for
the firm that develops the ability to capture intelligence, transform it into usable knowledge, and diffuse it rapidly throughout the company.67 Therefore, firms must develop
(e.g., through training programs) and acquire (e.g., by hiring educated and experienced
employees) knowledge, integrate it into the organization to create capabilities, and then
apply it to gain a competitive advantage.68
A strong knowledge-base is necessary to create innovations. In fact, firms lacking the
appropriate internal knowledge resources are less likely to invest money in R&D.69 Firms
must continue to learn (building their knowledge-base) because knowledge spillovers to
competitors are common. There are several ways in which knowledge spillovers occur,
including the hiring of professional staff and managers by competitors.70 Because of the
potential for spillovers, firms must move quickly to use their knowledge in productive
ways. In addition, firms must build routines that facilitate the diffusion of local knowledge throughout the organization for use everywhere that it has value.71 Firms are better
able to do these things when they have strategic flexibility.
Strategic flexibility is a set of capabilities used to respond to various demands and
opportunities existing in a dynamic and uncertain competitive environment. Thus,
strategic flexibility involves coping with uncertainty and its accompanying risks.72
Strategic flexibility is a
set of capabilities used to
respond to various demands
and opportunities existing
in a dynamic and uncertain
competitive environment.
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Part 1: Strategic Management Inputs
Firms should try to develop strategic flexibility in all areas of their operations. However,
those working within firms to develop strategic flexibility should understand that the task
is not easy, largely because of inertia that can build up over time. A firm’s focus and past
core competencies may actually slow change and strategic flexibility.73
To be strategically flexible on a continuing basis and to gain the competitive benefits of such flexibility, a firm has to develop the capacity to learn. Continuous learning
provides the firm with new and up-to-date skill sets, which allow it to adapt to its environment as it encounters changes.74 Firms capable of rapidly and broadly applying what
they have learned exhibit the strategic flexibility and the capacity to change in ways that
will increase the probability of successfully dealing with uncertain, hypercompetitive
environments.
1-2 The I/O Model of Above-Average
Returns
From the 1960s through the 1980s, the external environment was thought to be the
primary determinant of strategies that firms selected to be successful.75 The industrial
organization (I/O) model of above-average returns explains the external environment’s
dominant influence on a firm’s strategic actions. The model specifies that the industry or
segment of an industry in which a company chooses to compete has a stronger influence
on performance than do the choices managers make inside their organizations.76 The
firm’s performance is believed to be determined primarily by a range of industry properties, including economies of scale, barriers to market entry, diversification, product dif
differentiation, the degree of concentration of firms in the industry, and market frictions.77
We examine these industry characteristics in Chapter 2.
Grounded in economics, the I/O model has four underlying assumptions. First, the
external environment is assumed to impose pressures and constraints that determine
the strategies that would result in above-average returns. Second, most firms competing
within an industry or within a segment of that industry are assumed to control similar
strategically relevant resources and to pursue similar strategies in light of those resources.
Third, resources used to implement strategies are assumed to be highly mobile across
firms, so any resource differences that might develop between firms will be short-lived.
Fourth, organizational decision makers are assumed to be rational and committed to
acting in the firm’s best interests, as shown by their profit-maximizing behaviors.78 The
I/O model challenges firms to find the most attractive industry in which to compete.
Because most firms are assumed to have similar valuable resources that are mobile across
companies, their performance generally can be increased only when they operate in the
industry with the highest profit potential and learn how to use their resources to implement the strategy required by the industry’s structural characteristics. To do so, they must
imitate each other.79
The five forces model of competition is an analytical tool used to help firms find the
industry that is the most attractive for them. The model (explained in Chapter 2) encompasses several variables and tries to capture the complexity of competition. The five forces
model suggests that an industry’s profitability (i.e., its rate of return on invested capital
relative to its cost of capital) is a function of interactions among five forces: suppliers,
buyers, competitive rivalry among firms currently in the industry, product substitutes,
and potential entrants to the industry.80
Firms use the five forces model to identify the attractiveness of an industry (as
measured by its profitability potential) as well as the most advantageous position
for the firm to take in that industry, given the industry’s structural characteristics.81
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Chapter 1: Strategic Management and Strategic Competitiveness
Figure 1.2 The I/O Model of Above-Average Returns
1. Study the external
environment, especially
the industry environment.
2. Locate an industry with
high potential for aboveaverage returns.
The External Environment
An Attractive Industry
characteristics suggest aboveaverage returns
3. Identify the strategy called
for by the attractive
industry to earn aboveaverage returns.
Strategy Formulation
4. Develop or acquire assets
and skills needed to
implement the strategy.
Assets and Skills
5. Use the firm’s strengths (its
developed or acquired assets
and skills) to implement
the strategy.
Strategy Implementation
above-average returns in a
particular industry
implement a chosen strategy
with effective implementation of
the chosen strategy
Superior Returns
returns
Typically, the model suggests that firms can earn above-average returns by producing
either standardized goods or services at costs below those of competitors (a cost leadership strategy) or by producing differentiated goods or services for which customers are
willing to pay a price premium (a differentiation strategy). The cost leadership and product differentiation strategies are discussed more fully in Chapter 4. The fact that the fast
food industry faces “higher commodity costs, fiercer competition, a restaurant industry
showing little to no growth, and a strapped lower-income consumer,”82 suggests that fast
food giant McDonald’s is competing in a relatively unattractive industry.
As shown in Figure 1.2, the I/O model suggests that above-average returns are earned
when firms are able to effectively study the external environment as the foundation for
identifying an attractive industry and implementing the appropriate strategy. For example, in some industries, firms can reduce competitive rivalry and erect barriers to entry
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Part 1: Strategic Management Inputs
by forming joint ventures. Because of these outcomes, the joint ventures increase profitability in the industry.83 Companies that develop or acquire the internal skills needed to
implement strategies required by the external environment are likely to succeed, while
those that do not are likely to fail.84 Hence, this model suggests that returns are determined primarily by external characteristics rather than by the firm’s unique internal
resources and capabilities.
Research findings support the I/O model because approximately 20 percent of a firm’s
profitability is explained by the industry in which it chooses to compete. However, this
research also shows that 36 percent of the variance in firm profitability can be attributed
to the firm’s characteristics and actions.85 Thus, managers’ strategic actions affect the firm’s
performance in addition to or in conjunction with external environmental influences.86
These findings suggest that the external environment and a firm’s resources, capabilities,
core competencies, and competitive advantages (see Chapter 3) influence the company’s
ability to achieve strategic competitiveness and earn above-average returns.
Most of the firms in the airline industry are similar in services offered and in performance. They largely imitate each other and have performed poorly over the years. The
few airlines which have not followed in the mode of trying to imitate others, such as
Southwest Airlines, have developed unique and valuable resources and capabilities on
which they have relied to provide a superior product (better service at a lower price) than
major rivals.
As shown in Figure 1.2, the I/O model assumes that a firm’s strategy is a set of commitments and actions flowing from the characteristics of the industry in which the firm
has decided to compete. The resource-based model, discussed next, takes a different view
of the major influences on a firm’s choice of strategy.
1-3 The Resource-Based Model of
Above-Average Returns
Resources are inputs into
a firm’s production process,
such as capital equipment,
the skills of individual
employees, patents, finances,
and talented managers.
A capability is the capacity
for a set of resources to
perform a task or an activity in
an integrative manner.
Core competencies are
capabilities that serve as
a source of competitive
advantage for a firm over
its rivals.
The resource-based model of above-average returns assumes that each organization
is a collection of unique resources and capabilities. The uniqueness of its resources
and capabilities is the basis of a firm’s strategy and its ability to earn above-average
returns.87
Resources are inputs into a firm’s production process, such as capital equipment,
the skills of individual employees, patents, finances, and talented managers. In general,
a firm’s resources are classified into three categories: physical, human, and organizational capital. Described fully in Chapter 3, resources are either tangible or intangible
in nature.
Individual resources alone may not yield a competitive advantage.88 In fact, resources
have a greater likelihood of being a source of competitive advantage when they are formed
into a capability. A capability is the capacity for a set of resources to perform a task or
an activity in an integrative manner.89 Core competencies are capabilities that serve as a
source of competitive advantage for a firm over its rivals.90 Core competencies are often
visible in the form of organizational functions. For example, Apple’s R&D function is one
of its core competencies, as its ability to produce innovative new products that are perceived as valuable in the marketplace, is a critical reason for Apple’s success.
According to the resource-based model, differences in firms’ performances across
time are due primarily to their unique resources and capabilities rather than the industry’s
structural characteristics. This model also assumes that firms acquire different resources
and develop unique capabilities based on how they combine and use the resources; that
resources and certainly capabilities are not highly mobile across firms; and that the
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Chapter 1: Strategic Management and Strategic Competitiveness
differences in resources and capabilities are the basis of competitive advantage.91 Through
continued use, capabilities become stronger and more difficult for competitors to understand and imitate. As a source of competitive advantage, a capability must not be easily
imitated but also not too complex to understand and manage.92
The resource-based model of superior returns is shown in Figure 1.3. This model suggests that the strategy the firm chooses should allow it to use its competitive advantages
in an attractive industry (the I/O model is used to identify an attractive industry).
Not all of a firm’s resources and capabilities have the potential to be the foundation
for a competitive advantage. This potential is realized when resources and capabilities
are valuable, rare, costly to imitate, and non-substitutable.93 Resources are valuable when
they allow a firm to take advantage of opportunities or neutralize threats in its external
environment. They are rare when possessed by few, if any, current and potential competitors. Resources are costly to imitate when other firms either cannot obtain them or are at a
Figure 1.3 The Resource-Based Model of Above-Average Returns
1. Identify the firm’s resources.
Study its strengths and
weaknesses compared with
those of competitors.
2. Determine the firm’s
capabilities. What do the
capabilities allow the firm
to do better than its
competitors?
3. Determine the potential
of the firm’s resources
and capabilities in terms of
a competitive advantage.
4. Locate an attractive
industry.
5. Select a strategy that best
allows the firm to utilize
its resources and capabilities
relative to opportunities in
the external environment.
Resources
process
Capability
resources to integratively perform
a task or activity
Competitive Advantage
its rivals
An Attractive Industry
that can be exploited by the
firm’s resources and capabilities
Strategy Formulation and
Implementation
average returns
Superior Returns
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Part 1: Strategic Management Inputs
cost disadvantage in obtaining them compared with the firm that already possesses them.
And they are non-substitutable when they have no structural equivalents. Many resources
can either be imitated or substituted over time. Therefore, it is difficult to achieve and
sustain a competitive advantage based on resources alone. Individual resources are often
integrated to produce configurations in order to build capabilities. These capabilities are
more likely to have these four attributes.94 When these four criteria are met, however,
resources and capabilities become core competencies.
As noted previously, research shows that both the industry environment and a firm’s
internal assets affect that firm’s performance over time.95 Thus, to form a vision and
mission, and subsequently to select one or more strategies and determine how to implement them, firms use both the I/O and resource-based models.96 In fact, these models complement each other in that one (I/O) focuses outside the firm while the other
(resource-based) focuses inside the firm. Next, we discuss the formation of a firm’s
vision and mission—actions taken after the firm understands the realities of its external
environment (Chapter 2) and internal organization (Chapter 3).
1-4 Vision and Mission
After studying the external environment and the internal organization, the firm has the
information it needs to form its vision and a mission (see Figure 1.1). Stakeholders (those
who affect or are affected by a firm’s performance, as explained later in the chapter) learn
a great deal about a firm by studying its vision and mission. Indeed, a key purpose of
vision and mission statements is to inform stakeholders of what the firm is, what it seeks
to accomplish, and who it seeks to serve.
1-4a
Vision
Vision is a picture of what the firm wants to be and, in broad terms, what it wants to
ultimately achieve.97 Thus, a vision statement articulates the ideal description of an organization and gives shape to its intended future. In other words, a vision statement points
the firm in the direction of where it would like to be in the years to come. An effective
vision stretches and challenges people as well. In her book about Steve Jobs, Apple’s phenomenally successful CEO, Carmine Gallo argues that one of the reasons that Apple
is so innovative was Jobs’ vision for the company. She suggests that he thought bigger
and differently than most people. To be innovative, she explains that one has to think
differently about the firm’s products and customers—“sell dreams not products”—and
differently about the story to “create great expectations.”98 With Steve Jobs’ death, Apple
will be challenged to remain highly innovative. Interestingly, similar to Jobs, many new
entrepreneurs are highly optimistic when they develop their ventures.99 However, very
few are able to develop and successfully implement a vision in the manner that Jobs did.
It is also important to recognize that vision statements reflect a firm’s values and aspirations and are intended to capture the heart and mind of each employee and, hopefully,
many of its other stakeholders. A firm’s vision tends to be enduring while its mission
can change with new environmental conditions. A vision statement tends to be relatively
short and concise, making it easily remembered. Examples of vision statements include
the following:
Vision is a picture of what
the firm wants to be and, in
broad terms, what it wants to
ultimately achieve.
Our vision is to be the world’s best quick service restaurant. (McDonald’s)
To make the automobile accessible to every American. (Ford Motor Company’s vision when
established by Henry Ford)
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Chapter 1: Strategic Management and Strategic Competitiveness
As a firm’s most important and prominent strategic leader, the CEO is responsible for
working with others to form the firm’s vision. Experience shows that the most effective
vision statement results when the CEO involves a host of stakeholders (e.g., other top-level
managers, employees working in different parts of the organization, suppliers, and customers) to develop it. In short, they need to develop a clear and shared vision for it to be successful.100 In addition, to help the firm reach its desired future state, a vision statement should be
clearly tied to the conditions in the firm’s external environment and internal organization.
Moreover, the decisions and actions of those involved with developing the vision, especially
the CEO and the other top-level managers, must be consistent with that vision.
1-4b Mission
The vision is the foundation for the firm’s mission. A mission specifies the businesses in which the film intends to compete and the customers it intends to serve.101
The firm’s mission is more concrete than its vision. However, similar to the vision, a
mission should establish a firm’s individuality and should be inspiring and relevant
to all stakeholders.102 Together, the vision and mission provide the foundation that
the firm needs to choose and implement one or more strategies. The probability of
forming an effective mission increases when employees have a strong sense of the
ethical standards that guide their behaviors as they work to help the firm reach its
vision.103 Thus, business ethics are a vital part of the firm’s discussions to decide what
it wants to become (its vision) as well as who it intends to serve and how it desires to
serve those individuals and groups (its mission).104
Even though the final responsibility for forming the firm’s mission rests with the
CEO, the CEO and other top-level managers often involve more people in developing the
mission. The main reason for this is that the mission deals more directly with product
markets and customers, and middle- and first-level managers and other employees have
more direct contact with customers and the markets in which they serve. Examples of
mission statements include the following:
Be the best employer for our people in each community around the world and deliver operational excellence to our customers in each of our restaurants. (McDonald’s)
Our mission is to be recognized by our customers as the leader in applications engineering.
We always focus on the activities customers’ desire; we are highly motivated and strive to
advance our technical knowledge in the areas of material, part design and fabrication technology. (LNP, a GE Plastics Company)
McDonald’s mission statement flows from its vision of being the world’s best
quick-service restaurant. LNP’s mission statement describes the business areas (material,
part design, and fabrication technology) in which the firm intends to compete.
Clearly, vision and mission statements that are poorly developed do not provide the
direction a firm needs to take appropriate strategic actions. Still, as shown in Figure
1.1, a firm’s vision and mission are critical aspects of the analysis and the base required
to engage in strategic actions that help to achieve strategic competitiveness and earn
above-average returns. Therefore, firms must accept the challenge of forming effective
vision and mission statements.
1-5 Stakeholders
Every organization involves a system of primary stakeholder groups with whom it
establishes and manages relationships.105 Stakeholders are the individuals, groups,
A mission specifies the
businesses in which the firm
intends to compete and the
customers it intends to serve.
Stakeholders are the
individuals, groups, and
organizations that can affect
the firm’s vision and mission,
are affected by the strategic
outcomes achieved, and have
enforceable claims on the
firm’s performance.
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Part 1: Strategic Management Inputs
Strategic Focus
The Failure of BlackBerry to Develop an Ecosystem of Stakeholders
Even now BlackBerry has not been able to create the type
of stakeholder ecosystem comparable to those of Apple and
Google.
Since 2010 BlackBerry has had two new CEOs and,
although there are improvements, the firm has never recovered. Although BlackBerry has tried to focus on the business
and government sectors using its classic look with physical keyboard, it still had a 34 percent drop in revenue in
fourth quarter of 2014. The reviews of its latest product, the
BlackBerry Classic, note that although consumers are likely
to appreciate the retro feel of the device because of the perfected physical keyboard and mouse-like track pad, preloaded
apps are slow and poorly designed. The app situation is problematic because BlackBerry doesn’t have the number of app
developers of the Apple or Google ecosystems. Many of the
apps that you do find are difficult to download and often do
not resize to fit the Classics’ square screen well. As such you
get a real physical keyboard to help with emails, manage your
calendar, and browse the web, but few other good software
© Bloomua/Shutterstock.com
In 2007 the Apple iPhone was introduced as a consumer
product which became known as the smartphone. At the
time, the dominant player in this category was Research in
Motion (RIM) and later known as BlackBerry. As late as 2010,
BlackBerry held 43 percent of the commercial and government communication sectors. As consumers, including the
business and government segments, found the smartphone
to be superior as far as utility, BlackBerry’s market share began
to decrease precipitously. Although BlackBerry’s technology
allowed it to be a superior communication device for email
and phone, the iPhone was superior as a handheld computer
device, including communication and messaging, with much
more versatility.
BlackBerry’s demise provides an informed example of
how the competitive landscape has changed in regard to
successful business model implementation. Previously,
having a good product or service and well run cost-effective
company with sound capital structure was sufficient. With
newer business models, having an effective strategy to manage the ecosystem or network of suppliers and customers
has become more salient. Because BlackBerry had remarkably loyal customers and a strong product it failed to recognize the importance of Apple’s ecosystem innovation, which
allowed it to expand and diversify its range of applications
for its handheld computer (smartphone). In particular, complementors to the industry (a concept explored in Chapter 2)
were key; the innovation for Apple was its ecosystem of app
developers. Apple not only focused on the value chain of
making the iPhone and iPad, but it also focused on managing the ecosystem of creating valuable apps. As a result, an
army of software developers were committed to producing iPhone applications, was behind the development of
Apple’s device for the general consumer and for business
professionals. They created a network of stakeholders and
facilitated a way to make it easy to install apps on the phone.
App developers responded in huge numbers. When the app
store launched in 2008, there were 500 apps. Within a year
there were 55,000 apps and over a billion downloads. This
was the significant difference between the small development community focused on BlackBerry and the massive
development community that arose around applications for
the iPhone. The “open” system strategy approach used by
Google in fostering the Android system allowed a competitive ecosystem to develop that rivaled that of the iPhone.
Both the iPhone and Android systems have more fully
developed app ecosystems than Blackberry, which
has limited Blackberry’s success.
applications. Although this is the Classic is the best model ever
released, it is expected that BlackBerry will continue to decline
due to the lack of quality apps such as the ones found in its
competitors’ ecosystems.
Apple was able to outsource innovation to more
developers than it could afford to employ thereby ensuring
a steady stream of desirable new applications and content.
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Chapter 1: Strategic Management and Strategic Competitiveness
Transparent revenue sharing for these developers and a few
early app millionaires created incentive at negligible expense.
On the other hand, BlackBerry restricted its development
community and could not hope to innovate fast enough to
compete with the iPhone’s positive feedback loop accruing
value to customers, innovators, and content providers,
resulting in profitable market share which drew capital
market players as well.
In summary, BlackBerry’s big failure was that it did not pay
attention to the complementary software that became available
on other ecosystems. A big lesson here is that managing supplier and stakeholder value creation also creates strong support
from customers because it creates value for the all stakeholders
and likewise draws financial capital and an associated increasing
stock price.
Sources: S. Cojocaru & C. Cojocaru, 2014, New trends in mobile technology
leadership, Manager
Manager, 19(1): 79–89; M. Cording, J. S. Harrison, R. E. Hoskisson, &
K. Jonsen, 2014, “Walking the talk”: A multi-stakeholder exploration of organizational authenticity, employee productivity and post-merger performance, Academy
of Management Perspectives, 28(1): 38–56; B. Dummit, 2014, BlackBerry’s revenue
falls 34%; decline underscores challenges smartphone maker faces, even as it
cuts costs, Wall Street Journal, www.wsj.com, Dec 20; M. Freer, 2014, Four success
strategies from failed business models, Forbes, www.forbes.com, Jul 21; D. Gallagher,
2014, BlackBerry’s new plan could bear fruit; attempt at revival is showing signs of
life, Wall Street Journal, www.wsj.com, Nov 16; D. Reisinger, 2014, Why BlackBerry is
showing signs of stability under CEO John Chin, eWeek, www.eweek.com,
Dec 22; M. G. Jacobides, 2013, BlackBerry forgot to manage the ecosystem,
Business Strategy Review
Review, 24(4), 8; B. Matichuk, 2013, BlackBerry’s business
model led to its failure, Troy Media, www.troymedia.com, Oct 1.
and organizations that can affect the firm’s vision and mission, are affected by the
strategic outcomes achieved, and have enforceable claims on the firm’s performance.106 Claims on a firm’s performance are enforced through the stakeholders’
ability to withhold participation essential to the organization’s survival, competitiveness, and profitability.107 Stakeholders continue to support an organization when
its performance meets or exceeds their expectations.108 Also, research suggests that
firms that effectively manage stakeholder relationships outperform those that do not.
Stakeholder relationships and the firm’s overall reputation among stakeholders can
therefore be a source of competitive advantage.109 This can be illustrated through the
application of a strong stakeholder strategy in the comparison between BlackBerry’s
and Apple’s ecosystem of stakeholders in the strategic focus. BlackBerry was unable
to develop a strong set of application suppliers compared to the Apple ecosystem of
app supplier stakeholders.110
Although organizations have dependency relationships with their stakeholders,
they are not equally dependent on all stakeholders at all times. As a consequence,
not every stakeholder has the same level of influence.111 The more critical and valued
a stakeholder’s participation, the greater a firm’s dependency on it. Greater dependence, in turn, gives the stakeholder more potential influence over a firm’s commitments, decisions, and actions. Managers must find ways to either accommodate
or insulate the organization from the demands of stakeholders controlling critical
resources.112
1-5a
Classifications of Stakeholders
The parties involved with a firm’s operations can be separated into at least three groups.113
As shown in Figure 1.4, these groups are the capital market stakeholders (shareholders
and the major suppliers of a firm’s capital), the product market stakeholders (the firm’s
primary customers, suppliers, host communities, and unions representing the workforce), and the organizational stakeholders (all of a firm’s employees, including both nonmanagerial and managerial personnel).
Each stakeholder group expects those making strategic decisions in a firm to provide the leadership through which its valued objectives will be reached.114 The objectives of the various stakeholder groups often differ from one another, sometimes placing
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Part 1: Strategic Management Inputs
Figure 1.4 The Three Stakeholder Groups
People who are
e af
affected by a firm’s
m’
performance and who have claims on
its performance
Stakeholders
Capital Market Stakeholders
eholders
(e.g., banks)
Product Market Stakeholders
Organizational Stakeholders
those involved with a firm’s strategic management process in situations where trade-offs
have to be made. The most obvious stakeholders, at least in U.S. organizations, are
shareholders—individuals and groups who have invested capital in a firm in the expectation of earning a positive return on their investments. These stakeholders’ rights are
grounded in laws governing private property and private enterprise.
In contrast to shareholders, another group of stakeholders—the firm’s customers—
prefers that investors receive a minimum return on their investments. Customers could
have their interests maximized when the quality and reliability of a firm’s products are
improved, but without high prices. High returns to customers, therefore, might come at
the expense of lower returns for capital market stakeholders.
Because of potential conflicts, each firm must carefully manage its stakeholders. First,
a firm must thoroughly identify and understand all important stakeholders. Second, it
must prioritize them in case it cannot satisfy all of them. Power is the most critical criterion in prioritizing stakeholders. Other criteria might include the urgency of satisfying
each particular stakeholder group and the degree of importance of each to the firm.115
When the firm earns above-average returns, the challenge of effectively managing
stakeholder relationships is lessened substantially. With the capability and flexibility
provided by above-average returns, a firm can more easily satisfy multiple stakeholders. When the firm earns only average returns, it is unable to maximize the interests of
all stakeholders. The objective then becomes one of at least minimally satisfying each
stakeholder.
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23
Trade-off decisions are made in light of
how important the support of each stakeholder group is to the firm. For example,
environmental groups may be very important to firms in the energy industry but less
important to professional service firms.
A firm earning below-average returns does
not have the capacity to minimally satisfy
all stakeholders. The managerial challenge
in this case is to make trade-offs that minimize the amount of support lost from
stakeholders. Societal values also influence
the general weightings allocated among
the three stakeholder groups shown in
Figure 1.4. Although all three groups are
served by and, in turn, influence firms decisions in the major industrialized nations,
the priorities in their service and influence
vary because of cultural and institutional
differences. Next, we present additional
details about each of the three major stakeholder groups.
© Africa Studio/Shutterstock.com
Chapter 1: Strategic Management and Strategic Competitiveness
As a firm formulates its strategy, it must consider all of its primary
stakeholders in the product and capital markets as well as
organizational shareholders.
Capital Market Stakeholders
Shareholders and lenders both expect a firm to preserve and enhance the wealth they
have entrusted to it. The returns they expect are commensurate with the degree of
risk they accept with those investments (i.e., lower returns are expected with lowrisk investments, while higher returns are expected with high-risk investments).
Dissatisfied lenders may impose stricter covenants on subsequent borrowing of
capital. Dissatisfied shareholders may reflect their concerns through several means,
including selling their stock. Institutional investors (e.g., pension funds, mutual
funds) often are willing to sell their stock if the returns are not what they desire,
or they may take actions to improve the firm’s performance such as pressuring top
managers and members of boards of directors to improve the strategic decisions and
governance oversight.116 Some institutions owning major shares of a firm’s stock may
have conflicting views of the actions needed, which can be challenging for managers.
This is because some may want an increase in returns in the short-term while
the others desire a focus on building long-term competitiveness.117 Managers may have
to balance their desires with those of other shareholders or prioritize the importance
of the institutional owners with different goals. Clearly shareholders who hold a large
share of stock (sometimes referred to as blockholders, see Chapter 10) are influential, especially in the determination of the firm’s capital structure (i.e., the amount
of equity versus the amount of debt used). Large shareholders often prefer that
the firm minimize its use of debt because of the risk of debt, its cost, and the possibility that debt holders have first call on the firm’s assets over the shareholders in case
of default.118
When a firm is aware of potential or actual dissatisfactions among capital market
stakeholders, it may respond to their concerns. The firm’s response to stakeholders
who are dissatisfied is affected by the nature of its dependence on them (which, as
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Part 1: Strategic Management Inputs
noted earlier, is also influenced by a society’s values). The greater and more significant the dependency is, the more likely the firm is to provide a significant response.
Sometimes firms are unable to satisfy key stakeholders such as creditors and have to
file for bankruptcy.
Product Market Stakeholders
Some might think that product market stakeholders (customers, suppliers, host communities, and unions) share few common interests. However, all four groups can benefit
as firms engage in competitive battles. For example, depending on product and industry characteristics, marketplace competition may result in lower product prices being
charged to a firm’s customers and higher prices being paid to its suppliers (the firm
might be willing to pay higher supplier prices to ensure delivery of the types of goods and
services that are linked with its competitive success).119
Customers, as stakeholders, demand reliable products at the lowest possible
prices. Suppliers seek loyal customers who are willing to pay the highest sustainable prices for the goods and services they receive. Although all product market
stakeholders are important, without customers, the other product market stakeholders are of little value. Therefore, the firm must try to learn about and understand
current and potential customers.120
Host communities are represented by national (home and abroad), state/province,
and local government entities with which the firm must deal. Governments want companies willing to be long-term employers and providers of tax revenue without placing
excessive demands on public support services. These stakeholders also influence the
firm through laws and regulations. In fact, firms must deal with laws and regulations developed and enforced at the national, state, and local levels (the influence is
polycentric—multiple levels of power and influence).121
Union officials are interested in secure jobs, under highly desirable working conditions, for employees they represent. Thus, product market stakeholders are generally
satisfied when a firm’s profit margin reflects at least a balance between the returns to
capital market stakeholders (i.e., the returns lenders and shareholders will accept and still
retain their interests in the firm) and the returns in which they share.
Organizational Stakeholders
Employees—the firm’s organizational stakeholders—expect the firm to provide a
dynamic, stimulating, and rewarding work environment. Employees generally prefer to
work for a company that is growing and in which the employee can develop their skills,
especially those skills required to be effective team members and to meet or exceed
global work standards. Workers who learn how to use new knowledge productively
are critical to organizational success. In a collective sense, the education and skills
of a firm’s workforce are competitive weapons affecting strategy implementation and
firm performance.122 Strategic leaders are ultimately responsible for serving the needs
of organizational stakeholders on a day-to-day basis. In fact, to be successful, strategic
leaders must effectively use the firm’s human capital.123 The importance of human capital to their success is probably why outside directors are more likely to propose layoffs
compared to inside strategic leaders, while such insiders are likely to use preventative
cost-cutting measures and seek to protect incumbent employees.124 A highly important means of building employee skills for the global competitive landscape is through
international assignments. The process of managing expatriate employees and helping
them build knowledge can have significant effects over time on the firm’s ability to
compete in global markets.125
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Chapter 1: Strategic Management and Strategic Competitiveness
1-6 Strategic Leaders
Thomas SAMSON/Getty Images
Strategic leaders are people located in dif
different areas and levels of the firm using the
strategic management process to select strategic actions that help the firm achieve its
vision and fulfill its mission. Regardless of
their location in the firm, successful strategic
leaders are decisive, committed to nurturing
those around them, and committed to helping the firm create value for all stakeholder
groups.126 In this vein, research evidence
suggests that employees who perceive that
their CEO is a visionary leader also believe
that the CEO leads the firm to operate in
ways that are consistent with the values of
all stakeholder groups rather than emphasizTony Hsieh, CEO of Zappos.com, an online shoe and clothing retailer,
ing only maximizing profits for shareholders.
has been helpful in shaping Zappos’s entrepreneurial culture.
In turn, visionary leadership motivates
employees to expend extra effort, thereby
helping to increase firm performance.
When identifying strategic leaders, most of us tend to think of CEOs and other toplevel managers. Clearly, these people are strategic leaders. In the final analysis, CEOs
are responsible for making certain their firm effectively uses the strategic management
process. Indeed, the pressure on CEOs to manage strategically is stronger than ever.127
However, many other people help choose a firm’s strategy and then determine the actions
for successfully implementing it.128 The main reason is that the realities of twenty-first
century competition that we discussed earlier in this chapter (e.g., the global economy,
globalization, rapid technological change, and the increasing importance of knowledge
and people as sources of competitive advantage) are creating a need for those “closest to
the action” to be making decisions and determining the actions to be taken. In fact, all
managers (as strategic leaders) must think globally and act locally.129 Thus, the most effective CEOs and top-level managers understand how to delegate strategic responsibilities to
people throughout the firm who influence the use of organizational resources. Delegation
also helps to avoid too much managerial hubris at the top and the problems it causes,
especially in situations allowing significant managerial discretion.130
Organizational culture also affects strategic leaders and their work. In turn, strategic leaders’ decisions and actions shape a firm’s culture. Organizational culture refers
Strategic leaders are
to the complex set of ideologies, symbols, and core values that are shared throughout
people located in different
areas and levels of the
the firm and that influence how the firm conducts business. It is the social energy that
firm using the strategic
drives—or fails to drive—the organization.131 For example, Southwest Airlines is known
management process to
for having a unique and valuable culture. Its culture encourages employees to work hard
select strategic actions that
but also to have fun while doing so. Moreover, its culture entails respect for others—
help the firm achieve its
vision and fulfill its mission.
employees and customers alike. The firm also places a premium on service, as suggested by its
commitment to provide POS (Positively Outrageous Service) to each customer.
Organizational culture
1-6a
The Work of Effective Strategic Leaders
Perhaps not surprisingly, hard work, thorough analyses, a willingness to be brutally
honest, a penchant for wanting the firm and its people to accomplish more, and tenacity are prerequisites to an individual’s success as a strategic leader. The top strategic
refers to the complex set
of ideologies, symbols, and
core values that are shared
throughout the firm and
that influence how the firm
conducts business.
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Part 1: Strategic Management Inputs
leaders are chosen on the basis of their capabilities (their accumulation of human capital and skills over time). Effective top management teams (those with better human
capital, management skills, and cognitive abilities) make better strategic decisions.132
In addition, strategic leaders must have a strong strategic orientation while simultaneously embracing change in the dynamic competitive landscape we have discussed.133 In
order to deal with this change effectively, strategic leaders must be innovative thinkers and promote innovation in their organization.134 Promoting innovation is facilitated by a diverse top management team representing different types of expertise
and leveraging relationships with external parties.135 Strategic leaders can best leverage partnerships with external parties and organizations when their organizations are
ambidextrous, both innovative and good at execution.136 In addition, strategic leaders
need to have a global mind-set, or sometimes referred to as an ambicultural approach
to management.137
Strategic leaders, regardless of their location in the organization, often work
long hours, and their work is filled with ambiguous decision situations. However,
the opportunities afforded by this work are appealing and offer exciting chances to
dream and to act. The following words, given as advice to the late Time Warner chair
and co-CEO Steven J. Ross by his father, describe the opportunities in a strategic
leader’s work:
There are three categories of people—the person who goes into the office, puts his feet up on
his desk, and dreams for 12 hours; the person who arrives at 5 a.m. and works for 16 hours,
never once stopping to dream; and the person who puts his feet up, dreams for one hour, then
does something about those dreams.138
The operational term used for a dream that challenges and energizes a company is
vision. The most effective strategic leaders provide a vision as the foundation for the
firm’s mission and subsequent choice and use of one or more strategies.139
1-7 The Strategic Management Process
As suggested by Figure 1.1, the strategic management process is a rational approach
firms use to achieve strategic competitiveness and earn above-average returns.
Figure 1.1 also features the topics we examine in this book to present the strategic
management process.
This book is divided into three parts aligned with the A-S-P process explained in the
beginning of the chapter. In Part 1, we describe the analyses (A) necessary for developing
strategies. Specifically, we explain what firms do to analyze their external environment
(Chapter 2) and internal organization (Chapter 3). These analyses are completed to identify marketplace opportunities and threats in the external environment (Chapter 2) and to
decide how to use the resources, capabilities, core competencies, and competitive advantages in the firm’s internal organization to pursue opportunities and overcome threats
(Chapter 3). The analyses explained in Chapters 2 and 3 are the well-known SWOT analyses (strengths, weaknesses, opportunities, threats).140 Firms use knowledge about its
external environment and internal organization, then formulates its strategy taking into
account its vision and mission.
The firm’s analyses (see Figure 1.1) provide the foundation for choosing one or
more strategies (S) and deciding which one(s) to implement. As suggested in Figure 1.1
by the horizontal arrow linking the two types of strategic actions, formulation and
implementation must be simultaneously integrated for a successful strategic management process. Integration occurs as decision makers review implementation issues
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Chapter 1: Strategic Management and Strategic Competitiveness
when choosing strategies and consider possible changes to the firm’s strategies while
implementing a current strategy.
In Part 2 of this book, we discuss the different strategies firms may choose to
use. First, we examine business-level strategies (Chapter 4). A business-level strategy describes the actions a firm takes to exploit its competitive advantage over rivals.
A company competing in a single product market (e.g., a locally owned grocery store
operating in only one location) has but one business-level strategy, while a diversified firm competing in multiple product markets (e.g., General Electric) forms a business-level strategy for each of its businesses. In Chapter 5, we describe the actions and
reactions that occur among firms in marketplace competition. Competitors typically
respond to and try to anticipate each other’s actions. The dynamics of competition
affect the strategies firms choose as well as how they try to implement the chosen
strategies.141
For the diversified firm, corporate-level strategy (Chapter 6) is concerned with determining the businesses in which the company intends to compete as well as how to manage its different businesses. Other topics vital to strategy formulation, particularly in the
diversified company, include acquiring other businesses and, as appropriate, restructuring the firm’s portfolio of businesses (Chapter 7) and selecting an international strategy
(Chapter 8). With cooperative strategies (Chapter 9), firms form a partnership to share
their resources and capabilities in order to develop a competitive advantage. Cooperative
strategies are becoming increasingly important as firms seek ways to compete in the
global economy’s array of different markets.142
To examine actions taken to implement strategies, we consider several topics in
Part 3 of the book. First, we examine the different mechanisms used to govern firms
(Chapter 10). With demands for improved corporate governance being voiced by many
stakeholders in the current business environment, organizations are challenged to learn
how to simultaneously satisfy their stakeholders’ different interests.143 Finally, the organizational structure and actions needed to control a firm’s operations (Chapter 11), the
patterns of strategic leadership appropriate for today’s firms and competitive environments (Chapter 12), and strategic entrepreneurship (Chapter 13) as a path to continuous
innovation are addressed.
It is important to emphasize that primarily because they are related to how a firm
interacts with its stakeholders, almost all strategic management process decisions have
ethical dimensions.144 Organizational ethics are revealed by an organization’s culture;
that is to say, a firm’s decisions are a product of the core values that are shared by most
or all of a company’s managers and employees. Especially in the turbulent and often
ambiguous competitive landscape in the global economy, those making decisions
as a part of the strategic management process must understand how their decisions
affect capital market, product market, and organizational stakeholders differently and
regularly evaluate the ethical implications of their decisions.145 Decision makers failing to recognize these realities accept the risk of placing their firm at a competitive
disadvantage.146
As you will discover, the strategic management process examined in this book calls
for disciplined approaches to serve as the foundation for developing a competitive advantage. Therefore, it has a major effect on the performance (P) of the firm.147 Performance is
reflected in the firm’s ability to achieve strategic competitiveness and earn above-average
returns. Mastery of this strategic management process will effectively serve you, our
readers, and the organizations for which you will choose to work.
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Part 1: Strategic Management Inputs
SUMMARY
■ Firms use the strategic management process to achieve strategic competitiveness and earn above-average returns. Firms
analyze the external environment and their internal organization, then formulate and implement a strategy to achieve a
desired level of performance (A-S-P). Performance is reflected
by the firm’s level of strategic competitiveness and the extent
to which it earns above-average returns. Strategic competitiveness is achieved when a firm develops and implements a
value-creating strategy. Above-average returns (in excess
of what investors expect to earn from other investments with
similar levels of risk) provide the foundation needed to
simultaneously satisfy all of a firm’s stakeholders.
■ The fundamental nature of competition is different in the
current competitive landscape. As a result, those making
strategic decisions must adopt a different mind-set, one that
allows them to learn how to compete in highly turbulent and
chaotic environments that produce a great deal of uncertainty.
The globalization of industries and their markets along with
rapid and significant technological changes are the two
primary factors contributing to the turbulence of the
competitive landscape.
■ Firms use two major models to help develop their vision and
mission when choosing one or more strategies in pursuit of
strategic competitiveness and above-average returns. The core
assumption of the I/O model is that the firm’s external environment has a large influence on the choice of strategies more
than do the firm’s internal resources, capabilities, and core competencies. Thus, the I/O model is used to understand the effects
an industry’s characteristics can have on a firm when deciding
what strategy or strategies to use in competing against rivals.
The logic supporting the I/O model suggests that aboveaverage returns are earned when the firm locates an attractive
industry or part of an industry and successfully implements
the strategy dictated by that industry’s characteristics. The
core assumption of the resource-based model is that the firm’s
unique resources, capabilities, and core competencies have
more of an influence on selecting and using strategies than
does the firm’s external environment. Above-average returns
are earned when the firm uses its valuable, rare, costly-toimitate, and non-substitutable resources and capabilities to
compete against its rivals in one or more industries. Evidence
indicates that both models …