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use class materials, scheme through and learn abit what the assignment is about
use umuc references with doi only
1/22/2018 Project 1: External Environmental Analysis – Submit Files – BMGT 495 6380 Strategic Management (2182) – UMUC Learning Management System
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Assignment 1: External Environment Analysis (25%)
Purpose: This assignment is the first of three assignments. You will use the tools and
apply concepts learned in this and previous business courses to demonstrate an
understanding of how organizations develop and manage strategies to establish,
safeguard and sustain its position in a competitive market.
Monitoring competitors’ performance is a key aspect of performing an external
environment analysis. This assignment provides you with the opportunity to evaluate the
competitive position of one of the organizations listed below and integrate that information
in an External Factor Evaluation (EFE) matrix and Competitive Profile Matrices (CPM).
In this assignment, students are presenting a PowerPoint presentation. The expectation is
that the presentation provides the level of detail to help a viewer grasps the main topics
and to fully understanding the External Environmental Analysis.
Analysis is the operative word. In analyzing the external environment, you are expected to
thoroughly research and take that research and break it into small parts to gain a better
understanding of what is happening in the external environment of the business. In
researching an industry, it is important to understand that every company within an
industry is different so gathering information on one company does not mean that the
collected information is relevant to other company within that industry. When researching,
parsing the material is critical to an accurate analysis. Avoid presenting just any
information as that may lead to using irrelevant information.
You will then create the PowerPoint Presentation using the Note section to share the
analysis. In using the Note Section of the presentation, you are expected to present
information and support the ideas and reasoning using the course material and your
research. You will not lift any information from source documents without properly citing
and referencing. For the technical analysis aspect of the assignment, you are required to
create the technique on your own and may not use from any source material that you
happen to find. No work from a clearinghouse or similar website may be used or cited as
a credible source.
Instructions:
NOTE: All submitted work is to be your original work (only your work). You may not
use any work from another student, the Internet or an online clearinghouse. You are
expected to understand the Academic Dishonesty and Plagiarism Policy, and know
that it is your responsibility to learn about instructor and general academic
expectations with regard to proper citation of sources as specified in the
APA Publication Manual, 6th Ed. (You are held accountable for intext citations and
an associated reference list only).
Step 1: The External
Analysis
After reading the course material for the first three weeks, you will perform an external
analysis on an industry where a company from the list below operates and competes. You
will select one of these companies to complete the analysis. Using a company other than
these will result in a zero for the assignment. You will perform research on the selected
company, its industry and its competitors.
Focus on factors related to the company’s industry and the environment that it and its
competitors make. The factors to measure are those identified in a SWOT, Porter’s Five
Forces, PESTEL, EFE, and CPM.
Team, Inc. (NASDAQ: TISI)
HealthStream (NASDAQ: HSTM)
United Rentals (NYSE: URI)
Hawkins (NASDAQ: HWKN)
Step 2: Complete the External Environmental Analysis
In the past weeks, you have learned new concepts and techniques to assess the business
environment. You will use these techniques (tools), concepts and information from your
own research to perform the external analysis of the selected company’s environment.
You are not lifting from other sources but performing your own analysis. Include the
following:
Company overview
1/22/2018 Project 1: External Environmental Analysis – Submit Files – BMGT 495 6380 Strategic Management (2182) – UMUC Learning Management System
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Industry analysis
Competitive analysis: [Use the company’s closest competitors (3) plus the selected
company.]
Techniques Analysis: PESTEL, Five Forces, OT from SWOT, EFE, and CPM.
Trends: Discuss trends significant to the industry and company and discuss key
areas of uncertainty related to trends or events that potentially could impact the
company’s strategy.
Utilize the Notes section to support each slide
Step 3: Use the Grading Rubric
Use the grading rubric to ensure all required elements are represented in the presentation.
Step 4: Proofread
Proofread for organization, spelling, and grammar and completeness.
Use the spell check in MS PowerPoint as a first measure;
Read through the PowerPoint aloud;
Have someone who has excellent English skills proofread the presentation.
Step 5: Submission of PowerPoint Presentation
Submit the presentation in the Assignment Folder. (The assignment submitted to the
Assignment Folder will be considered a student’s final product and therefore ready for
grading by the instructor. It is incumbent upon the student to verify the assignment is the
correct submission. No exceptions will be considered by the instructor).
Preparation for the Assignment
As you prepare to create the PowerPoint, read the following requirements that will help
you meet the writing and APA requirements. Not reading this information will lead to a
lower grade.
Use the grading rubric while completing the assignment. Refer back to the rubric to
ensure you have met the requirements.
Third person writing is required. Third person means that there are no words such
as “I, me, my, we, or us” (first person writing), nor is there use of “you or your”
(second person writing). If uncertain how to write in the third person, view this
link: http://www.quickanddirtytips.com/education/grammar/firstsecondandthird
person.
Contractions are not used in business writing, so do not use them in this
assignment.
You are expected to paraphrase and NOT use direct quotes unless related to a
company’s mission or vision statements. To learn how to paraphrase, review this
link: https://writing.wisc.edu/Handbook/QPA_paraphrase2.html.
In completing this assignment, you are required to support reasoning or conclusions
using intext citations. Note that a reference within a reference list cannot exist
without an associated intext citation and vice versa.
When using a source document, the expectation is that the information is cited and
referenced with a page or paragraph number.
No books are allowed other than the course eBook.
How to Set Up the PowerPoint Presentation
1/22/2018 Project 1: External Environmental Analysis – Submit Files – BMGT 495 6380 Strategic Management (2182) – UMUC Learning Management System
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Create a PowerPoint Presentation. The final product will be no longer than 20 slides
including the title page and reference page. You will use the note section of the
PowerPoint to discuss, explain and support the reasoning and conclusions for the
information presented in each slide. The expectation is that what is presented is more
than a few sentences for each slide. The analysis must be thorough.
Due Date
Jan 28, 2018 11:59 PM
Hide Rubrics
Rubric Name: Assignment #1
Criteria Outstanding Superior Good Substandard
Failure
Company Overview
2.25 points
Company overview
is accurately and
comprehensively
discussed.
(2.025 2.25)
1.9125 points
Company overview is
accurately present and
most areas are
thoroughly discussed.
(1.8 2.024)
1.6875 points
Company
analysis is mostly
accurate;
some areas are
thoroughly
presented but others
may need
clarification or
additional
information.
(1.575 1.79)
1.4625 points
Company overview was
attempted but key points
were missing or superficially
presented.
(1.35 1.574)
0 points
Failed to perfor
a company
overview.
(0 1.349)
Content: Industry
Analysis
2.25 points
Industry analysis
was presented
accurately and
comprehensively;
includes PESTEL
analysis, Five
Forces, analysis
of strategic groups,
ideas that can be
borrowed from
strategic groups,
gaps in industry that
could lead to
opportunities.
(2.025 2.25)
1.9125 points
Industry analysis is
present accurately and
most areas are
developed including
PESTEL analysis, Five
Forces; analysis of
strategic groups, ideas
that can be borrowed
from strategic groups,
gaps in industry that
could lead to
opportunities.
(1.8 2.024)
1.68755 points
Industry analysis
is mostly accurate;
some areas are
thoroughly
presented but others
may need
clarification;
PESTEL and Five
Forces is discussed
but could be more
thorough, strategic
groups mentioned;
gaps mentioned but
opportunities not
fully addressed.
(1.575 1.79)
1.4625 points
Attempted to perform an
industry analysis but key
points were missing or
superficially presented.
(1.35 1.574)
0 points
Failed to perfor
industry analys
(0 – 1.349)
Content:
Competitive
Analysis
2.25 points
Competitive analysis
was performed
accurately and
comprehensively;
identified
competitors,
competitor
product/service;
competitor strengths
and weaknesses;
strategies used by
each competitor to
achieve their
objective; market
outlook.
(2.025 2.25)
1.9125 points
Competitive analysis is
accurately present and
most areas are
thoroughly discussed.
(1.8 2.024)
1.6875 points
Competitive analysis
is mostly accurate;
some areas are
thoroughly
presented but others
may need
clarification.
(1.575 1.79)
1.4625 points
Competitive analysis was
attempted but key points
were missing or superficially
presented.
(1.35 1.574)
0 points
Failed to perfor
competitive ana
(0 1.349)
Content: External
Environment –
2.25 points
Four or more
techniques/tools
1.9125 points
Three techniques and
tools were accurately
1.6875 points
Two techniques and
tools were
1.4625 points
One technique or tool was
accurately created and
0 points
Failed to create
techniques/tool
1/22/2018 Project 1: External Environmental Analysis – Submit Files – BMGT 495 6380 Strategic Management (2182) – UMUC Learning Management System
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Techniques and
Tools
were accurately
created and
comprehensively
discussed
with thorough
explanations.
(2.025 2.25)
created and
comprehensively
discussed with
thorough explanations;
four or more
techniques/tools
created but may not
have been depicted
accurately or
comprehensively
discussed.
(1.8 2.024)
accurately created
and
comprehensively
discussed with
thorough
explanations; three
techniques/tools
created but may not
have been depicted
accurately or
comprehensively
discussed.
(1.575 1.79)
comprehensively discussed
with thorough explanations;
two
techniques/tools created but
did not depicted accurately
or comprehensively
discussed; Presented up to
45 techniques but did not
discuss or discussion
showed lack of
understanding of use of
techniques/tools or
accuracy of information
presented.
(1.35 1.574)
(0 1.349)
Content: Trends 2.25 points
Trend analysis is
accurately and
comprehensively
discussed.
(2.025 2.25)
1.9125 points
Trend analysis is
accurately present and
most areas are
thoroughly discussed.
(1.8 2.024)
1.6875 points
Trends analysis
is mostly accurate;
some areas need
clarification or more
thoroughness.
(1.575 1.79)
1.4625 points
Discussion of trends was
attempted but key points
were missing or superficially
presented.
(1.35 1.574)
0 points
Failed to
discuss trends.
(0 1.349)
Critical
Thinking/Reasoning
3.75 points
Comments reflect a
highly accomplished
level of analysis,
synthesis, evaluation
and reasoning of the
case material and
case study facts
resulting in accurate,
thorough, and
soundly reasoned
conclusions.
(3.375 3.75)
3.1875 points
Comments reflect an
excellent level of
analysis, synthesis,
evaluation and
reasoning of the case
material and case
study facts resulting in
accurately
reasoned conclusions.
(3 3.374)
2.8125 points
Comments reflect
a satisfactory level
of analysis,
synthesis,
evaluation
and reasoning of the
case material and
case study facts
resulting in partially
correct conclusions
that lack
development or
detail that
demonstrates
insight into
reasoning.
(2.625 2.99)
2.6 points
Comments reflect an
unsatisfactory level of
analysis, synthesis,
evaluation and reasoning of
the case material and case
study facts, resulting
in conclusions that
are underdeveloped or lack
soundly reasoned
conclusions.
(2.25 2.624)
0 points
Comments refle
unsatisfactory le
of analysis,
synthesis,
evaluation
and reasoning o
case material a
case study facts
resulting in failu
draw little to
no conclusions.
2.249)
Slides Creation and
Transition
1.25 points
Presentation flows
well and logically;
transitions are
smooth, interesting
and enhance
presentation
(1.125 1.25)
1.0625 points
Presentation flows
well; smooth
transitions used on
most slides
(1 1.124)
0.9375 points
Presentation flows
well; smooth
transitions used on
some slides
(0.875 0.99)
0.8125 points
Presentation is
unorganized; very few
transitions and/or they
distract from presentation
(0.75 0.874)
0 points
Presentation ha
flow; no transiti
used
(0 0.74)
Application of
Resources
3.75 points
Presents
exceptionally well
supported
arguments or
positions with
evidence from the
readings/experience;
ideas go beyond the
course material and
recognize
implications and
extensions of the
material and
concepts.
(3.375 3.75)
3.1875 points
Presents excellent
arguments or
positions that
are mostly supported
by evidence from the
readings and course
content; ideas
presented
demonstrate
understanding of the
material and concepts.
(3 3.374)
2.81225 points
Satisfactory
arguments or
positions are
presented but there
is a mix of opinion or
unclear view with
supported
arguments using
course readings.
Case study facts are
occasionally used
but arguments
would be much
stronger with use of
facts.
(2.625 2.99)
2.4375 points
Arguments are frequently
illogical and
unsubstantiated; Limited
use of facts in case study
and essential information
presented in course
readings.
(2.25 2.624)
0 points
Arguments lack
meaningful
explanation or
support of
ideas. Does no
provide facts
presented in ca
study.
(0 – 2.24)
Attention to 1.25 points 1.0625 points 0.9375 points 0.8125 points 0 points
1/22/2018 Project 1: External Environmental Analysis – Submit Files – BMGT 495 6380 Strategic Management (2182) – UMUC Learning Management System
https://learn.umuc.edu/d2l/lms/dropbox/user/folder_submit_files.d2l?db=586682&grpid=0&isprv=0&bp=0&ou=267247 5/5
Instructions Demonstrates
exceptional
understanding of
requirements
responding
completely to each
aspect of
assignment including
minor aspects of the
assignment such as
using third person
writing, required use
of course readings,
and assignment
format. (1.125
1.25)
Demonstrates
excellent
understanding of
requirements; missed
one minor aspect of
assignment.
(1.0 1.124)
Demonstrates
satisfactory
understanding of
requirements;
missed a key
element or two
minor aspects of
assignment.
(0.875 0.99)
Fails to show a firm
understanding of
requirements; missed two
key elements or several
minor aspects of
assignment.
(0.75 0.874)
Fails to demons
understanding o
assignment
requirements.
(0 – 0.74)
Writing Mechanics 2.5 points
Strictly adheres to
standard usage rules
of written English,
including but not
limited to
capitalization,
punctuation, runon
sentences, missing
or extra words,
stylistic errors,
spelling and
grammatical errors.
No errors found. No
contractions or
jargon used.
(2.25 2.5)
2.125 points
Excellently adheres to
standard usage of
mechanics:
conventions of written
English, including
capitalization,
punctuation, and
spelling. One to three
errors found.
(2.0 2.249)
1.875 points
Satisfactorily
adheres to standard
usage rules of
mechanics:
conventions of
English, including
capitalization,
punctuation, and
spelling. Four to 10
errors found.
(1.75 1.99)
1.625 points
Minimally adheres to
standard usage rules of
mechanics: conventions of
written English, including
capitalization, punctuation,
and spelling. More than 10
errors found.
(1.5 1.749)
0 points
Does not adher
standard usage
rules of mechan
conventions of
written English
largely
incomprehensib
or errors are too
plentiful to coun
(0 – 1.49)
APA Style (6th ed.) 1.25 points
No APA style or
usage errors; Proper
citation of source
material is used
throughout;
Reference titles
follow APA with only
the first word, the
first word after a
colon and proper
nouns capitalized.
(1.125 1.25)
1.0625 points
Attempts intext
citations and reference
list but one or two APA
style errors noted or
fails to use APA
citations when
appropriate 12 times.
(1.0 1.124)
0.9375 points
Attempts intext
citations and
reference lists; APA
style errors are
noted throughout;
Fails to use APA
citations when
appropriate 3 times
in document.
(0.875 0.99)
0.8125 points
Attempts intext citations
and reference lists; Fails to
use APA citation when
appropriate 45 times; or
presents only 12 intext
citations and reference list
that requires APA citations
throughout the document.
(0.75 0.874)
0 points
No attempt at A
style; or attemp
either intext
citations or
reference list bu
omits the other.
(0. – 0.74)
Overall Score
Outstanding
22.5 or more
Superior
20 or more
Good
17.5 or more
Substandard
15 or more
Failure
0 or more
1/22/2018 Announcements – BMGT 495 6380 Strategic Management (2182) – UMUC Learning Management System
https://learn.umuc.edu/d2l/lms/news/main.d2l?ou=267247 1/1
Hi everybody,
Besides the Weekly Learning Activities (Discussion forum participation) in Week 3, Assignment 1
entitled “External Environmental Analysis” would need to be submitted as PowerPoint Presentation
with the due date Sunday of this week.
First of all, the focal company must be one of the companies that are provided within Assignment 1
instructions. Any of the learners that use a focal company that is not specified within Assignment 1
shall earn a zero for his or her respective assignment because his/her respective focal company is
completely wrong. No exception for whatever reason.
Please follow exactly the instructions in Assignment 1, review the rubrics, research the company,
compile your drafts, revise them, finalize the draft, and submit your assignment in PowerPoint with
embedded speaker notes. The PowerPoint would have three main sections: a title page slide, the
main content slides, and reference page slides.
In each slide:
Learners are expected to write in their own words.
Learners are expected to use short bullet points in slides.
Learners are expected to include corresponding in-text citations in slides.
Learners are expected to use in their own words to write the speaker notes in each slide with
details to explain, discuss, and analyze the written content of each slide.
Learners are expected to (1) quote succinctly, (2) use our course ebook and reading materials
from LEO course content, (3) refer only to scholarly sources via UMUC online library with doi
numbers, (4) use articles researched from that focal company’s own website, and (5) give due
credit to all these reference sources.
Learners are expected to avoid any unapproved reference sources as mentioned in W1
Announcement 18.
Please keep in mind that learners are expected to include corresponding in-text citations and
reference sources in speaker notes and in PowerPoint slides.
Week 1
https://www.youtube.com/watch?v=3Hd88eBgkw0
https://www.youtube.com/watch?v=mLJ34L5UW4E
http://www.managementstudyguide.com/strategic-management-process.htm
https://www.strategy-business.com/feature/Creating-a-Strategy-That-Works
https://www.mindtools.com/pages/article/what-is-strategy.htm
week 2
https://hbr.org/2004/04/hardball-five-killer-strategies-for-trouncing-the-competition
https://www.mindtools.com/pages/article/newTMC_05.htm
http://www.maxi-pedia.com/EFE+matrix+external
http://www.maxi-pedia.com/Five+Forces+model+by+Michael+Porter
https://www.mindtools.com/pages/article/newTMC_09.htm
https://www.jstor.org/stable/pdf/256040
https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-perils-of-bad-strategy
https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/have-you-tested-your-strategy-lately
https://www.youtube.com/watch?v=nS-Slo8S6V4
week 3
https://learn.umuc.edu/content/enforced/267247-001153-01-2182-OL1-6380/Is%20the%20Resource-based%20%E2%80%9CView%E2%80%9D%20a%20Useful%20Perspective%20for%20Strategic%20Management%20Research ?_&d2lSessionVal=5ZA1zumheGH2wEYwsqmcX2NRA
https://www.strategicmanagementinsight.com/tools/competitive-profile-matrix-cpm.html
http://www.investinganswers.com/education/ratio-analysis/15-financial-ratios-every-investor-should-use-3011
https://www.strategicmanagementinsight.com/tools/vrio.html
Saylor URL: http://www.saylor.org/books Saylor.org
4
Chapter 1
Mastering Strategy: Art and Science
L E A R N I N G O B J E C T I V E S
After reading this chapter, you should be able to understand and articulate answers to the following
questions:
1. What are strategic management and strategy?
2. Why does strategic management matter?
3. What elements determine firm performance?
Strategic Management: A Core Concern for Apple
The Opening of the Apple Store
Image courtesy of Neil Bird, http://www.flickr.com/photos/nechbi/2058929337.
March 2, 2011, was a huge day for Apple. The firm released its much-anticipated iPad2, a thinner and
faster version of market-leading Apple’s iPad tablet device. Apple also announced that a leading publisher,
Random House, had made all seventeen thousand of its books available through Apple’s iBookstore.
Apple had enjoyed tremendous success for quite some time. Approximately fifteen million iPads were sold
in 2010, and the price of Apple’s stock had more than tripled from early 2009 to early 2011.
Chapter 1 from Mastering Strategic Management was adapted by The Saylor Foundation under
a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested
by the work’s original creator or licensee. © 2014, The Saylor Foundation.
http://www.saylor.org/site/textbooks/Mastering%20Strategic%20Management
http://creativecommons.org/licenses/by-nc-sa/3.0/
Saylor URL: http://www.saylor.org/books Saylor.org
37
Chapter 2
Leading Strategically
L E A R N I N G O B J E C T I V E S
After reading this chapter, you should be able to understand and articulate answers to the following
questions:
1. What are vision, mission, and goals, and why are they important to organizations?
2. How should executives analyze the performance of their organizations?
3. In what ways can having a celebrity CEO and a strong entrepreneurial orientation help or harm an
organization?
Questions Are Brewing at Starbucks
Starbucks’s global empire includes this store in Seoul, South Korea.
Image courtesy of Wikimedia,http://commons.wikimedia.org/wiki/File:Starbucks-seoul.JPG.
Chapter 2 from Mastering Strategic Management was adapted by The Saylor Foundation under
a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested
by the work’s original creator or licensee. © 2014, The Saylor Foundation.
http://www.saylor.org/site/textbooks/Mastering%20Strategic%20Management
http://creativecommons.org/licenses/by-nc-sa/3.0/
Saylor URL: http://www.saylor.org/books Saylor.org
38
March 30, 2011, marked the fortieth anniversary of Starbucks first store opening for business in Seattle,
Washington. From its humble beginnings, Starbucks grew to become the largest coffeehouse company in
the world while stressing the importance of both financial and social goals. As it created thousands of
stores across dozens of countries, the company navigated many interesting periods. The last few years
were a particularly fascinating era.
In early 2007, Starbucks appeared to be very successful, and its stock was worth more than $35 per share.
By 2008, however, the economy was slowing, competition in the coffee business was heating up, and
Starbucks’s performance had become disappointing. In a stunning reversal of fortune, the firm’s stock was
worth less than $10 per share by the end of the year. Anxious stockholders wondered whether Starbucks’s
decline would continue or whether the once high-flying company would return to its winning ways.
Riding to the rescue was Howard Schultz, the charismatic and visionary founder of Starbucks who had
stepped down as chief executive officer eight years earlier. Schultz again took the helm and worked to turn
the company around by emphasizing its mission statement: “to inspire and nurture the human spirit—one
person, one cup and one neighborhood at a time.” [1]About a thousand underperforming stores were shut
down permanently. Thousands of other stores closed for a few hours so that baristas could be retrained to
make inspiring drinks. Food offerings were revamped to ensure that coffee—not breakfast sandwiches—
were the primary aroma that tantalized customers within Starbucks’s outlets.
By the time Starbucks’s fortieth anniversary arrived, Schultz had led his company to regain excellence,
and its stock price was back above $35 per share. In March 2011, Schultz summarized the situation by
noting that “over the last three years, we’ve completely transformed the company, and the health of
Starbucks is quite good. But I don’t think this is a time to celebrate or run some victory lap. We’ve got a lot
of work to do.” [2] Indeed, important questions loomed. Could performance improve further? How long
would Schultz remain with the company? Could Schultz’s eventual successor maintain Schultz’s
entrepreneurial approach as well as keep Starbucks focused on its mission?
[1] Our Starbucks mission statement. Retrieved from http://www.starbucks.com/about-us/company-
information/mission-statement. Accessed March 31, 2011.
Saylor URL: http://www.saylor.org/books Saylor.org
39
[2] Starbucks CEO: Can you “get big and stay small” [Review of the book Onward: How Starbucks fought for its life
without losing its soul by Howard Schultz]. 2011, March 28. NPR Books. Retrieved
from http://www.npr.org/2011/03/28/134738487/starbucks-ceo-can-you-get-big-and-stay-small.
Saylor URL: http://www.saylor.org/books Saylor.org
40
2.1 Vision, Mission, and Goals
L E A R N I N G O B J E C T I V E S
1. Define vision and mission and distinguish between them.
2. Know what the acronym SMART represents.
3. Be able to write a SMART goal.
The Importance of Vision
Good business leaders create a vision, articulate the vision, passionately own the vision, and relentlessly
drive it to completion.
– Jack Welch, former CEO of General Electric
Many skills and abilities separate effective strategic leaders like Howard Schultz from poor strategic
leaders. One of them is the ability to inspire employees to work hard to improve their organization’s
performance. Effective strategic leaders are able to convince employees to embrace lofty ambitions and
move the organization forward. In contrast, poor strategic leaders struggle to rally their people and
channel their collective energy in a positive direction.
As the quote from Jack Welch suggests, a vision is one key tool available to executives to inspire the
people in an organization. An organization’s vision describes what the organization hopes to become
in the future. Well-constructed visions clearly articulate an organization’s aspirations. Avon’s vision is
“to be the company that best understands and satisfies the product, service, and self-fulfillment needs
of women—globally.” This brief but powerful statement emphasizes several aims that are important to Avon,
including excellence in customer service, empowering women, and the intent to be a worldwide player.
Like all good visions, Avon sets a high standard for employees to work collectively toward.
Perhaps no vision captures high standards better than that of aluminum maker Alcoa. This firm’s very ambitious
vision is “to be the best company in the world—in the eyes of our customers, shareholders, communities
and people.” By making clear their aspirations, Alcoa’s executives hope to inspire employees to act in ways that
help the firm become the best in the world.
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The results of a survey of one thousand five hundred executives illustrate how the need to create an
inspiring vision creates a tremendous challenge for executives. When asked to identify the most important
characteristics of effective strategic leaders, 98 percent of the executives listed “a strong sense of vision”
first. Meanwhile, 90 percent of the executives expressed serious doubts about their own ability to create a
vision. [1] Not surprisingly, many organizations do not have formal visions. Many organizations that do
have visions find that employees do not embrace and pursue the visions. Having a well-formulated vision
employees embrace can therefore give an organization an edge over its rivals.
Mission Statements
In working to turnaround Starbucks, Howard Schultz sought to renew Starbucks’s commitment to
its mission statement: “to inspire and nurture the human spirit—one person, one cup and one
neighborhood at a time.” A mission such as Starbucks’s states the reasons for an organization’s existence.
Well-written mission statements effectively capture an organization’s identity and provide answers to the
fundamental question “Who are we?” While a vision looks to the future, a mission captures the key
elements of the organization’s past and present.
Organizations need support from their key stakeholders, such as employees, owners, suppliers, and
customers, if they are to prosper. A mission statement should explain to stakeholders why they should
support the organization by making clear what important role or purpose the organization plays in
society. Google’s mission, for example, is “to organize the world’s information and make it universally
accessible and useful.” Google pursued this mission in its early days by developing a very popular Internet
search engine. The firm continues to serve its mission through various strategic actions, including offering
its Internet browser Google Chrome to the online community, providing free e-mail via its Gmail service,
and making books available online for browsing.
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Many consider Abraham Lincoln to have been one of the
greatest strategic leaders in modern history.
Image courtesy of Alexander Gardner,
http://wikimediafoundation.org/wiki/File:Abraham_Li
ncoln_head_on_shoulders_photo_portrait .
One of Abraham Lincoln’s best-known statements is that “a house divided against itself cannot stand.”
This provides a helpful way of thinking about the relationship between vision and mission. Executives ask
for trouble if their organization’s vision and mission are divided by emphasizing different domains. Some
universities have fallen into this trap. Many large public universities were established in the late 1800s
with missions that centered on educating citizens. As the twentieth century unfolded, however, creating
scientific knowledge through research became increasingly important to these universities. Many
university presidents responded by creating visions centered on building the scientific prestige of their
schools. This created a dilemma for professors: Should they devote most of their time and energy to
teaching students (as the mission required) or on their research studies (as ambitious presidents
demanded via their visions)? Some universities continue to struggle with this trade-off today and remain
houses divided against themselves. In sum, an organization is more effective to the extent that its vision
and its mission target employees’ effort in the same direction.
Pursuing the Vision and Mission through SMART Goals
An organization’s vision and mission offer a broad, overall sense of the organization’s direction. To work
toward achieving these overall aspirations, organizations also need to create goals—narrower aims that
should provide clear and tangible guidance to employees as they perform their work on a daily basis. The
most effective goals are those that are specific, measurable, aggressive, realistic, and time-bound. An easy
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way to remember these dimensions is to combine the first letter of each into one word: SMART.
Employees are put in a good position to succeed to the extent that an organization’s goals are SMART.
A goal is specific if it is explicit rather than vague. In May 1961, President John F. Kennedy proposed a
specific goal in a speech to the US Congress: “I believe that this nation should commit itself to achieving
the goal, before this decade is out, of landing a man on the moon and returning him safely to the
earth.” [2]Explicitness such as was offered in this goal is helpful because it targets people’s energy. A few
moments later, Kennedy made it clear that such targeting would be needed if this goal was to be reached.
Going to the moon, he noted, would require “a major national commitment of scientific and technical
manpower, materiel and facilities, and the possibility of their diversion from other important activities
where they are already thinly spread.” While specific goals make it clear how efforts should be directed,
vague goals such as “do your best” leave individuals unsure of how to proceed.
A goal is measurable to the extent that whether the goal is achieved can be quantified. President
Kennedy’s goal of reaching the moon by the end of the 1960s offered very simple and clear measurability:
Either Americans would step on the moon by the end of 1969 or they would not. One of Coca-Cola’s
current goals is a 20 percent improvement to its water efficiency by 2012 relative to 2004 water usage.
Because water efficiency is easily calculated, the company can chart its progress relative to the 20 percent
target and devote more resources to reaching the goal if progress is slower than planned.
A goal is aggressive if achieving it presents a significant challenge to the organization. A series of
research studies have demonstrated that performance is strongest when goals are challenging but
attainable. Such goals force people to test and extend the limits of their abilities. This can result in
reaching surprising heights. President Kennedy captured this theme in a speech in September 1962: “We
choose to go to the moon. We choose to go to the moon in this decade…not because [it is] easy, but
because [it is] hard, because that goal will serve to organize and measure the best of our energies and
skills.”
In the case of Coca-Cola, reaching a 20 percent improvement will require a concerted effort, but the goal
can be achieved. Meanwhile, easily achievable goals tend to undermine motivation and effort. Consider a
situation in which you have done so well in a course that you only need a score of 60 percent on the final
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exam to earn an A for the course. Understandably, few students would study hard enough to score 90
percent or 100 percent on the final exam under these circumstances. Similarly, setting organizational
goals that are easy to reach encourages employees to work just hard enough to reach the goals.
It is tempting to extend this thinking to conclude that setting nearly impossible goals would encourage
even stronger effort and performance than does setting aggressive goals. People tend to get discouraged
and give up, however, when faced with goals that have little chance of being reached. If, for example,
President Kennedy had set a time frame of one year to reach the moon, his goal would have attracted
scorn. The country simply did not have the technology in place to reach such a goal. Indeed, Americans
did not even orbit the moon until seven years after Kennedy’s 1961 speech. Similarly, if Coca-Cola’s water
efficiency goal was 95 percent improvement, Coca-Cola’s employees would probably not embrace it. Thus
goals must also be realistic, meaning that their achievement is feasible.
You have probably found that deadlines are motivating and that they help you structure your work time.
The same is true for organizations, leading to the conclusion that goals should be time-bound through
the creation of deadlines. Coca-Cola has set a deadline of 2012 for its water efficiency goal, for example.
The deadline for President Kennedy’s goal was the end of 1969. The goal was actually reached a few
months early. On July 20, 1969, Neil Armstrong became the first human to step foot on the moon.
Incredibly, the pursuit of a well-constructed goal had helped people reach the moon in just eight years.
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Americans landed on the moon eight years after President Kennedy set a moon landing as a key
goal for the United States.
Image courtesy of NASA Apollo Archive,
http://upload.wikimedia.org/wikipedia/commons/8/8b/5927_NASA .
The period after an important goal is reached is often overlooked but is critical. Will an organization rest
on its laurels or will it take on new challenges? The US space program again provides an illustrative
example. At the time of the first moon landing, Time magazine asked the leader of the team that built the
moon rockets about the future of space exploration. “Given the same energy and dedication that took
them to the moon,” said Wernher von Braun, “Americans could land on Mars as early as 1982.” [3] No new
goal involving human visits to Mars was embraced, however, and human exploration of space was de-
emphasized in favor of robotic adventurers. Nearly three decades after von Braun’s proposed timeline for
reaching Mars expired, President Barack Obama set in 2010 a goal of creating by 2025 a new space
vehicle capable of taking humans beyond the moon and into deep space. This would be followed in the
mid-2030s by a flight to orbit Mars as a prelude to landing on Mars. [4] Time will tell whether these goals
inspire the scientific community and the country in general.
K E Y T A K E A W A Y
x Strategic leaders need to ensure that their organizations have three types of aims. A vision states what
the organization aspires to become in the future. A mission reflects the organization’s past and present by
stating why the organization exists and what role it plays in society. Goals are the more specific aims that
organizations pursue to reach their visions and missions. The best goals are SMART: specific, measurable,
aggressive, realistic, and time-bound.
E X E R C I S E S
1. Take a look at the website of your college or university. What is the organization’s vision and mission?
Were they easy or hard to find?
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2. As a member of the student body, do you find the vision and mission of your college or university to be
motivating and inspirational? Why or why not?
3. What is an important goal that you have established for your career? Could this goal be improved by
applying the SMART goal concept?
[1] Quigley, J. V. 1994. Vision: How leaders develop it, share it, and sustain it. Business Horizons, 37(5), 37–41.
[2] Key documents in the history of space policy: 1960s. National Aeronautics and Space Administration. Retrieved
from http://history.nasa.gov/spdocs.html#1960s
[3] The Moon: Next, Mars and beyond. 1969, July 15. Time. Retrieved
fromhttp://www.time.com/time/magazine/article/0,9171,901107,00.html
[4] Amos, J. 2010, April 15. Obama sets Mars goal for America. BBC News. Retrieved from
http://news.bbc.co.uk/2/hi/8623691.stm
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2.2 Assessing Organizational Performance
L E A R N I N G O B J E C T I V E S
1. Understand the complexities associated with assessing organizational performance.
2. Learn each of the dimensions of the balanced scorecard framework.
3. Learn what is meant by a “triple bottom line.”
Organizational Performance: A Complex Concept
Organizational performance refers to how well an organization is doing to reach its vision, mission, and
goals. Assessing organizational performance is a vital aspect of strategic management. Executives must
know how well their organizations are performing to figure out what strategic changes, if any, to make.
Performance is a very complex concept, however, and a lot of attention needs to be paid to how it is
assessed.
Two important considerations are (1) performance measures and (2) performance referents (Figure 2.5
“How Organizations and Individuals Can Use Financial Performance Measures and Referents”).
A performance measure is a metric along which organizations can be gauged. Most executives examine
measures such as profits, stock price, and sales in an attempt to better understand how well their
organizations are competing in the market. But these measures provide just a glimpse of organizational
performance. Performance referents are also needed to assess whether an organization is doing well. A
performance referent is a benchmark used to make sense of an organization’s standing along a
performance measure. Suppose, for example, that a firm has a profit margin of 20 percent in 2011. This
sounds great on the surface. But suppose that the firm’s profit margin in 2010 was 35 percent and that the
average profit margin across all firms in the industry for 2011 was 40 percent. Viewed relative to these two
referents, the firm’s 2011 performance is cause for concern.
Using a variety of performance measures and referents is valuable because different measures and
referents provide different information about an organization’s functioning. The parable of the blind men
and the elephant—popularized in Western cultures through a poem by John Godfrey Saxe in the
nineteenth century—is useful for understanding the complexity associated with measuring organizational
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performance. As the story goes, six blind men set out to “see” what an elephant was like. The first man
touched the elephant’s side and believed the beast to be like a great wall. The second felt the tusks and
thought elephants must be like spears. Feeling the trunk, the third man thought it was a type of snake.
Feeling a limb, the fourth man thought it was like a tree trunk. The fifth, examining an ear, thought it was
like a fan. The sixth, touching the tail, thought it was like a rope. If the men failed to communicate their
different impressions they would have all been partially right but wrong about what ultimately mattered.
Figure 2.5 How Organizations and Individuals Can Use Financial Performance Measures and
Referents
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This story parallels the challenge involved in understanding the multidimensional nature of organization
performance because different measures and referents may tell a different story about the organization’s
performance. For example, the Fortune 500 lists the largest US firms in terms of sales. These firms are
generally not the strongest performers in terms of growth in stock price, however, in part because they are
so big that making major improvements is difficult. During the late 1990s, a number of Internet-centered
businesses enjoyed exceptional growth in sales and stock price but reported losses rather than profits.
Many investors in these firms who simply fixated on a single performance measure—sales growth—
absorbed heavy losses when the stock market’s attention turned to profits and the stock prices of these
firms plummeted.
The story of the blind men and the elephant provides a metaphor for understanding the
complexities of measuring organizational performance.
Image courtesy of Hanabusa Itcho,
http://en.wikipedia.org/wiki/File:Blind_monks_examining_an_elephant .
The number of performance measures and referents that are relevant for understanding an organization’s
performance can be overwhelming, however. For example, a study of what performance metrics were used
within restaurant organizations’ annual reports found that 788 different combinations of measures and
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referents were used within this one industry in a single year. [1]Thus executives need to choose a rich yet
limited set of performance measures and referents to focus on.
The Balanced Scorecard
To organize an organization’s performance measures, Professor Robert Kaplan and Professor David
Norton of Harvard University developed a tool called the balanced scorecard. Using the scorecard helps
managers resist the temptation to fixate on financial measures and instead monitor a diverse set of
important measures.
Indeed, the idea behind the framework is to provide a “balance” between financial measures
and other measures that are important for understanding organizational activities that lead to sustained,
long-term performance. The balanced scorecard recommends that managers gain an overview of the
organization’s performance by tracking a small number of key measures that collectively reflect four
dimensions: (1) financial, (2) customer, (3) internal business process, and (4) learning and growth. [2]
Financial Measures
Financial measures of performance relate to organizational effectiveness and profits. Examples include
financial ratios such as return on assets, return on equity, and return on investment. Other common
financial measures include profits and stock price. Such measures help answer the key question “How do
we look to shareholders?”
Financial performance measures are commonly articulated and emphasized within an organization’s
annual report to shareholders. To provide context, such measures should be objective and be coupled with
meaningful referents, such as the firm’s past performance. For example, Starbucks’s 2009 annual report
highlights the firm’s performance in terms of net revenue, operating income, and cash flow over a five-
year period.
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Customer Measures
Customer measures of performance relate to customer attraction, satisfaction, and retention. These
measures provide insight to the key question “How do customers see us?” Examples might include the
number of new customers and the percentage of repeat customers.
Starbucks realizes the importance of repeat customers and has taken a number of steps to satisfy and to
attract regular visitors to their stores. For example, Starbucks rewards regular customers with free drinks
and offers all customers free Wi-Fi access. [3] Starbucks also encourages repeat visits by providing cards
with codes for free iTunes downloads. The featured songs change regularly, encouraging frequent repeat
visits.
Internal Business Process Measures
Internal business process measures of performance relate to organizational efficiency. These measures
help answer the key question “What must we excel at?” Examples include the time it takes to manufacture
the organization’s good or deliver a service. The time it takes to create a new product and bring it to
market is another example of this type of measure.
Organizations such as Starbucks realize the importance of such efficiency measures for the long-term
success of its organization, and Starbucks carefully examines its processes with the goal of decreasing
order fulfillment time. In one recent example, Starbucks efficiency experts challenged their employees to
assemble a Mr. Potato Head to understand how work could be done more quickly. [4] The aim of this
exercise was to help Starbucks employees in general match the speed of the firm’s high performers, who
boast an average time per order of twenty-five seconds.
Learning and Growth Measures
Learning and growth measures of performance relate to the future. Such measures provide insight to tell
the organization, “Can we continue to improve and create value?” Learning and growth measures focus on
innovation and proceed with an understanding that strategies change over time. Consequently,
developing new ways to add value will be needed as the organization continues to adapt to an evolving
environment. An example of a learning and growth measure is the number of new skills learned by
employees every year.
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One way Starbucks encourages its employees to learn skills that may benefit both the firm and individuals
in the future is through its tuition reimbursement program. Employees who have worked with Starbucks
for more than a year are eligible. Starbucks hopes that the knowledge acquired while earning a college
degree might provide employees with the skills needed to develop innovations that will benefit the
company in the future. Another benefit of this program is that it helps Starbucks reward and retain high-
achieving employees.
Measuring Performance Using the Triple Bottom Line
Ralph Waldo Emerson once noted, “Doing well is the result of doing good. That’s what capitalism is all
about.” While the balanced scorecard provides a popular framework to help executives understand an
organization’s performance, other frameworks highlight areas such as social responsibility. One such
framework, the triple bottom line, emphasizes the three Ps of people (making sure that the actions of the
organization are socially responsible), the planet (making sure organizations act in a way that promotes
environmental sustainability), and traditional organization profits. This notion was introduced in the
early 1980s but did not attract much attention until the late 1990s.
The triple bottom line emphasizes the three Ps of people (social concerns), planet (environmental
concerns), and profits (economic concerns).
In the case of Starbucks, the firm has made clear the importance it attaches to the planet by creating an
environmental mission statement (“Starbucks is committed to a role of environmental leadership in all
facets of our business”) in addition to its overall mission.[5]In terms of the “people” dimension of the
triple bottom line, Starbucks strives to purchase coffee beans harvested by farmers who work under
humane conditions and are paid reasonable wages. The firm works to be profitable as well, of course.
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K E Y T A K E A W A Y
x Organizational performance is a multidimensional concept, and wise managers rely on multiple measures
of performance when gauging the success or failure of their organizations. The balanced scorecard
provides a tool to help executives gain a general understanding of their organization’s current level of
achievement across a set of four important dimensions. The triple bottom line provides another tool to
help executives focus on performance targets beyond profits alone; this approach stresses the
importance of social and environmental outcomes.
E X E R C I S E S
1. How might you apply the balanced scorecard framework to measure performance of your college or
university?
2. Identify a measurable example of each of the balanced scorecard dimensions other than the examples
offered in this section.
3. Identify a mission statement from an organization that emphasizes each of the elements of the triple
bottom line.
[1] Short, J. C., & Palmer, T. B. 2003. Organizational performance referents: An empirical examination of their
content and influences. Organizational Behavior and Human Decision Processes, 90, 209–224.
[2] Kaplan, R. S., & Norton, D. 1992, February. The balanced scorecard: Measures that drive performance. Harvard
Business Review, 70–79.
[3] Miller, C. 2010, June 15. Aiming at rivals, Starbucks will offer free Wi-Fi. New York Times. Section B, p. 1.
[4] Jargon, J. 2009, August 4. Latest Starbucks buzzword: “Lean” Japanese techniques. Wall Street Journal, p. A1.
[5] Our Starbucks mission statement. Retrieved on March 31, 2011, fromhttp://www.starbucks.com/about-
us/company-information/mission-statement. Accessed March 31, 2011.
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2.3 The CEO as Celebrity
L E A R N I N G O B J E C T I V E S
1. Understand the benefits and costs of CEO celebrity status.
2. List and define the four types of CEOs based on differences in fame and reputation.
3. Be able to offer an example of each of the four types of CEOs
Benefits and Costs of CEO Celebrity
The nice thing about being a celebrity is that when you bore people, they think it’s their fault.
Henry Kissinger, former US Secretary of State
The word celebrity quickly brings to mind actors, sports stars, and musicians. Some CEOs, such as Bill
Gates, Oprah Winfrey, Martha Stewart, and Donald Trump, also achieve celebrity status. Celebrity CEOs
are not a new phenomenon. In the early twentieth century, industrial barons such as Henry Ford, John D.
Rockefeller, and Cornelius Vanderbilt were household names. However, in the current era of mass and
instant media, celebrity CEOs have become more prevalent and visible (Figure 2.7 “CEO”). [1]
Cornelius Vanderbilt was one of the earliest celebrity CEOs; Vanderbilt University serves as his
legacy.
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Image courtesy of Mathew Brady and Michel Vuijlsteke,
http://en.wikipedia.org/wiki/File:Cornelius_Vanderbilt_Daguerrotype2 .
Both benefits and costs are associated with CEO celebrity. As the quote from Henry Kissinger suggests,
celebrity confers a mystique and reverence that can be leveraged in a variety of ways. CEO celebrity can
serve as an intangible asset for the CEO’s firm and may increase opportunities available to the firm.
Hiring or developing a celebrity CEO may increase stock price, enhance a firm’s image, and improve the
morale of employees and other stakeholders. However, employing a celebrity CEO also entails risks for an
organization. Increased attention to the firm via the celebrity CEO means any gaps between actual and
expected firm performance are magnified. Further, if a celebrity CEO acts in an unethical or illegal
manner, chances are that the CEO’s firm will receive much more media attention than will other firms
with similar problems. [2]
There are also personal benefits and risks associated with celebrity for the CEO. Celebrity CEOs tend to
receive higher compensation and job perks than their colleagues. Celebrity CEOs are likely to enjoy
increased prestige power, which facilitates invitations to serve on the boards of directors of other firms
and creates opportunities to network with other “managerial elites.” Celebrity also can provide CEOs with
a “benefit of the doubt” effect that protects against quick sanctions for downturns in firm performance
and stock price. However, celebrity also creates potential costs for individuals. Celebrity CEOs face larger
and more lasting reputation erosion if their job performance and behavior is inconsistent with their
celebrity image. Celebrity CEOs face increased personal media scrutiny, and their friends and family must
often endure increased attention into their personal and public lives. Accordingly, wise CEOs will attempt
to understand and manage their celebrity status. [3]
Types of CEOs
Icons are CEOs possessing both fame and strong reputations. The icon CEO combines style and substance
in the execution of his or her job responsibilities. Mary Kay Ash, Richard Branson, Bill Gates, and Warren
Buffett are good examples of icons. The late Mary Kay Ash founded Mary Kay Cosmetics Corporation. The
firm’s great success and Ash’s unconventional motivational methods, such as rewarding sales
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representatives with pink Cadillacs, made her famous. Partly because she emphasized helping other
women succeed and ethical business practices, Mary Kay Ash also had a very positive reputation. Richard
Branson has created an empire with more than four hundred companies, including Virgin Atlantic
Airways and Virgin Records. Branson’s celebrity status led him to star in his own reality-based show. He
has also appeared on television series such as Baywatch and Friends, in addition to several cameo
appearances in major motion pictures. Bill Gates, founder and former CEO of Microsoft, also has fame
and a largely positive reputation. Gates is a proverbial “household name” in the tradition of Ford,
Rockefeller, and Vanderbilt. He also is routinely listed among Time magazine’s “100 Most Influential
People” and has received “rock star” receptions in India and Vietnam in recent years.
Former Microsoft CEO Bill Gates exemplifies a CEO who has reached icon
status.
Image courtesy of World Economic Forum,
http://en.wikipedia.org/wiki/File:Bill_Gates_in_WEF_,2007 .
Warren Buffett is perhaps the best-known executive in the United States. As CEO of Berkshire Hathaway,
he has accumulated wealth estimated at $62 billion and was the richest person in the world as of March
2008. Buffett’s business insights command a level of respect that is perhaps unrivaled. Many in the
investment and policymaking communities pay careful attention to his investment choices and his
commentary on economic conditions. Despite Buffett’s immense wealth and success, his reputation
centers on humility and generosity. Buffett avoids the glitz of Wall Street and has lived for fifty years in a
house he bought in Omaha, Nebraska, for $31,000. Meanwhile, his 2006 donation of approximately $30
billion to the Bill and Melinda Gates Foundation was the largest charitable gift in history.
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CEOs who display high levels of relative fame but low levels of reputation are in the group called
scoundrels. These CEOs are well known but vilified. The late Leona Helmsley was a prototypical
scoundrel. Leona Helmsley’s life was a classic rags-to-riches story. Born to immigrant parents, Helmsley
became a billionaire through her work as the head of an extensive hotel and real estate empire. While
certainly famous, her reputation was anything but positive, as reflected by her nickname: the Queen of
Mean. During Helmsley’s trial for tax fraud, her housekeeper quoted her as proclaiming, “We don’t pay
taxes. Only the little people pay taxes.” Following twenty-one months in jail, Helmsley was required to
perform 750 hours of community service. One hundred fifty hours were added to this sentence after it was
discovered that employees had performed some of her service hours. Helmsley’s apparent arrogance,
combined with her cruelty to employees and her reputation as the ultimate workplace bully, cemented her
position as a scoundrel.
The corporate governance scandals of the early 2000s revealed several CEOs as scoundrels. Perhaps the
best known were Kenneth Lay and Dennis Kozlowski. Both men rose to prominence as their firms’ success
and stock prices soared but were undone by dubious activities. Lay was once revered as the son of a poor
minister who founded Enron and built it into a giant in the energy business. In 2001, however, he became
the face of corporate abuses in the United States after Enron’s collapse led to scenes, captured on
television, of employees left jobless and with retirement accounts full of worthless Enron stock. Lay was
convicted of fraud in 2006 but died before sentencing.
Also born to a poor family, Kozlowski started at Tyco as an accountant and worked his way up to the
executive suite. In May 2001, a BusinessWeek cover story lauded Kozlowski as “the most aggressive CEO”
in the country and detailed his strategy for building Tyco into the next General Electric by using
acquisitions to gain the first or second position in all the industries in which it competed. By 2002,
Kozlowski’s reputation was in jeopardy. He was indicted for avoiding more than $1 million in sales taxes
on art purchases. Media stories described in detail a $2 million birthday party Kozlowski threw for his
wife (billing half of it to Tyco as a company function), a $19 million apartment Tyco purchased for him,
and $11 million worth of furnishings for the apartment (including an infamous $6,000 shower curtain).
Accusations that Kozlowski and another Tyco executive stole hundreds of millions of dollars from the firm
ultimately led to a prison sentence of eight to twenty-five years.
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Hidden gems are CEOs who lack fame but possess positive reputations. These CEOs toil in relative
obscurity while leading their firms to success. Their skill as executives is known mainly by those in their
own firm and by their competitors. In many cases, the firm has some renown due to its success, but the
CEO stays unknown. For example, consider the case of Anne Mulcahy. Mulcahy, CEO of Xerox, started
her career at Xerox as a copier salesperson. Despite building an excellent reputation by rescuing Xerox
from near bankruptcy, Mulcahy eschews fame and publicity. While being known for successfully leading
Xerox by example and being willing to fly anywhere to meet a customer, she avoids stock analysts and
reporters.
Silent killers are the fourth and final group of CEOs. These CEOs are overlooked and ignored sources of
harm to their firms. While scoundrels are closely monitored and scrutinized by the media, it may be too
late before the poor ethics or incompetence of the silent killers is detected. In this sense, silent killers are
sometimes worse than scoundrels. One example of a silent killer is Harding Lawrence, former CEO of
defunct Braniff International. Lawrence initiated a massive expansion of the airline following industry
deregulation in the late 1970s. The result was a bloated firm, ill-equipped to survive the extremely
competitive setting that evolved in the early 1980s. Howard Putnam, the CEO of a small regional carrier
named Southwest Airlines, was hired in a failed effort to save the company. By the time Braniff went
bankrupt, Putnam was left to explain its demise, and the name of the main culprit was all but forgotten.
Ironically, had Putnam declined the opportunity to try to save Braniff, perhaps he and not Herb Kelleher
would have become an icon at the helm of Southwest.
Strategy at the Movies
Iron Man
Has Tony Stark gone crazy? This was the question that many stakeholders of Stark Industries were asking
themselves in the 2008 blockbuster Iron Man. Tony Stark, CEO of Stark Industries, stunned his
shareholders, employees, and the world when he announced that he was changing Stark Industries’
mission from being one of the world’s leading weapons manufacturers to being a socially responsible,
clean energy producer. Following his announcement, Stark faced fierce opposition from his board of
directors, employees, the media, and clients such as the US military. The changes at Stark Industries
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attracted tremendous attention in part because of the glamorous Stark’s status as a celebrity CEO.
Initially, Stark is seen by the public as a scoundrel that pays little attention to the social impact his
company makes. After shifting the direction of Stark Industries, however, Stark is viewed as an icon that
is just as attentive to the social performance of the company as he is to its financial performance. Iron
Man illustrates that while changing elements such as firm mission and CEO status is difficult, it is not
impossible.
Iron Man: The Greatest Creation of Fictional Celebrity CEO Tony Stark
Image courtesy of Pop Culture Geek, http://www.flickr.com/photos/popculturegeek/4858995531.
Celebrity Rehabilitation
Anything I say or do is now at risk of showing up on the front page of a national daily newspaper and
therefore, I need to be much more conscious about the implications of everything that I say or do in all
situations.
John Mackey, CEO of Whole Foods Market
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Achieving the level of success that brings about celebrity is seldom a completely smooth process. Even
well-regarded celebrity CEOs seldom have totally untarnished reputations. Bill Gates has been portrayed
as a ruthless and devious genius, for example, while General Electric CEO Jack Welch was attacked in
media outlets for an extramarital affair.
One of the more interesting recent cases of a tarnished reputation centers on John Mackey, founder and
CEO of Whole Foods Market. His strategy of offering organic food and high levels of service allowed
Whole Foods to carve out a profitable and growing niche in an industry whose overall margins have been
squeezed as Walmart’s Supercenters have gained market share. Under Mackey’s leadership, Whole Food’s
stock price tripled from 2001 to 2006. Mackey’s efforts to make food supplies healthier and his teamwork-
centered management approach attracted publicity, and he appeared headed for icon status.
But in 2007 Mackey and Whole Foods were embarrassed by the revelation that Mackey had been
anonymously posting negative information about a rival, Wild Oats, online. Through his online persona
“rahodeb” (a scrambling of his wife’s name), Mackey asserted that Wild Oats’ stock was overpriced and
that the firm was headed toward bankruptcy. This was viewed by some observers as a possible effort to
manipulate Wild Oats’ stock price prior to a proposed acquisition by Whole Foods. Meanwhile, in e-mails
to other Whole Foods executives, Mackey noted that the acquisition of Wild Oats could allow them to
avoid “nasty price wars.” This caught the eye of Federal Trade Commission (FTC) regulators who were
concerned about the antitrust implications of the acquisition.
Whole Foods CEO John Mackey’s celebrity status was amplified when it was revealed that he had posted negative
information online about competitor Wild Oats.
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Image courtesy of Joe M500, http://en.wikipedia.org/wiki/File:John_Mackey,_of_Whole_Foods_in_2009 .
What should a CEO do when his or her reputation takes a hit? As the old saying goes, honesty is the best
policy. An example is offered by David Neeleman, founder and CEO of JetBlue. The reputations of JetBlue
and Neeleman took a severe blow after a widely reported February 2007 debacle in which travelers were
stranded in airplanes for excessive periods of time during a busy holiday weekend. Neeleman took a giant
step toward restoring both his and JetBlue’s reputation by issuing a public, heartfelt apology. He not only
issued a written apology to customers but also bought full-page advertisements in newspapers, posted a
video apology online, and created a new “bill of rights” for JetBlue customers.
Mackey apologized for his actions via his blog in 2008. As part of this apology, Mackey acknowledged that
he had failed to recognize how expectations change when one becomes a celebrity. Mackey noted that
when Whole Foods was a smaller company, “I was seldom interviewed and few people knew or cared who
I was. I wasn’t a public figure and had no desire to become one.” As his company grew, however, Mackey
became subject to more scrutiny. As Mackey put it, “At some point in the past 10 years I went from being a
relatively unknown person to becoming a public figure. I regret not having the wisdom to recognize this
fact until very recently.”[4] A big part of managing celebrity status is realizing that one is in fact a celebrity.
K E Y T A K E A W A Y
x The media exposure common to modern CEOs provides the opportunity for such top executives to reach
celebrity status. While this status can provide positive benefits to their firms such as increased
performance, CEOs should be aware of and manage the potential for increased scrutiny associated with
this status.
E X E R C I S E S
1. Can you identify another example of a celebrity CEO, such as Cornelius Vanderbilt, that existed prior to
the 1900s?
2. Identify examples of icons, scoundrels, hidden gems, and silent killers other than the examples offered in
this section.
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3. Would you enjoy the media attention associated with CEO celebrity, or would you prefer to hide from the
limelight? Does your answer have implications for your future career choices?
[1] This section of the chapter is adapted from Ketchen, D., Adams, G., & Shook, C. 2008. Understanding and
managing CEO celebrity. Business Horizons, 51(6), 529–534.
[2] Ranft, A. L., Zinko, R., Ferris, G. R., & Buckley, M. R. 2006. Marketing the image of management: The costs and
benefits of CEO reputation. Organizational Dynamics, 35(3), 279–290.
[3] Wade, J. B., Porac, J. F., Pollock, T. G., & Graffin, S. D. 2008. Star CEOs: Benefit or burden? Organizational
Dynamics, 37(2), 203–210.
[4] John Mackey’s blog. 2008, May 21. Re: Apology. Retrieved
fromhttp://www2.wholefoodsmarket.com/blogs/jmackey/2008/05/21/back-to-blogging/#more-26.
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2.4 Entrepreneurial Orientation
L E A R N I N G O B J E C T I V E S
1. Understand how thinking and acting entrepreneurially can help organizations and individuals.
2. List and define the five dimensions of an entrepreneurial orientation.
The Value of Thinking and Acting Entrepreneurially
When asked to think of an entrepreneur, people typically offer examples such as Howard Schultz, Estée
Lauder, and Michael Dell—individuals who have started their own successful businesses from the bottom
up that generated a lasting impact on society. But entrepreneurial thinking and doing are not limited to
those who begin in their garage with a new idea, financed by family members or personal savings. Some
people in large organizations are filled with passion for a new idea, spend their time championing a new
product or service, work with key players in the organization to build a constituency, and then find ways
to acquire the needed resources to bring the idea to fruition. Thinking and behaving entrepreneurially can
help a person’s career too. Some enterprising individuals successfully navigate through the environments
of their respective organizations and maximize their own career prospects by identifying and seizing new
opportunities.[1]
As a college student, Michael Dell demonstrated an entrepreneurial
orientation by starting a computer-upgrading business in his dorm room.
He later founded Dell Inc.
Image courtesy of Ilan Costica,
http://en.wikipedia.org/wiki/File:Michael_Dell_at_Oracle_OpenWorld.J
PG.
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In the 1730s, Richard Cantillon used the French term entrepreneur, or literally “undertaker,” to refer to
those who undertake self-employment while also accepting an uncertain return. In subsequent years,
entrepreneurs have also been referred to as innovators of new ideas (Thomas Edison), individuals who
find and promote new combinations of factors of production (Bill Gates’ bundling of Microsoft’s
products), and those who exploit opportunistic ideas to expand small enterprises (Mark Zuckerberg at
Facebook). The common elements of these conceptions of entrepreneurs are that they do something new
and that some individuals can make something out of opportunities that others cannot.
Entrepreneurial orientation (EO) is a key concept when executives are crafting strategies in the hopes of
doing something new and exploiting opportunities that other organizations cannot exploit. EO refers to
the processes, practices, and decision-making styles of organizations that act entrepreneurially. [2] Any
organization’s level of EO can be understood by examining how it stacks up relative to five dimensions: (1)
autonomy, (2) competitive aggressiveness, (3) innovativeness, (4) proactiveness, (5) and risk taking.
These dimensions are also relevant to individuals.
Autonomy
Autonomy refers to whether an individual or team of individuals within an organization has the freedom
to develop an entrepreneurial idea and then see it through to completion. In an organization that offers
high autonomy, people are offered the independence required to bring a new idea to fruition, unfettered
by the shackles of corporate bureaucracy. When individuals and teams are unhindered by organizational
traditions and norms, they are able to more effectively investigate and champion new ideas.
Some large organizations promote autonomy by empowering a division to make its own decisions, set its
own objectives, and manage its own budgets. One example is Sony’s PlayStation group, which was created
by chief operating officer (COO) Ken Kutaragi, largely independent of the Sony bureaucracy. In time, the
PlayStation business was responsible for nearly all Sony’s net profit. Because of the success generated by
the autonomous PlayStation group, Kutaragi later was tapped to transform Sony’s core consumer
electronics business into a PlayStation clone. In some cases, an autonomous unit eventually becomes
completely distinct from the parent company, such as when Motorola spun off its successful
semiconductor business to create Freescale.
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Competitive Aggressiveness
Competitive aggressiveness is the tendency to intensely and directly challenge competitors rather than
trying to avoid them. Aggressive moves can include price-cutting and increasing spending on marketing,
quality, and production capacity. An example of competitive aggressiveness can be found in Ben & Jerry’s
marketing campaigns in the mid-1980s, when Pillsbury’s Häagen-Dazs attempted to limit distribution of
Ben & Jerry’s products. In response, Ben & Jerry’s launched their “What’s the Doughboy Afraid Of?”
advertising campaign to challenge Pillsbury’s actions. This marketing action was coupled with a series of
lawsuits—Ben & Jerry’s was competitively aggressive in both the marketplace and the courtroom.
Although aggressive moves helped Ben & Jerry’s, too much aggressiveness can undermine an
organization’s success. A small firm that attacks larger rivals, for example, may find itself on the losing
end of a price war. Establishing a reputation for competitive aggressiveness can damage a firm’s chances
of being invited to join collaborative efforts such as joint ventures and alliances. In some industries, such
as the biotech industry, collaboration is vital because no single firm has the knowledge and resources
needed to develop and deliver new products. Executives thus must be wary of taking competitive actions
that destroy opportunities for future collaborating.
Innovativeness
Innovativeness is the tendency to pursue creativity and experimentation. Some innovations build on
existing skills to create incremental improvements, while more radical innovations require brand-new
skills and may make existing skills obsolete. Either way, innovativeness is aimed at developing new
products, services, and processes. Those organizations that are successful in their innovation efforts tend
to enjoy stronger performance than those that do not.
Known for efficient service, FedEx has introduced its Smart Package, which allows both shippers and
recipients to monitor package location, temperature, and humidity. This type of innovation is a welcome
addition to FedEx’s lineup for those in the business of shipping delicate goods, such as human organs.
How do firms generate these types of new ideas that meet customers’ complex needs? Perennial
innovators 3M and Google have found a few possible answers. 3M sends nine thousand of its technical
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personnel in thirty-four countries into customers’ workplaces to experience firsthand the kinds of
problems customers encounter each day. Google’s two most popular features of its Gmail, thread sorting
and unlimited e-mail archiving, were first suggested by an engineer who was fed up with his own e-mail
woes. Both firms allow employees to use a portion of their work time on projects of their own choosing
with the goal of creating new innovations for the company. This latter example illustrates how multiple
EO dimensions—in this case, autonomy and innovativeness—can reinforce one another.
Ben & Jerry’s displays innovativeness by developing a series of offbeat and creative flavors over time.
Image courtesy of theimpulsivebuy,
Proactiveness
Proactiveness is the tendency to anticipate and act on future needs rather than reacting to events after
they unfold. A proactive organization is one that adopts an opportunity-seeking perspective. Such
organizations act in advance of shifting market demand and are often either the first to enter new markets
or “fast followers” that improve on the initial efforts of first movers.
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Consider Proactive Communications, an aptly named small firm in Killeen, Texas. From its beginnings in
2001, this firm has provided communications in hostile environments, such as Iraq and areas impacted by
Hurricane Katrina. Being proactive in this case means being willing to don a military helmet or sleep
outdoors—activities often avoided by other telecommunications firms. By embracing opportunities that
others fear, Proactive’s executives have carved out a lucrative niche in a world that is technologically,
environmentally, and politically turbulent. [3]
Risk Taking
Risk taking refers to the tendency to engage in bold rather than cautious actions. Starbucks, for example,
made a risky move in 2009 when it introduced a new instant coffee called VIA Ready Brew. Instant coffee
has long been viewed by many coffee drinkers as a bland drink, but Starbucks decided that the
opportunity to distribute its product in a different format was worth the risk of associating its brand name
with instant coffee.
Although a common belief about entrepreneurs is that they are chronic risk takers, research suggests that
entrepreneurs do not perceive their actions as risky, and most take action only after using planning and
forecasting to reduce uncertainty. [4] But uncertainty seldom can be fully eliminated. A few years ago,
Jeroen van der Veer, CEO of Royal Dutch Shell PLC, entered a risky energy deal in Russia’s Far East. At
the time, van der Veer conceded that it was too early to know whether the move would be
successful. [5] Just six months later, however, customers in Japan, Korea, and the United States had
purchased all the natural gas expected to be produced there for the next twenty years. If political
instabilities in Russia and challenges in pipeline construction do not dampen returns, Shell stands to post
a hefty profit from its 27.5 percent stake in the venture.
Building an Entrepreneurial Orientation
Steps can be taken by executives to develop a stronger entrepreneurial orientation throughout an
organization and by individuals to become more entrepreneurial themselves. For executives, it is
important to design organizational systems and policies to reflect the five dimensions of EO. As an
example, how an organization’s compensation systems encourage or discourage these dimensions should
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be considered. Is taking sensible risks rewarded through raises and bonuses, regardless of whether the
risks pay off, for example, or does the compensation system penalize risk taking? Other organizational
characteristics such as corporate debt level may influence EO. Do corporate debt levels help or impede
innovativeness? Is debt structured in such a way as to encourage risk taking? These are key questions for
executives to consider.
Examination of some performance measures can assist executives in assessing EO within their
organizations. To understand how the organization develops and reinforces autonomy, for example, top
executives can administer employee satisfaction surveys and monitor employee turnover rates.
Organizations that effectively develop autonomy should foster a work environment with high levels of
employee satisfaction and low levels of turnover. Innovativeness can be gauged by considering how many
new products or services the organization has developed in the last year and how many patents the firm
has obtained.
Similarly, individuals should consider whether their attitudes and behaviors are consistent with the five
dimensions of EO. Is an employee making decisions that focus on competitors? Does the employee
provide executives with new ideas for products or processes that might create value for the organization?
Is the employee making proactive as opposed to reactive decisions? Each of these questions will aid
employees in understanding how they can help to support EO within their organizations.
K E Y T A K E A W A Y
x Building an entrepreneurial orientation can be valuable to organizations and individuals alike in
identifying and seizing new opportunities. Entrepreneurial orientation consists of five dimensions: (1)
autonomy, (2) competitive aggressiveness, (3) innovativeness, (4) proactiveness, and (5) risk taking.
E X E R C I S E S
1. Can you name three firms that have suffered because of lack of an entrepreneurial orientation?
2. Identify examples of each dimension of entrepreneurial orientation other than the examples offered in
this section.
3. How does developing an entrepreneurial orientation have implications for your future career choices?
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4. How could you apply the dimensions of entrepreneurial orientation to a job search?
[1] This section is adapted from Certo, S. T., Moss, T. W., & Short, J. C. 2009. Entrepreneurial orientation: An
applied perspective. Business Horizons, 52, 319–324.
[2] Lumpkin, G. T., & Dess, G. G. 1996. Clarifying the entrepreneurial orientation construct and linking it to
performance. Academy of Management Review, 21, 135–172.
[3] Choi, A. S. 2008, April 16. PCI builds telecommunications in Iraq. Bloomberg Businessweek. Retrieved
fromhttp://www.businessweek.com/magazine/content/08_64/s0804065916656.htm.
[4] Simon, M., Houghton, S. M., & Aquino, K. 2000. Cognitive biases, risk perception, and venture formation: How
individuals decide to start companies. Journal of Business Venturing, 14, 113–134.
[5] Certo, S. T., Connelly, B., & Tihanyi, L. 2008. Managers and their not-so-rational decisions. Business
Horizons, 51(2), 113–119.
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2.5 Conclusion
This chapter explains several challenges that executives face in attempting to lead their organizations
strategically. Executives must ensure that their organizations have visions, missions, and goals in
place that help move these organizations forward. Measures and referents for assessing performance
must be thoughtfully chosen. Some executives become celebrities, thereby creating certain
advantages and disadvantages for themselves and for their firms. Finally, executives must monitor
the degree of entrepreneurial orientation present within their organizations and make adjustments
when necessary. When executives succeed at leading strategically, an organization has an excellent
chance of success.
E X E R C I S E S
1. Divide your class into four or eight groups, depending on the size of the class. Assign each group to
develop arguments that one of the key issues discussed in this chapter (vision, mission, goals; assessing
organizational performance; CEO celebrity; entrepreneurial orientation) is the most important within
organizations. Have each group present their case, and then have the class vote individually for the
winner. Which issue won and why?
2. This chapter discussed Howard Schultz and Starbucks on several occasions. Based on your reading of the
chapter, how well has Schultz done in dealing with setting a vision, mission, and goals, assessing
organizational performance, CEO celebrity, and entrepreneurial orientation?
3. Write a vision and mission for an organization or firm that you are currently associated with. How could
you use the balanced scorecard to assess how well that organization is fulfilling the mission you wrote?
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Chapter 4
Managing Firm Resources
L E A R N I N G O B J E C T I V E S
After reading this chapter, you should be able to understand and articulate answers to the following
questions:
1. What is resource-based theory, and why is it important to organizations?
2. In what ways can intellectual property serve as a value-added resource for organizations?
3. How should executives use the value chain to maximize the performance of their organizations?
4. What is SWOT analysis and how can it help an organization?
Southwest Airlines: Let Your LUV Flow
Southwest Airlines’ acquisition of AirTran in 2011 may lead the firm into stormy skies.
Chapter 4 from Mastering Strategic Management was adapted by The Saylor Foundation under
a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested
by the work’s original creator or licensee. © 2014, The Saylor Foundation.
http://www.saylor.org/site/textbooks/Mastering%20Strategic%20Management
http://creativecommons.org/licenses/by-nc-sa/3.0/
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Image courtesy of Stuart Seeger,http://en.wikipedia.org/wiki/File:Southwest_737_At_Burbank
In 1971, an upstart firm named Southwest Airlines opened for business by offering flights between
Houston, San Antonio, and its headquarters at Love Field in Dallas. From its initial fleet of three airplanes
and three destinations, Southwest has grown to operate hundreds of airplanes in scores of cities. Despite
competing in an industry that is infamous for bankruptcies and massive financial losses, Southwest
marked its thirty-eighth profitable year in a row in 2010.
Why has Southwest succeeded while many other airlines have failed? Historically, the firm has differed
from its competitors in a variety of important ways. Most large airlines use a “hub and spoke” system.
This type of system routes travelers through a large hub airport on their way from one city to another.
Many Delta passengers, for example, end a flight in Atlanta and then take a connecting flight to their
actual destination. The inability to travel directly between most pairs of cities adds hours to a traveler’s
itinerary and increases the chances of luggage being lost. In contrast, Southwest does not have a hub
airport; preferring instead to connect cities directly. This helps make flying on Southwest attractive to
many travelers.
Southwest has also been more efficient than its rivals. While most airlines use a variety of different
airplanes, Southwest operates only one type of jet: the Boeing 737. This means that Southwest can service
its fleet much more efficiently than can other airlines. Southwest mechanics need only the know-how to
fix one type of airplane, for example, while their counterparts with other firms need a working knowledge
of multiple planes. Southwest also gains efficiency by not offering seat assignments in advance, unlike its
competitors. This makes the boarding process move more quickly, meaning that Southwest’s jets spend
more time in the air transporting customers (and making money) and less time at the gate relative to its
rivals’ planes.
Organizational culture is the dimension along which Southwest perhaps has differed most from its rivals.
The airline industry as a whole suffers from a reputation for mediocre (or worse) service and indifferent
(sometimes even surly) employees. In contrast, Southwest enjoys strong loyalty and a sense of teamwork
among its employees.
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One tangible indicator of this culture is Southwest’s stock ticker symbol. Most companies choose stock
ticker symbols that evoke their names. Ford’s ticker symbol is F, for example, and Walmart’s symbol is
WMT. When Southwest became a publicly traded company in 1977, executives chose LUV as its ticker
symbol. LUV pays a bit of homage to the firm’s humble beginnings at Love Field. More important,
however, LUV represents the love that executives have created among employees, between employees and
the company, and between customers and the company. This “LUV affair” has long been and remains a
huge success. As recently as March 2011, for example, Southwest was ranked fourth
on Fortune magazine’s World’s Most Admired Company list.
In September 2010, Southwest surprised many observers when it announced that it was acquiring
AirTran Airways for $1.4 billion. Southwest and AirTran both emphasized low fares, but they differed in
many ways. AirTran routed most of its passengers through a hub-and-spoke system, and it relied on a
different plane than Southwest, the Boeing 717. The acquisition of AirTran thus raised important
questions about Southwest’s future. [1] How would AirTran’s hub-and-spoke system be integrated with
Southwest’s nonhub approach? Could the airlines’ respective fleets of 737s and 717s be joined without
losing efficiency? Perhaps most important, could Southwest maintain its legendary organizational culture
while taking over a sizable rival and integrating AirTran’s thousands of employees? When the acquisition
was finalized on May 2, 2011, it remained unclear whether Southwest was flying off course or whether
Southwest’s “LUV story” would continue for many years.
[1] Schlangenstein, M., & Hughes, J. 2010, September 28. Southwest risks keep-it-simple focus to spur growth.
Retrieved from http://www.washingtonpost.com/wp-dyn/content/article/2010/09/28/AR2010092801578.html
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4.1 Resource-Based Theory
L E A R N I N G O B J E C T I V E S
1. Define the four characteristics of resources that lead to sustained competitive advantage as articulated by
the resource-based theory of the firm.
2. Understand the difference between resources and capabilities.
3. Be able to explain the difference between tangible and intangible resources.
4. Know the elements of the marketing mix.
Four Characteristics of Strategic Resources
Southwest Airlines provides an illustration of resource-based theory in action. Resource-
based theory contends that the possession of strategic resources provides an organization with a golden
opportunity to develop competitive advantages over its rivals. These competitive advantages in turn
can help the organization enjoy strong profits.[1]
A strategic resource is an asset that is valuable, rare, difficult to imitate, and nonsubstitutable. [2] A
resource is valuable to the extent that it helps a firm create strategies that capitalize on opportunities and
ward off threats. Southwest Airlines’ culture fits this standard well. Most airlines struggle to be profitable,
but Southwest makes money virtually every year. One key reason is a legendary organizational culture
that inspires employees to do their very best. This culture is also rare in that strikes, layoffs, and poor
morale are common within the airline industry.
Competitors have a hard time duplicating resources that are difficult to imitate. Some difficult to imitate
resources are protected by various legal means, including trademarks, patents, and copyrights. Other
resources are hard to copy because they evolve over time and they reflect unique aspects of the firm.
Southwest’s culture arose from its very humble beginnings. The airline had so little money that at times it
had to temporarily “borrow” luggage carts from other airlines and put magnets with the Southwest logo
on top of the rivals’ logo. Southwest is a “rags to riches” story that has evolved across several decades.
Other airlines could not replicate Southwest’s culture, regardless of how hard they might try, because of
Southwest’s unusual history.
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A resource is nonsubstitutable when competitors cannot find alternative ways to gain the benefits that a
resource provides. A key benefit of Southwest’s culture is that it leads employees to treat customers well,
which in turn creates loyalty to Southwest among passengers. Executives at other airlines would love to
attract the customer loyalty that Southwest enjoys, but they have yet to find ways to inspire the kind of
customer service that the Southwest culture encourages.
Southwest Airlines’ unique culture is reflected in the customization of their aircraft over the years, such as the “Lone Star
One” design.
Image courtesy of planephotoman,http://en.wikipedia.org/wiki/File:Southwest_737_Lonestar_One .
Ideally, a firm will have a culture that embraces the four qualities. If so, these resources can provide
not only a competitive advantage but also a sustained competitive advantage—one that
will endure over time and help the firm stay successful far into the future. Resources that do not
have all four qualities can still be very useful, but they are unlikely to provide long-term advantages.
A resource that is valuable and rare but that can be imitated, for example, might provide an edge in the
short term, but competitors can overcome such an advantage eventually.
Resource-based theory also stresses the merit of an old saying: the whole is greater than the sum of its
parts. Specifically, it is also important to recognize that strategic resources can be created by taking
several strategies and resources that each could be copied and bundling them together in a way that
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cannot be copied. For example, Southwest’s culture is complemented by approaches that individually
could be copied—the airline’s emphasis on direct flights, its reliance on one type of plane, and its unique
system for passenger boarding—to create a unique business model whose performance is without peer in
the industry.
Resource-based theory can be confusing because the term resources is used in many different ways within
everyday common language. It is important to distinguish strategic resources from other resources. To
most individuals, cash is an important resource. Tangible goods such as one’s car and home are also vital
resources. When analyzing organizations, however, common resources such as cash and vehicles are not
considered to be strategic resources. Resources such as cash and vehicles are valuable, of course, but an
organization’s competitors can readily acquire them. Thus an organization cannot hope to create an
enduring competitive advantage around common resources.
On occasion, events in the environment can turn a common resource into a strategic resource. Consider,
for example, a very generic commodity: water. Humans simply cannot live without water, so water has
inherent value. Also, water cannot be imitated (at least not on a large scale), and no other substance can
substitute for the life-sustaining properties of water. Despite having three of the four properties of
strategic resources, water in the United States has remained cheap. Yet this may be changing. Major cities
in hot climates such as Las Vegas, Los Angeles, and Atlanta are confronted by dramatically shrinking
water supplies. As water becomes more and more rare, landowners in Maine stand to benefit. Maine has
been described as “the Saudi Arabia of water” because its borders contain so much drinkable water. It is
not hard to imagine a day when companies in Maine make huge profits by sending giant trucks filled with
water south and west or even by building water pipelines to service arid regions.
From Resources to Capabilities
The tangibility of a firm’s resources is an important consideration within resource-based
theory. Tangible resources are resources that can be readily seen, touched, and quantified. Physical assets
such as a firm’s property, plant, and equipment, as well as cash, are considered to be tangible resources.
In contrast, intangible resources are quite difficult to see, to touch, or to quantify. Intangible resources
include, for example, the knowledge and skills of employees, a firm’s reputation, and a firm’s culture. In
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comparing the two types of resources, intangible resources are more likely to meet the criteria for
strategic resources (i.e., valuable, rare, difficult to imitate, and nonsubstitutable) than are tangible
resources. Executives who wish to achieve long-term competitive advantages should therefore place a
premium on trying to nurture and develop their firms’ intangible resources.
Capabilities are another key concept within resource-based theory. A good and easy-to-remember way to
distinguish resources and capabilities is this: resources refer to what an organization owns, capabilities
refer to what the organization can do. Capabilities tend to arise over time as a firm takes actions that build on
its strategic resources. Southwest Airlines, for example, has developed the capability of providing excellent
customer service by building on its strong organizational culture. Capabilities are important in part because
they are how organizations capture the potential value that resources offer. Customers do not simply
send money to an organization because it owns strategic resources. Instead, capabilitiesare needed to bundle,
to manage, and otherwise to exploit resources in a manner that provides value added to customers
and creates advantages over competitors.
Some firms develop a dynamic capability. This means that a firm has a unique capability of creating new
capabilities. Said differently, a firm that enjoys a dynamic capability is skilled at continually updating its
array of capabilities to keep pace with changes in its environment. General Electric, for example, buys and
sells firms to maintain its market leadership over time, while Coca-Cola has an uncanny knack for
building new brands and products as the soft-drink market evolves. Not surprisingly, both of these firms
rank among the top thirteen among the “World’s Most Admired Companies” for 2011.
Strategy at the Movies
That Thing You Do!
How can the members of an organization reach success “doing that thing they do”? According to resource-
based theory, one possible road to riches is creating—on purpose or by accident—a unique combination of
resources. In the 1996 movie That Thing You Do!, unwittingly assembling a unique bundle of resources
leads a 1960s band called The Wonders to rise from small-town obscurity to the top of the music charts.
One resource is lead singer Jimmy Mattingly, who possesses immense musical talent. Another is guitarist
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Lenny Haise, whose fun attitude reigns in the enigmatic Mattingly. Although not a formal band member,
Mattingly’s girlfriend Faye provides emotional support to the group and even suggests the group’s name.
When the band’s usual drummer has to miss a gig due to injury, the door is opened for charismatic
drummer Guy Patterson, whose energy proves to be the final piece of the puzzle for The Wonders.
Despite Mattingly’s objections, Guy spontaneously adds an up-tempo beat to a sleepy ballad called “That
Thing You Do!” during a local talent contest. When the talent show audience goes crazy in response, it
marks the beginning of a meteoric rise for both the song and the band. Before long, The Wonders perform
on television and “That Thing You Do!” is a top-ten hit record. The band’s magic vanishes as quickly as it
appeared, however. After their bass player joins the Marines, Lenny elopes on a whim, and Jimmy’s diva
attitude runs amok, the band is finished and Guy is left to “wonder” what might have been. That Thing
You Do! illustrates that while bundling resources in a unique way can create immense success, preserving
and managing these resources over time can be very difficult.
Liv Tyler plays Faye Dolan, the love interest of drummer Guy Patterson, in That Thing You Do!
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Image courtesy of Daniel Dormann,http://en.wikipedia.org/wiki/File:LivTylerJune08 .
Is Resource-Based Theory Old News?
Resource-based theory has evolved in recent years to provide a way to understand how strategic resources
and capabilities allow firms to enjoy excellent performance. But more than one wry observer has
wondered aloud, “Is resource-based theory just old wine in a new bottle?” This is a question worth
considering because the role of resources in shaping success and failure has been discussed for many
centuries.
Aesop was a Greek storyteller who lived approximately 2,500 years ago. Aesop is known in particular for
having created a series of fables—stories that appear on the surface to be simply children’s tales but that
offer deep lessons for everyone. One of Aesop’s fables focuses on an ass (donkey) and some grasshoppers.
When the ass tries to duplicate the sweet singing of the grasshoppers by copying their diet, he soon dies of
starvation. Attempting to replicate the grasshoppers’ unique singing capability proved to be a fatal
mistake. The fable illustrates a central point of resource-based theory: it is an array of resources and
capabilities that fuels enduring success, not any one resource alone.
In a far more recent example, sociologist Philip Selznick developed the concept
of distinctive competence through a series of books in the 1940s and 1950s.[3] A distinctive competence is
a set of activities that an organization performs especially well. Southwest Airlines, for example, appears
to have a distinctive competency in operations, as evidenced by how quickly it moves its flights in and out
of airports. Further, Selznick suggested that possessing a distinctive competency creates a competitive
advantage for a firm. Certainly, there is plenty of overlap between the concept of distinctive competency,
on the one hand, and capabilities, on the other.
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So is resource-based theory in fact old wine in a new bottle? Not really. Resource-based theory builds on
past ideas about resources, but it represents a big improvement on past ideas in at least two ways. First,
resource-based theory offers a complete framework for analyzing organizations, not just snippets of
valuable wisdom like Aesop and Selznick provided. Second, the ideas offered by resource-based theory
have been developed and refined through scores of research studies involving thousands of organizations.
In other words, there is solid evidence backing it up.
The Marketing Mix
Leveraging resources and capabilities to create desirable products and services is important, but
customers must still be convinced to purchase these goods and services. The marketing mix—also known
as the four Ps of marketing—provides important insights into how to make this happen. A master of the
marketing mix was circus impresario P. T. Barnum, who is famous in part for his claim that “there’s a
sucker born every minute.” The real purpose of the marketing mix is not to trick customers but rather to
provide a strong alignment among the four Ps (product, price, place, and promotion) to offer customers a
coherent and persuasive message.
A firm’s product is what it sells to customers. Southwest Airlines sells, of course, airplane flights. The
airline tries to set its flights apart from those of airlines by making flying fun. This can include, for
example, flight attendants offering preflight instructions as a rap. The price of a good or service should
provide a good match with the value offered. Throughout its history, Southwest has usually charged lower
airfares than its rivals. Place can refer to a physical purchase point as well as a distribution channel.
Southwest has generally operated in cities that are not served by many airlines and in secondary airports
in major cities. This has allowed the firm to get favorable lease rates at airports and has helped it create
customer loyalty among passengers who are thankful to have access to good air travel.
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Finally, promotion consists of the communications used to market a product, including advertising, public
relations, and other forms of direct and indirect selling. Southwest is known for its clever advertising. In a
recent television advertising campaign, for example, Southwest lampooned the baggage fees charged by
most other airlines while highlighting its more customer-friendly approach to checked luggage. Given the
consistent theme of providing a good value plus an element of fun to passengers that is developed across
the elements of the marketing mix, it is no surprise that Southwest has been so successful within a very
challenging industry.
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Few executives in history have had the marketing savvy of P. T. Barnum.
Image courtesy of The Strobridge Litho. Co., Cincinnati & New York,
http://en.wikipedia.org/wiki/File:Barnum_%26_Bailey_clowns_and_geese2 .
K E Y T A K E A W A Y
x Resource-based theory suggests that resources that are valuable, rare, difficult to imitate, and
nonsubstitutable best position a firm for long-term success. These strategic resources can provide the
foundation to develop firm capabilities that can lead to superior performance over time. Capabilities are
needed to bundle, to manage, and otherwise to exploit resources in a manner that provides value added
to customers and creates advantages over competitors.
E X E R C I S E S
1. Does your favorite restaurant have the four qualities of resources that lead to success as articulated by
resource-based theory?
2. If you were hired by your college or university to market your athletic department, what element of the
marketing mix would you focus on first and why?
3. What other classic stories or fables could be applied to discuss the importance of firm resources and
superior performance?
[1] Barney, J. B. 1991. Firm resources and sustained competitive advantage. Journal of Management, 17, 99–120;
Wernerfelt, B. 1984. A resource-based view of the firm. Strategic Management Journal, 5, 171–180.
[2] Barney, J. B. 1991. Firm resources and sustained competitive advantage. Journal of Management, 17, 99–120;
Chi, T. 1994. Trading in strategic resources: Necessary conditions, transaction cost problems, and choice of
exchange structure. Strategic Management Journal, 15(4), 271–290.
[3] Selznick, P. 1957. Leadership in administration. New York: Harper; Selznick, P. 1952. The organizational weapon.
New York, NY: McGraw-Hill; Selznick, P. 1949. TVA and the grass roots. Berkeley, CA: University of California Press.
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4.2 Intellectual Property
L E A R N I N G O B J E C T I V E S
1. Define the four major types of intellectual property.
2. Be able to provide examples of each intellectual property type.
3. Understand how intellectual property can be a valuable resource for firms.
Defining Intellectual Property
The inability of competitors to imitate a strategic resource is a key to leveraging the resource to achieve
long–term competitive advantages. Companies are clever, and effective imitation is often very possible.
But resources that involve intellectual property reduce or even eliminate this risk. As a result, developing
intellectual property is important to many organizations.
Intellectual property refers to creations of the mind, such as inventions, artistic products, and symbols.
The four main types of intellectual property are patents, trademarks, copyrights, and trade secrets.
If a piece of intellectual property is also valuable, rare, and nonsubstitutable, it constitutes
a strategic resource. Even if a piece of intellectual property does not meet all four criteria for serving as a
strategic resource, it can be bundled with other resources and activities to create a resource.
A variety of formal and informal methods are available to protect a firm’s intellectual property from
imitation by rivals. Some forms of intellectual property are best protected by legal means, while defending
others depends on surrounding them in secrecy. This can be contrasted with Southwest Airlines’ well-
known culture, which rivals are free to attempt to copy if they wish. Southwest’s culture thus is not
intellectual property, although some of its complements such as Southwest’s logo and unique color
schemes are.
Patents
Patents are legal decrees that protect inventions from direct imitation for a limited period of time.
Obtaining a patent involves navigating a challenging process. To earn a patent from the US
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Patent and Trademark Office, an inventor must demonstrate than an invention is new, nonobvious, and
useful. If the owner of a patent believes that a company or person has infringed on the patent, the owner
can sue for damages. In 2011, for example, a private company named EBSCO alleged that retailer Bass Pro
Shops sold a product that violated EBSCO’s patent on a deer-hunting stand that helps prevent hunters
from falling out of trees. Rather than endure a costly legal fight, the two sides agreed to settle EBSCO’s
complaint out of court.
Patenting an invention is important because patents can fuel enormous profits. Imagine, for example, the
potential for lost profits if the Slinky had not been patented. Shipyard engineer Richard James came up
with the idea for the Slinky by accident in 1943 while he was trying to create springs for use in ship
instruments. When James accidentally tipped over one of his springs, he noticed that it moved downhill in
a captivating way. James spent his free time perfecting the Slinky and then applied for a patent in 1946.
To date, more than three hundred million Slinkys have been sold by the company that Richard James and
his wife Betty created.
Patenting inventions such as the Slinky helps ensure that the invention is protected from imitation.
Image courtesy of Roger McLassus,http://upload.wikimedia.org/wikipedia/commons/f/f3/2006-
02-04_Metal_spiral .
Trademarks
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Trademarks are phrases, pictures, names, or symbols used to identify a particular organization.
Trademarks are important because they help an organization stand out and build an identity in the
marketplace. Some trademarks are so iconic that almost all consumers recognize them, including
McDonald’s golden arches, the Nike swoosh, and Apple’s outline of an apple.
Other trademarks help rising companies carve out a unique niche for themselves. For example, French
shoe designer Christian Louboutin has trademarked the signature red sole of his designer shoes. Because
these shoes sell for many hundreds of dollars via upscale retailers such as Neiman Marcus and Saks Fifth
Avenue, competitors would love to copy their look. Thus legally protecting the distinctive red sole from
imitation helps preserve Louboutin’s profits.
Fashionistas instantly recognize the trademark red sole of Christian Louboutin’s high-end shoes.
Image courtesy of
Arroser,http://wikimediafoundation.org/wiki/File:Louboutin_altadama140 .
Trademarks are important to colleges and universities. Schools earn tremendous sums of money through
royalties on T-shirts, sweatshirts, hats, backpacks, and other consumer goods sporting their names and
logos. On any given day, there are probably several students in your class wearing one or more pieces of
clothing featuring your school’s insignia; your school benefits every time items like this are sold.
Schools’ trademarks are easy to counterfeit, however, and the sales of counterfeit goods take money away
from colleges and universities. Not surprisingly, many schools fight to protect their trademarks. In
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October 2009, for example, the University of Oklahoma announced that it was teaming with law
enforcement officials to combat the sale of counterfeit goods around its campus. [1] This initiative and
similar ones at other colleges and universities are designed to ensure that schools receive their fair share
of the sales that their names and logos generate.
Figure 4.7 Trademarks
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Images courtesy of unknown author, http://en.wikipedia.org/wiki/File:Aspirine-1923 (bottom
left); Wilinckx, http://en.wikipedia.org/wiki/File:Trademark-symbool (top left); Hult Ketchen
International Group, LLC (top right); Helix84,
http://en.wikipedia.org/wiki/File:Burrbery_check.gif
Copyrights
Copyrights provide exclusive rights to the creators of original artistic works such as books, movies, songs,
and screenplays. Sometimes copyrights are sold and licensed. In the late 1960s,
Buick thought it had an agreement in place to license the number one hit “Light My Fire” for a television
advertisement from The Doors until the band’s volatile lead singer Jim Morrison loudly protested what he
saw as mistreating a work of art. Classic rock by The Beatles has been used in television ads in recent
years. After the late pop star Michael Jackson bought the rights to the band’s music catalog, he licensed
songs to Target and other companies. Some devoted music fans consider such ads to be abominations,
perhaps proving the merit of Morrison’s protest decades ago.
He looks calm here, but the licensing of a copyrighted song for a car commercial enraged rock legend Jim Morrison.
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Image courtesy of Polfoto/Jan Persson,
http://upload.wikimedia.org/wikipedia/commons/1/15/The_Doors_in_Copenhagen_1968 .
Over time, piracy has become a huge issue for the owners of copyrighted works. In China, millions of
pirated DVDs are sold each year, and music piracy is estimated to account for at least 95 percent of music
sales. This piracy deprives movie studios, record labels, and artists of millions of dollars in royalties. In
response to the damage piracy has caused, the US government has pressed its Chinese counterpart and
other national governments to better enforce copyrights.
Trade Secrets
Trade secrets refer to formulas, practices, and designs that are central to a firm’s business and that remain
unknown to competitors. Trade secrets are protected by laws on theft, but once a secret is revealed,
it cannot be a secret any longer. This leads firms to rely mainly on silence and privacy rather than the
legal system to protect trade secrets.
Some trade secrets have become legendary, perhaps because a mystique arises around the unknown. One
famous example is the blend of eleven herbs and spices used in Kentucky Fried Chicken’s original recipe
chicken. KFC protects this secret by having multiple suppliers each produce a portion of the herb and
spice blend; no one supplier knows the full recipe. The formulation of Coca-Cola is also shrouded in
mystery. In 2006, Pepsi was approached by shady individuals who were offering a chance to buy a stolen
copy of Coca-Cola’s secret recipe. Pepsi wisely refused. An FBI sting was used to bring the thieves to
justice. The soft-drink industry has other secrets too. Dr Pepper’s recipe remains unknown outside the
company. Although Coke’s formula has been the subject of greater speculation, Dr Pepper is actually the
original secret soft drink; it was created a year before Coca-Cola.
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The recipe for Dr Pepper is a secret dating back to the 1880s.
Image courtesy of anyjazz65,
K E Y T A K E A W A Y
x Intellectual property can serve as a strategic resource for organizations. While some sources of
intellectual property such as patents, trademarks, and copyrights can receive special legal protection,
trade secrets provide competitive advantages by simply staying hidden from competitors.
E X E R C I S E S
1. What designs for your college or university are protected by trademarks?
2. What type of intellectual property provides the most protection for firms?
3. Why would a firm protect a resource through trade secret rather than by a formal patent?
[1] Ward, C. 2009, October 8. OU works to prevent trademark infringement. The Oklahoma Daily. Retrieved
from http://www.oudaily.com/news/2009/oct/08/ou-works-prevent-trademark-infringement
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4.3 Value Chain
L E A R N I N G O B J E C T I V E S
1. Define the primary activities of the value chain.
2. Know the different support activities within the value chain.
3. Be able to apply the value chain to an organization of your choosing.
4. Understand the difference between a value chain and supply chain.
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Image courtesy of Carol M. Highsmith,
http://commons.wikimedia.org/wiki/File:Randy%27s_donuts1_edit1 .
Elements of the Value Chain
When executives choose strategies, an organization’s resources and capabilities should be examined
alongside consideration of its value chain. A value chain charts the path by which products and services
are created and eventually sold to customers. [1] The term value chain reflects the fact that, as each step of
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this path is completed, the product becomes more valuable than it was at the previous step.
Within the lumber business, for example, value is added when a tree is transformed into usable
wooden boards; the boards created from a tree can be sold for more money than the price of the tree.
Adapted from Porter, M. (1985). Competitive Advantage. New York: Free Press. Exhibit is
Creative Commons licensed at http://en.wikipedia.org/wiki/Image:ValueChain.PNG.”
Value chains include both primary and secondary activities. Primary activities are actions that are directly
involved in creating and distributing goods and services. Consider a simple illustrative example: doughnut
shops. Doughnut shops transform basic commodity products such as flour, sugar, butter, and grease into
delectable treats. Value is added through this process because consumers are willing to pay much more for
doughnuts than they would be willing to pay for the underlying ingredients.
There are five primary activities. Inbound logistics refers to the arrival of raw materials. Although
doughnuts are seen by most consumers as notoriously unhealthy, the Doughnut Plant in New York City
http://en.wikipedia.org/wiki/Image:ValueChain.PNG
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has carved out a unique niche for itself by obtaining organic ingredients from a local farmer’s
market.Operations refers to the actual production process, while outbound logistics tracks the movement
of a finished product to customers. One of Southwest Airlines’ unique capabilities is moving passengers
more quickly than its rivals. This advantage in operations is based in part on Southwest’s reliance on one
type of airplane (which speeds maintenance) and its avoidance of advance seat assignments (which
accelerates the passenger boarding process).
Attracting potential customers and convincing them to make purchases is the domain
of marketing and sales. For example, people cannot help but notice Randy’s Donuts in Inglewood,
California, because the building has a giant doughnut on top of it. Finally, service refers to the extent to
which a firm provides assistance to their customers. Voodoo Donuts in Portland, Oregon, has developed a
clever website (voodoodoughnut.com) that helps customers understand their uniquely named products,
such as the Voodoo Doll, the Texas Challenge, the Memphis Mafia, and the Dirty Snowball.
Secondary activities are not directly involved in the evolution of a product but instead provide important
underlying support for primary activities. Firm infrastructure refers to how the firm is organized and led
by executives. The effects of this organizing and leadership can be profound. For example, Ron Joyce’s
leadership of Canadian doughnut shop chain Tim Hortons was so successful that Canadians consume
more doughnuts per person than all other countries. In terms of resource-based theory, Joyce’s leadership
was clearly a valuable and rare resource that helped his firm prosper.
Also important is human resource management, which involves the recruitment, training, and
compensation of employees. A recent research study used data from more than twelve thousand
organizations to demonstrate that the knowledge, skills, and abilities of a firm’s employees can act as a
strategic resource and strongly influence the firm’s performance. [2] Certainly, the unique level of
dedication demonstrated by employees at Southwest Airlines has contributed to that firm’s excellent
performance over several decades.
Technology refers to the use of computerization and telecommunications to support primary activities.
Although doughnut making is not a high-tech business, technology plays a variety of roles for doughnut
shops, such as allowing customers to use credit cards. Procurement is the process of negotiating for and
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purchasing raw materials. Large doughnut chains such as Dunkin’ Donuts and Krispy Kreme can gain cost
advantages over their smaller rivals by purchasing flour, sugar, and other ingredients in bulk. Meanwhile,
Southwest Airlines has gained an advantage over its rivals by using futures contracts within its
procurement process to minimize the effects of rising fuel prices.
From the Value Chain to Best Value Supply Chains
“Time is money!” warns a famous saying. This simple yet profound statement suggests that organizations
that quickly complete their work will enjoy greater profits, while slower-moving firms will suffer. The
belief that time is money has encouraged the modern emphasis on supply chain management. A
supply chain is a system of people, activities, information, and resources involved in creating a product
and moving it to the customer. A supply chain is a broader concept than a value chain; the latter refers to
activities within one firm, while the former captures the entire process of creating and distributing a
product, often across several firms.
Competition in the twenty-first century requires an approach that considers the supply chain concept in
tandem with the value-creation process within a firm: best value supply chains. These chains do not fixate
on speed or on any other single metric. Instead, relative to their peers, best value supply chains focus on
the total value added to the customer.
Creating best value supply chains requires four components. The first is
strategic supply chain management—the use of supply chains as a means to create competitive advantages
and enhance firm performance. Such an approach contradicts the popular wisdom centered on the need
to maximize speed. Instead, there is recognition that the fastest chain may not satisfy customers’ needs.
Best value supply chains strive to excel along four measures. Speed (or “cycle time”) is the time duration
from initiation to completion of the production and distribution process. Quality refers to the relative
reliability of supply chain activities. Supply chains’ efforts at managing cost involve enhancing value by
either reducing expenses or increasing customer benefits for the same cost level. Flexibility refers to a
supply chain’s responsiveness to changes in customers’ needs. Through balancing these four metrics, best
value supply chains attempt to provide the highest level of total value added.
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The value of strategic supply chain management is reflected in how firms such as Walmart have used their
supply chains as competitive weapons to gain advantages over peers. Walmart excels in terms of speed
and cost by locating all domestic stores within one day’s drive of a warehouse while owning a trucking
fleet. This creates distribution speed and economies of scale that competitors simply cannot match. When
Kmart’s executives decided in the late 1990s to compete head-to-head with Walmart on price, Walmart’s
sophisticated logistics system enabled it to easily withstand the price war. Unable to match its rival’s
speed and costs, Kmart soon plunged into bankruptcy. Walmart’s supply chains also possess strong
quality and flexibility. When Hurricane Katrina devastated the Gulf Coast in 2005, Walmart used not only
its warehouses and trucks but also its satellite technology, radio frequency identification (RFID), and
global positioning systems to quickly divert assets to affected areas. The result was that Walmart emerged
as the first responder in many towns and provided essentials such as drinking water faster than local and
federal governments could.
Meanwhile, failing to manage a supply chain effectively causes serious harm. For example, in 2003
Motorola was unable to meet demand for its new camera phones because it did not have enough lenses
available. Also, firms whose supply chains were centered in the Port of Los Angeles collectively lost more
than $2 billion a day during a 2002 workers’ strike. In terms of stock price, firms’ market value erodes by
an average of 10 percent following the announcement of a major supply chain problem.
The second component is agility, the supply chain’s relative capacity to act rapidly in response to dramatic
changes in supply and demand. [3] Agility can be achieved using buffers. Excess capacity, inventory, and
management information systems all provide buffers that better enable a best value supply chain to
service and to be more responsive to its customers. Rapid improvements and decreased costs in deploying
information systems have enabled supply chains in recent years to reduce inventory as a buffer. Much
popular thinking depicts inventory reduction as a goal in and of itself. However, this cannot occur without
corresponding increases in buffer capacity elsewhere in the chain, or performance will suffer. A best value
supply chain seeks to optimize the total costs of all buffers used. The costs of deploying each buffer differs
across industries; therefore, no solution that works for one company can be directly applied to another in
a different industry without adaptation.
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Agility in a supply chain can also be improved and achieved by colocating with the customer. This
arrangement creates an information flow that cannot be duplicated through other methods. Daily face-to-
face contact for supply chain personnel enables quicker response times to customer demands due to the
speed at which information can travel back and forth between the parties. Again, this buffer of increased
and improved information flows comes at an expense, so executives seeking to build a best value supply
chain will investigate the opportunity and determine whether this action optimizes total costs.
Adaptability refers to a willingness and capacity to reshape supply chains when necessary. Generally,
creating one supply chain for a customer is desired because this helps minimize costs. Adaptable firms
realize that this is not always a best value solution, however. For example, in the defense industry, the US
Army requires one class of weapon simulators to be repaired within eight hours, while another class of
items can be repaired and returned within one month. To service these varying requirements efficiently
and effectively, Computer Science Corporation (the firm whose supply chains maintain the equipment)
must devise adaptable supply chains. In this case, spare parts inventory is positioned in proximity to the
class of simulators requiring quick turnaround, while the less-time-sensitive devices are sent to a
centralized repair facility. This supply chain configuration allows Computer Science Corporation to satisfy
customer demands while avoiding the excess costs that would be involved in localizing all repair activities.
In situations in which the interests of one firm in the chain and the chain as a whole conflict, most
executives will choose an option that benefits their firm. This creates a need for alignment among chain
members. Alignment refers to creating consistency in the interests of all participants in a supply chain. In
many situations, this can be accomplished through carefully writing incentives into contracts.
Collaborative forecasting with suppliers and customers can also help build alignment. Taking the time to
sit together with participants in the supply chain to agree on anticipated business levels permits shared
understanding and rapid information transfers between parties. This is particularly valuable when
customer demand is uncertain, such as in the retail industry. [4]
K E Y T A K E A W A Y
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x The value chain provides a useful tool for managers to examine systematically where value may be added
to their organizations. This tool is useful in that it examines key elements in the production of a good or
service, as well as areas in which value may be added in support of those primary activities.
E X E R C I S E S
1. If you were hired as a consultant for your university, what specific element of the value chain would you
seek to improve first?
2. What local business in your town could be improved most dramatically by applying the value chain?
Would improvements of primary or support activities help to improve this firm most? Could knowledge of
strategic supply chain management add further value to this firm?
[1] Porter, M. E. 1985. Competitive advantage: Creating and sustaining superior performance. New York, NY: Free
Press.
[2] Crook, T. R., Todd, S. Y., Combs, J. G., Woehr, D. J., & Ketchen, D. J. 2011. Does human capital matter? A meta-
analysis of the relationship between human capital and firm performance. Journal of Applied Psychology, 96(3),
443–456.
[3] Lee, H. L. 2004, October. The triple-A supply chain. Harvard Business Review, 83, 102–112.
[4] This section of the chapter is adapted from Ketchen, D. J., Rebarick, W., Hult, G. T., & Meyer, D. 2008. Best
value supply chains: A key competitive weapon for the 21st century. Business Horizons, 51, 235–243.
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4.4 Beyond Resource-Based Theory: Other Views on Firm
Performance
L E A R N I N G O B J E C T I V E S
1. Be able to discuss other theories about firm success and failure beyond resource-based theory.
2. Be able to apply different theories to help explain competition in different industries.
Although resource-based theory stands as perhaps the most popular explanation of why some
organizations prosper while others do not, several other theories are popular. Enactment treats
executives as the masters of their domains. Enactment contends that an organization can, at least in
part, create an environment for itself that is beneficial to the organization. This is accomplished by
putting strategies in place that reshape competitive conditions in a favorable way.
By the 1990s, Microsoft had been so successful at reshaping the software industry to its benefit that
the firm was the subject of a lengthy antitrust investigation by the federal government. More
recently, Apple has been able to reshape its environment by introducing products such as the iPhone
and the iPad that transcend the traditional boundaries between the cell phone, digital camera, music
player, and computer businesses. No airline has ever been able to enact the environment, however,
perhaps because the airline industry is so fragmented.
Environmental determinism offers a completely opposite view from enactment on why some firms
succeed and others fail. Environmental determinism views organizations much like biological
theories view animals—organizations (and animals) are very limited in their ability to adapt to the
conditions around them. Thus just as harsh environmental changes are believed to have made
dinosaurs extinct, changes in the business environment can destroy organizations regardless of how
clever and insightful executives are.
Until 1978, the federal government regulated the airline industry by dictating what routes each
airline would fly and what prices it would charge. Once these controls were removed, airlines were
subjected to a series of negative environmental trends, including recession, overcapacity in the
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industry, new entrants, fierce price competition, and fuel shortages. Perhaps not surprisingly, dozens
of airlines have been crushed by these conditions.
An old saying notes that “imitation is the sincerest form of flattery.” This flattery is the focus
of institutional theory. In particular, institutional theory centers on the extent to which firms copy one
another’s strategies. Consider, for example, fast-food hamburger restaurants. Innovations such as
dollar menus and drive-through windows tend to be introduced by one firm and then duplicated by
the others.
Airlines also seem to follow a “monkey see, monkey do” mentality. To build passenger loyalty,
American Airlines introduced a frequent flyer program called AAdvantage in 1981. After flying a
certain number of miles on American flights, AAdvantage members were rewarded with a free flight.
The idea was to make passengers less likely to shop around for the cheapest ticket. Ironically,
AAdvantage turned out to be not much of an advantage at all. Many of American’s rivals quickly
developed their own frequent-flyer programs, and today most airlines reward frequent passengers.
In recent years, ideas such as charging passengers to check their luggage and eliminating free food
on flights have been copied by one airline after another.
Transaction cost economics is a theory that centers on just one element of business activity: whether it
is cheaper for a firm to make or to buy the products that it needs. This is an important element,
however, because choosing the more efficient option can enhance a firm’s profits. Automakers such
as Ford and General Motors face a wide variety of make-or-buy decisions because so many different
parts are needed to build cars and trucks. Sometimes Ford and GM make these products, and other
times they purchase them from outside suppliers. These firms’ financial situations are improved
when these decisions are made wisely and harmed when they are made poorly.
In contrast, airlines always buy (or rent) their airplanes. Large planes are generally bought from
Boeing or Airbus, while modest-sized airliners are purchased from companies such as Brazil’s
Embraer. It would be simply too costly for an airline to pursue a backward integration strategy and
enter the airplane manufacturing business. Insights such as these are powerful enough that the
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creator of transaction cost economics, Professor Oliver Williamson, was awarded a Nobel Prize in
Economic Sciences in 2009.
Each of these theories—enactment, environmental determinism, institutional theory, and
transaction cost economics—is useful for understanding some situations and some important
business decisions. Thus executives should keep these perspectives in mind as they attempt to lead
their firms to greater levels of success. However, one important advantage that resource-based
theory offers over the alternatives is that only resource-based theory does a good job of explaining
firm performance across a wide variety of contexts. Thus resource-based theory offers the point of
view of business that has the strongest value for most executives.
K E Y T A K E A W A Y
x Although resource-based theory is the dominant perspective to predict performance in the strategic
management field, other theories exist to explain firm behavior. In some industries, explanations
provided by these theories can be very convincing.
E X E R C I S E S
1. What theory of the firm do you think best explains competition in the fast-food industry?
2. What is an example of an industry in which institutional theory seems to explain the behavior of firms?
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4.5 SWOT Analysis
L E A R N I N G O B J E C T I V E S
1. Understand what SWOT analysis is.
2. Learn how SWOT analysis can help organizations and individuals, and its limitations.
Five forces analysis examines the situation faced by the competitors in an industry. Strategic groups
analysis narrows the focus by centering on subsets of these competitors whose strategies are
similar. SWOT analysis takes an even narrower focus by centering on an individual firm. Specifically,
SWOT analysis is a tool that considers a firm’s strengths and weaknesses along with the
opportunities and threats that exist in the firm’s environment.
Executives using SWOT analysis compare these internal and external factors to generate ideas about
how their firm might become more successful. In general, it is wise to focus on ideas that allow a firm
to leverage its strengths, steer clear of or resolve its weaknesses, capitalize on opportunities, and
protect itself against threats. For example, untapped overseas markets have presented potentially
lucrative opportunities to Subway and other restaurant chains such as McDonald’s and Kentucky
Fried Chicken. Meanwhile, Subway’s strengths include a well-established brand name and a simple
business format that can easily be adapted to other cultures. In considering the opportunities offered
by overseas markets and Subway’s strengths, it is not surprising that entering and expanding in
different countries has been a key element of Subway’s strategy in recent years. Indeed, Subway
currently has operations in nearly 100 nations.
SWOT analysis is helpful to executives, and it is used within most organizations. Important cautions
need to be offered about SWOT analysis, however. First, in laying out each of the four elements of
SWOT, internal and external factors should not be confused with each other. It is important not to
list strengths as opportunities, for example, if executives are to succeed at matching internal and
external concerns during the idea generation process. Second, opportunities should not be confused
with strategic moves designed to capitalize on these opportunities. In the case of Subway, it would be
a mistake to list “entering new countries” as an opportunity. Instead, untapped markets are the
opportunity presented to Subway, and entering those markets is a way for Subway to exploit the
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opportunity. Finally, and perhaps most important, the results of SWOT analysis should not be
overemphasized. SWOT analysis is a relatively simple tool for understanding a firm’s situation. As a
result, SWOT is best viewed as a brainstorming technique for generating creative ideas, not as a
rigorous method for selecting strategies. Thus the ideas produced by SWOT analysis offer a starting
point for executives’ efforts to craft strategies for their organization, not an ending point.
In addition to organizations, individuals can benefit from applying SWOT analysis to their personal
situation. A college student who is approaching graduation, for example, could lay out her main
strengths and weaknesses and the opportunities and threats presented by the environment. Suppose,
for instance, that this person enjoys and is good at helping others (a strength) but also has a rather
short attention span (a weakness). Meanwhile, opportunities to work at a rehabilitation center or to
pursue an advanced degree are available. Our hypothetical student might be wise to pursue a job at
the rehabilitation center (where her strength at helping others would be a powerful asset) rather than
entering graduate school (where a lot of reading is required and her short attention span could
undermine her studies).
K E Y T A K E A W A Y
x Executives using SWOT analysis compare internal strengths and weaknesses with external opportunities
and threats to generate ideas about how their firm might become more successful. Ideas that allow a firm
to leverage its strengths, steer clear of or resolve its weaknesses, capitalize on opportunities, and protect
itself against threats are particularly helpful.
E X E R C I S E S
1. What do each of the letters in SWOT represent?
2. What are your key strengths, and how might you build your own personal strategies for success around
them?
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4.6 Conclusion
This chapter explains key issues that executives face in managing resources to keep their firms
competitive. Resource-based theory argues that firms will perform better when they assemble
resources that are valuable, rare, difficult to imitate, and nonsubstitutable. When executives can
successfully bundle organizational resources into unique capabilities, the firm is more likely to enjoy
lasting success. Different forms of intellectual property—which include patents, trademarks,
copyrights, and trade secrets—may also serve as strategic resources for firms. Examining a firm’s
resources can be aided by the value chain, a tool that systematically examines primary and secondary
activities in the creation of a good or service and by a knowledge of supply chain management that
examines the value added of multiple firms working together. While resource-based theory provides
a dominant view for examining the determinants of firm success, other perspectives provide insight
for understanding specific behaviors of firms within an industry. Finally, SWOT analysis is a simple
but powerful technique for examining the interactions between factors internal and external to the
firm.
E X E R C I S E S
1. Divide your class into four or eight groups, depending on the size of the class. Each group should search
for a patent tied to a successful product, as well as a patent associated with a product that was not a
commercial hit. Were there resources tied to the successful organization that the poor performer did not
seem to attain?
2. This chapter discussed Southwest Airlines. Based on your reading of the chapter, how well has Southwest
done in bundling together the resources recommended by resource-based theory? What theoretical
perspective best explains the competitive actions of most firms in the airline industry?
3. Conduct a SWOT analysis of your college or university. Based on your analysis, what one strategic move
should your school make first, and why?
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But future success was far from guaranteed. The firm’s visionary founder Steve Jobs was battling serious
health problems. Apple’s performance had suffered when an earlier health crisis had forced Jobs to step
away from the company. This raised serious questions. Would Jobs have to step away again? If so, how
might Apple maintain its excellent performance without its leader?
Meanwhile, the iPad2 faced daunting competition. Samsung, LG, Research in Motion, Dell, and other
manufacturers were trying to create tablets that were cheaper, faster, and more versatile than the iPad2.
These firms were eager to steal market share by selling their tablets to current and potential Apple
customers. Could Apple maintain leadership of the tablet market, or would one or more of its rivals
dominate the market in the years ahead? Even worse, might a company create a new type of device that
would make Apple’s tablets obsolete?
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1.1 Defining Strategic Management and Strategy
L E A R N I N G O B J E C T I V E S
1. Learn what strategic management is.
2. Understand the key question addressed by strategic management.
3. Understand why it is valuable to consider different definitions of strategy.
4. Learn what is meant by each of the 5 Ps of strategy.
What Is Strategic Management?
Issues such as those currently faced by Apple are the focus of strategic management because they help
answer the key question examined by strategic management—“Why do some firms outperform other
firms?” More specifically, strategic management examines how actions and events involving top
executives (such as Steve Jobs), firms (Apple), and industries (the tablet market) influence a firm’s
success or failure. Formal tools exist for understanding these relationships, and many of these tools are
explained and applied in this book. But formal tools are not enough; creativity is just as important to
strategic management. Mastering strategy is therefore part art and part science.
This introductory chapter is intended to enable you to understand what strategic management is and why
it is important. Because strategy is a complex concept, we begin by explaining five different ways to think
about what strategy involves. Next, we journey across many centuries to examine the evolution of
strategy from ancient times until today. We end this chapter by presenting a conceptual model that maps
out one way that executives can work toward mastering strategy. The model also provides an overall portrait
s of this book’s contents by organizing the remaining nine chapters into a coherent whole.
Defining Strategy: The Five Ps
Defining strategy is not simple. Strategy is a complex concept that involves many different processes and
activities within an organization. To capture this complexity, Professor Henry Mintzberg of McGill
University in Montreal, Canada, articulated what he labeled as “the 5 Ps of strategy.” According to
Mintzberg, understanding how strategy can be viewed as a plan, as a ploy, as a position, as a pattern, and
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as a perspective is important. Each of these five ways of thinking about strategy is necessary for
understanding what strategy is, but none of them alone is sufficient to master the concept. [1]
Figure 1.1 Defining Strategy: The Five Ps
Images courtesy of Thinkstock (first);Wikipedia (second); OldNavy (third); James Duncan
Davidson from Portland, USA (fourth)
Strategy as a Plan
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Strategic plans are the essence of strategy, according to one classic view of strategy. A strategic plan is a
carefully crafted set of steps that a firm intends to follow to be successful. Virtually every organization
creates a strategic plan to guide its future. In 1996, Apple’s performance was not strong, and Gilbert F.
Amelio was appointed as chief executive officer in the hope of reversing the company’s fortunes. In a
speech focused on strategy, Amelio described a plan that centered on leveraging the Internet (which at the
time was in its infancy) and developing multimedia products and services. Apple’s subsequent success
selling over the Internet via iTunes and with the iPad can be traced back to the plan articulated in 1996. [2]
A business model should be a central element of a firm’s strategic plan. Simply stated, a business model
describes the process through which a firm hopes to earn profits. It probably won’t surprise you to learn
that developing a viable business model requires that a firm sell goods or services for more than it costs
the firm to create and distribute those goods. A more subtle but equally important aspect of a business
model is providing customers with a good or service more cheaply than they can create it themselves.
Consider, for example, large chains of pizza restaurants such as Papa John’s and Domino’s.
Franchises such as Pizza Hut provide an example of a popular business model that has been successful worldwide.
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Image courtesy of Derek Jensen, http://wikimediafoundation.org/wiki/File:Bremen-indiana-pizza-hut .
Because these firms buy their ingredients in massive quantities, they pay far less for these items than any
family could (an advantage called economies of scale). Meanwhile, Papa John’s and Domino’s have
developed specialized kitchen equipment that allows them to produce better-tasting pizza than can be
created using the basic ovens that most families rely on for cooking. Pizza restaurants thus can make
better-tasting pizzas for far less cost than a family can make itself. This business model provides healthy
margins and has enabled Papa John’s and Domino’s to become massive firms.
Strategic plans are important to individuals too. Indeed, a well-known proverb states that “he who fails to
plan, plans to fail.” In other words, being successful requires a person to lay out a path for the future and
then follow that path. If you are reading this, earning a college degree is probably a key step in your
strategic plan for your career. Don’t be concerned if your plan is not fully developed, however. Life is full
of unexpected twists and turns, so maintaining flexibility is wise for individuals planning their career
strategies as well as for firms.
For firms, these unexpected twists and turns place limits on the value of strategic planning. Former
heavyweight boxing champion Mike Tyson captured the limitations of strategic plans when he noted,
“Everyone has a plan until I punch them in the face.” From that point forward, strategy is less about a
plan and more about adjusting to a shifting situation. For firms, changes in the behavior of competitors,
customers, suppliers, regulators, and other external groups can all be sources of a metaphorical punch in
the face. As events unfold around a firm, its strategic plan may reflect a competitive reality that no longer
exists. Because the landscape of business changes rapidly, other ways of thinking about strategy are
needed.
Strategy as a Ploy
A second way to view strategy is in terms of ploys. A strategic ploy is a specific move designed to outwit or
trick competitors. Ploys often involve using creativity to enhance success. One such case involves the
mighty Mississippi River, which is a main channel for shipping cargo to the central portion of the United
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States. Ships traveling the river enter it near New Orleans, Louisiana. The next major port upriver is
Louisiana’s capital, Baton Rouge. A variety of other important ports exist in states farther upriver.
Many decades ago, the governor of Louisiana was a clever and controversial man named Huey Long.
Legend has it that Long ordered that a bridge being constructed over the Mississippi River in Baton Rouge
be built intentionally low to the ground. This ploy created a captive market for cargo because very large
barges simply could not fit under the bridge. Large barges using the Mississippi River thus needed to
unload their cargo in either New Orleans or Baton Rouge. Either way, Louisiana would benefit. Of course,
owners of ports located farther up the river were not happy.
Ploys can be especially beneficial in the face of much stronger opponents. Military history offers quite a
few illustrative examples. Before the American Revolution, land battles were usually fought by two
opposing armies, each of which wore brightly colored clothing, marching toward each other across open
fields. George Washington and his officers knew that the United States could not possibly defeat better-
trained and better-equipped British forces in a traditional battle. To overcome its weaknesses, the
American military relied on ambushes, hit-and-run attacks, and other guerilla moves. It even broke an
unwritten rule of war by targeting British officers during skirmishes. This was an effort to reduce the
opponent’s effectiveness by removing its leadership.
Centuries earlier, the Carthaginian general Hannibal concocted perhaps the most famous ploy ever.
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Hannibal’s clever use of elephants to cross the Alps provides an example of a strategic ploy.
Image courtesy of Wikipedia, http://en.wikipedia.org/wiki/File:Hannibal3 .
Carthage was at war with Rome, a scary circumstance for most Carthaginians given their far weaker
fighting force. The Alps had never been crossed by an army. In fact, the Alps were considered such a
treacherous mountain range that the Romans did not bother monitoring the part of their territory that
bordered the Alps. No horse was up to the challenge, but Hannibal cleverly put his soldiers on elephants,
and his army was able to make the mountain crossing. The Romans were caught completely unprepared
and most of them were frightened by the sight of charging elephants. By using the element of surprise,
Hannibal was able to lead his army to victory over a much more powerful enemy.
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Ploys continue to be important today. In 2011, a pizzeria owner in Pennsylvania was accused of making a
rather unique attempt to outmaneuver two rival pizza shops. According to police, the man tried to
sabotage his competitors by placing mice in their pizzerias. If the ploy had not been discovered, the two
shops could have suffered bad publicity or even been shut down by authorities because of health concerns.
Although most strategic ploys are legal, this one was not, and the perpetrator was arrested. [3]
Strategy as a Pattern
Strategy as pattern is a third way to view strategy. This view focuses on the extent to which a firm’s actions
over time are consistent. A lack of a strategic pattern helps explain why Kmart deteriorated into
bankruptcy in 2002. The company was started in the late nineteenth century as a discount department
store. By the middle of the twentieth century, consistently working to be good at discount retailing had led
Kmart to become a large and prominent chain.
By the 1980s, however, Kmart began straying from its established strategic pattern. Executives shifted the
firm’s focus away from discount retailing and toward diversification. Kmart acquired large stakes in
chains involved in sporting goods (Sports Authority), building supplies (Builders Square), office supplies
(OfficeMax), and books (Borders). In the 1990s, a new team of executives shifted Kmart’s strategy again.
Brands other than Kmart were sold off, and Kmart’s strategy was adjusted to emphasize information
technology and supply chain management. The next team of executives decided that Kmart’s strategy
would be to compete directly with its much-larger rival, Walmart. The resulting price war left Kmart
crippled. Indeed, this last shift in strategy was the fatal mistake that drove Kmart into bankruptcy. Today,
Kmart is part of Sears Holding Company, and its prospects remain uncertain.
In contrast, Apple is very consistent in its strategic pattern: It always responds to competitive challenges
by innovating. Some of these innovations are complete busts. Perhaps the best known was the Newton, a
tablet-like device that may have been ahead of its time. Another was the Pippin, a video game system
introduced in 1996 to near-universal derision. Apple TV, a 2007 offering intended to link televisions with
the Internet, also failed to attract customers. Such failures do not discourage Apple, however, and enough
of its innovations are successful that Apple’s overall performance is excellent. However, there are risks to
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following a pattern too closely. A consistent pattern can make a company predictable, a possibility that
Apple must guard against in the years ahead.
Strategy as a Position
Viewing strategy as a plan, a ploy, and a pattern involve only the actions of a single firm. In contrast, the
next P—strategy as position—considers a firm and its competitors. Specifically, strategy as position refers
to a firm’s place in the industry relative to its competitors. McDonald’s, for example, has long been and
remains the clear leader among fast-food chains. This position offers both good and bad aspects for
McDonald’s. One advantage of leading an industry is that many customers are familiar with and loyal to
leaders. Being the market leader, however, also makes McDonald’s a target for rivals such as Burger King
and Wendy’s. These firms create their strategies with McDonald’s as a primary concern. Old Navy offers
another example of strategy as position. Old Navy has been positioned to sell fashionable clothes at
competitive prices.
Old Navy occupies a unique position as the low-cost strategy within the Gap Inc.’s fleet of brands.
Image courtesy of Lindsey Turner, http://www.flickr.com/photos/theogeo/2148416495.
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Old Navy is owned by the same corporation (Gap Inc.) as the midlevel brand the Gap and upscale brand
Banana Republic. Each of these three brands is positioned at a different pricing level. The firm hopes that
as Old Navy’s customers grow older and more affluent, they will shop at the Gap and then eventually at
Banana Republic. A similar positioning of different brands is pursued by General Motors through its
Chevrolet (entry level), Buick (midlevel), and Cadillac (upscale) divisions.
Firms can carve out a position by performing certain activities in a different manner than their rivals. For
example, Southwest Airlines is able to position itself as a lower-cost and more efficient provider by not
offering meals that are common among other airlines. In addition, Southwest does not assign specific
seats. This allows for faster loading of passengers. Positioning a firm in this manner can only be
accomplished when managers make trade-offs that cut off certain possibilities (such as offering meals and
assigned seats) to place their firms in a unique strategic space. When firms position themselves through
unique goods and services customers value, business often thrives. But when firms try to please everyone,
they often find themselves without the competitive positioning needed for long-term success. Thus
deciding what a firm is not going to do is just as important to strategy as deciding what it is going to do. [4]
To gain competitive advantage and greater success, firms sometimes change positions. But this can be a
risky move. Winn-Dixie became a successful grocer by targeting moderate-income customers. When the
firm abandoned this established position to compete for wealthier customers and higher margins, the
results were disastrous. The firm was forced into bankruptcy and closed many stores. Winn-Dixie
eventually exited bankruptcy, but like Kmart, its future prospects are unclear. In contrast to firms such as
Winn-Dixie that change positions, Apple has long maintained a position as a leading innovator in various
industries. This positioning has served Apple well.
Strategy as a Perspective
The fifth and final P shifts the focus to inside the minds of the executives running a
firm. Strategy as perspective refers to how executives interpret the competitive landscape around them.
Because each person is unique, two different executives could look at the same event—such as a new
competitor emerging—and attach different meanings to it. One might just see a new threat to his or her
firm’s sales; the other might view the newcomer as a potential ally.
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An old cliché urges listeners to “make lemons into lemonade.” A good example of applying this idea
through strategy as perspective is provided by local government leaders in Sioux City, Iowa. Rather than
petition the federal government to change their airport’s unusual call sign—SUX—local leaders decided to
leverage the call sign to attract the attention of businesses and tourists to build their city’s economic base.
An array of clothing and other goods sporting the SUX name is available at http://www.flysux.com. Some
strategists such as these local leaders are willing to take a seemingly sour situation and see the potential
sweetness, while other executives remain fixated on the sourness.
Executives who adopt unique and positive perspectives can lead firms to find and exploit opportunities
that others simply miss. In the mid-1990s, the Internet was mainly a communication tool for academics
and government agencies. Jeff Bezos looked beyond these functions and viewed the Internet as a potential
sales channel. After examining a number of different markets that he might enter using the Internet,
Bezos saw strong profit potential in the bookselling business, and he began selling books online. Today,
the company he created—Amazon—has expanded far beyond its original focus on books to become a
dominant retailer in countless different markets. The late Steve Jobs at Apple appeared to take a similar
perspective; he saw opportunities where others could not, and his firm has reaped significant benefits as a
result.
K E Y T A K E A W A Y
x Strategic management focuses on firms and the different strategies that they use to become and remain
successful. Multiple views of strategy exist, and the 5 Ps described by Henry Mintzberg enhance
understanding of the various ways in which firms conceptualize strategy.
E X E R C I S E S
1. Have you developed a strategy to manage your career? Should you make it more detailed? Why or why
not?
2. Identify an example of each of the 5 Ps of strategy other than the examples offered in this section.
3. What business that you visit regularly seems to have the most successful business model? What makes
the business model work?
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[1] Mintzberg, H. 1987. The strategy concept I: Five Ps for strategy. California Management Review, 30(1), 11–24.
[2] Markoff, J. 1996, May 14. Apple unveils strategic plan of small steps. New York Times. Retrieved
from http://www.nytimes.com/1996/05/14/business/apple-unveils-strategic -plan-of-small-steps.html
[3] Reuters. 2011, March 1. Philadelphia area pizza owner used mice vs. competition—police. Retrieved from
news.yahoo.com/s/nm/20110301/od_uk_nm/oukoe_uk_crime_pizza
[4] Porter, M. E. 1996, November–December. What is strategy? Harvard Business Review, 61–79.
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1.2 Intended, Emergent, and Realized Strategies
L E A R N I N G O B J E C T I V E S
1. Learn what is meant by intended and emergent strategies and the differences between them.
2. Understand realized strategies and how they are influenced by intended, deliberate, and emergent
strategies.
A few years ago, a consultant posed a question to thousands of executives: “Is your industry facing
overcapacity and fierce price competition?” All but one said “yes.” The only “no” came from the
manager of a unique operation—the Panama Canal! This manager was fortunate to be in charge of a
venture whose services are desperately needed by shipping companies and that offers the only simple
route linking the Atlantic and Pacific Oceans. The canal’s success could be threatened if transoceanic
shipping was to cease or if a new canal were built. Both of these possibilities are extremely remote,
however, so the Panama Canal appears to be guaranteed to have many customers for as long as
anyone can see into the future.
When an organization’s environment is stable and predictable, strategic planning can provide
enough of a strategy for the organization to gain and maintain success. The executives leading the
organization can simply create a plan and execute it, and they can be confident that their plan will
not be undermined by changes over time. But as the consultant’s experience shows, only a few
executives—such as the manager of the Panama Canal—enjoy a stable and predictable situation.
Because change affects the strategies of almost all organizations, understanding the concepts of
intended, emergent, and realized strategies is important. Also relevant are deliberate and
nonrealized strategies.
Intended and Emergent Strategies
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An intended strategy is the strategy that an organization hopes to execute. Intended strategies are usually
described in detail within an organization’s strategic plan. When a strategic plan is created for a new
venture, it is called a business plan. As an undergraduate student at Yale in 1965, Frederick Smith had to
complete a business plan for a proposed company as a class project. His plan described a delivery system
that would gain efficiency by routing packages through a central hub and then pass them to their
destinations. A few years later, Smith started Federal Express (FedEx), a company whose strategy closely
followed the plan laid out in his class project. Today, Frederick Smith’s personal wealth has surpassed $2
billion, and FedEx ranks eighth among the World’s Most Admired Companies according
to Fortune magazine. Certainly, Smith’s intended strategy has worked out far better than even he could
have dreamed.[2]
Emergent strategy has also played a role at Federal Express. An emergent strategy is an unplanned
strategy that arises in response to unexpected opportunities and challenges. Sometimes emergent
strategies result in disasters. In the mid-1980s, FedEx deviated from its intended strategy’s focus on
package delivery to capitalize on an emerging technology: facsimile (fax) machines. The firm developed a
service called ZapMail that involved documents being sent electronically via fax machines between FedEx
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offices and then being delivered to customers’ offices. FedEx executives hoped that ZapMail would be a
success because it reduced the delivery time of a document from overnight to just a couple of hours.
Unfortunately, however, the ZapMail system had many technical problems that frustrated customers.
Even worse, FedEx failed to anticipate that many businesses would simply purchase their own fax
machines. ZapMail was shut down before long, and FedEx lost hundreds of millions of dollars following
its failed emergent strategy. In retrospect, FedEx had made a costly mistake by venturing outside of the
domain that was central to its intended strategy: package delivery. [3]
Emergent strategies can also lead to tremendous success. Southern Bloomer Manufacturing Company was
founded to make underwear for use in prisons and mental hospitals. Many managers of such institutions
believe that the underwear made for retail markets by companies such as Calvin Klein and Hanes is
simply not suitable for the people under their care. Instead, underwear issued to prisoners needs to be
sturdy and durable to withstand the rigors of prison activities and laundering. To meet these needs,
Southern Bloomers began selling underwear made of heavy cotton fabric.
An unexpected opportunity led Southern Bloomer to go beyond its intended strategy of serving
institutional needs for durable underwear. Just a few years after opening, Southern Bloomer’s
performance was excellent. It was servicing the needs of about 125 facilities, but unfortunately, this was
creating a vast amount of scrap fabric. An attempt to use the scrap as stuffing for pillows had failed, so the
scrap was being sent to landfills. This was not only wasteful but also costly.
One day, cofounder Don Sonner visited a gun shop with his son. Sonner had no interest in guns, but he
quickly spotted a potential use for his scrap fabric during this visit. The patches that the gun shop sold to
clean the inside of gun barrels were of poor quality. According to Sonner, when he “saw one of those
flimsy woven patches they sold that unraveled when you touched them, I said, ‘Man, that’s what I can do’”
with the scrap fabric. Unlike other gun-cleaning patches, the patches that Southern Bloomer sold did not
give off threads or lint, two by-products that hurt guns’ accuracy and reliability. The patches quickly
became popular with the military, police departments, and individual gun enthusiasts. Before long,
Southern Bloomer was selling thousands of pounds of patches per month. A casual trip to a gun store
unexpectedly gave rise to a lucrative emergent strategy. [4]
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Realized Strategy
A realized strategy is the strategy that an organization actually follows. Realized strategies are a product of
a firm’s intended strategy (i.e., what the firm planned to do), the firm’s deliberate strategy (i.e., the parts
of the intended strategy that the firm continues to pursue over time), and its emergent strategy (i.e., what
the firm did in reaction to unexpected opportunities and challenges). In the case of FedEx, the intended
strategy devised by its founder many years ago—fast package delivery via a centralized hub—remains a
primary driver of the firm’s realized strategy. For Southern Bloomers Manufacturing Company, realized
strategy has been shaped greatly by both its intended and emergent strategies, which center on underwear
and gun-cleaning patches.
In other cases, firms’ original intended strategies are long forgotten. A nonrealized strategy refers to the
abandoned parts of the intended strategy. When aspiring author David McConnell was struggling to sell
his books, he decided to offer complimentary perfume as a sales gimmick. McConnell’s books never did
escape the stench of failure, but his perfumes soon took on the sweet smell of success. The California
Perfume Company was formed to market the perfumes; this firm evolved into the personal care products
juggernaut known today as Avon. For McConnell, his dream to be a successful writer was a nonrealized
strategy, but through Avon, a successful realized strategy was driven almost entirely by opportunistically
capitalizing on change through emergent strategy.
Strategy at the Movies
The Social Network
Did Harvard University student Mark Zuckerberg set out to build a billion-dollar company with more
than six hundred million active users? Not hardly. As shown in 2010’s The Social Network, Zuckerberg’s
original concept in 2003 had a dark nature. After being dumped by his girlfriend, a bitter Zuckerberg
created a website called “FaceMash” where the attractiveness of young women could be voted on. This
evolved first into an online social network called Thefacebook that was for Harvard students only. When
the network became surprisingly popular, it then morphed into Facebook, a website open to everyone.
Facebook is so pervasive today that it has changed the way we speak, such as the word friend being used
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as a verb. Ironically, Facebook’s emphasis on connecting with existing and new friends is about as
different as it could be from Zuckerberg’s original mean-spirited concept. Certainly, Zuckerberg’s
emergent and realized strategies turned out to be far nobler than the intended strategy that began his
adventure in entrepreneurship.
The Social Network demonstrates how founder Mark Zuckerberg’s intended strategy gave way to
an emergent strategy via the creation of Facebook.
Image courtesy of Robert Scoble, http://www.flickr.com/photos/scobleizer/5179377698.
K E Y T A K E A W A Y
x Most organizations create intended strategies that they hope to follow to be successful. Over time,
however, changes in an organization’s situation give rise to new opportunities and challenges.
Organizations respond to these changes using emergent strategies. Realized strategies are a product of
both intended and realized strategies.
E X E R C I S E S
1. What is the difference between an intended and an emergent strategy?
2. Can you think of a company that seems to have abandoned its intended strategy? Why do you suspect it
was abandoned?
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3. Would you describe your career strategy in college to be more deliberate or emergent? Why?
[1] Mintzberg, H., & Waters, J. A. 1985. Of strategies, deliberate and emergent. Strategic Management Journal, 6,
257–272.
[2] Donahoe, J. A. 2011, March 10. Forbes: Fred Smith’s fortune grows to $.21B. Memphis Business Journal.
Retrieved fromhttp://www.bizjournals.com/memphis/news/2011/03/10/forbes-fred-smiths-fortune-grows-
to.html; Fortune: FedEx 8th “most admired” company in the world. Memphis Business Journal. Retrieved
from http://www.bizjournals .com/memphis/news/2011/03/03/fortune-fedex-8th-most- admired.html
[3] Funding Universe. FedEx Corporation. Retrieved fromhttp://www.fundinguniverse.com/company –
histories/FedEx-Corporation-Company-History.html
[4] Wells, K. 2002. Floating off the page: The best stories from the Wall Street Journal’s middle column. New York:
Simon & Shuster. Quote from page 97.
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1.3 The History of Strategic Management
L E A R N I N G O B J E C T I V E S
1. Consider how strategy in ancient times and military strategy can provide insights to businesses.
2. Describe how strategic management has evolved into a field of study.
Those who cannot remember the past are condemned to repeat it.
– George Santayana, The Life of Reason
Santayana’s quote has strong implications for strategic management. The history of strategic management
can be traced back several thousand years. Great wisdom about strategy can be acquired by
understanding the past, but ignoring the lessons of history can lead to costly strategic mistakes that could
have been avoided. Certainly, the present offers very important lessons; businesses can gain knowledge
about what strategies do and do not work by studying the current actions of other businesses. But this
section discusses two less obvious sources of wisdom: (1) strategy in ancient times and (2) military
strategy. This section also briefly traces the development of strategic management as a field of study.
Strategy in Ancient Times
Perhaps the earliest-known discussion of strategy is offered in the Old Testament of the
Bible. [1] Approximately 3,500 years ago, Moses faced quite a challenge after leading his fellow Hebrews
out of enslavement in Egypt. Moses was overwhelmed as the lone strategist at the helm of a nation that
may have exceeded one million people. Based on advice from his father-in-law, Moses began delegating
authority to other leaders, each of whom oversaw a group of people. This hierarchical delegation of
authority created a command structure that freed Moses to concentrate on the biggest decisions and
helped him implement his strategies. Similarly, the demands of strategic management today are simply
too much for a chief executive officer (the top leader of a company) to handle alone. Many important tasks
are thus entrusted to vice presidents and other executives.
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In ancient China, strategist and philosopher Sun Tzu offered thoughts on strategy that continue to be
studied carefully by business and military leaders today. Sun Tzu’s best-known work is The Art of War. As
this title implies, Sun Tzu emphasized the creative and deceptive aspects of strategy.
One of Sun Tzu’s ideas that has numerous business applications is that winning a battle without fighting is
the best way to win. Apple’s behavior in the personal computer business offers a good example of this idea
in action. Many computer makers such as Toshiba, Acer, and Lenovo compete with one another based
primarily on price. This leads to price wars that undermine the computer makers’ profits. In contrast,
Apple prefers to develop unique features for its computers, features that have created a fiercely loyal set of
customers. Apple boldly charges far more for its computers than its rivals charge for theirs. Apple does
not even worry much about whether its computers’ software is compatible with the software used by most
other computers. Rather than fighting a battle with other firms, Apple wins within the computer business
by creating its own unique market and by attracting a set of loyal customers. Sun Tzu would probably
admire Apple’s approach.
Perhaps the most famous example of strategy in ancient times revolves around the Trojan horse.
According to legend, Greek soldiers wanted to find a way to enter the gates of Troy and attack the city
from the inside. They devised a ploy that involved creating a giant wooden horse, hiding soldiers inside
the horse, and offering the horse to the Trojans as a gift. The Trojans were fooled and brought the horse
inside their city. When night arrived, the hidden Greek soldiers opened the gates for their army, leading to
a Greek victory. In modern times, the term Trojan horse refers to gestures that appear on the surface to
be beneficial to the recipient but that mask a sinister intent. Computer viruses also are sometimes referred
to as Trojan horses.
A far more noble approach to strategy than the Greeks’ is attributed to King Arthur of Britain. Unlike the
hierarchical approach to organizing Moses used, Arthur allegedly considered himself and each of his
knights to have an equal say in plotting the group’s strategy. Indeed, the group is thought to have held its
meetings at a round table so that no voice, including Arthur’s, would be seen as more important than the
others. The choice of furniture in modern executive suites is perhaps revealing. Most feature rectangular
meeting tables, perhaps signaling that one person—the chief executive officer—is in charge.
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Another implication for strategic management offered by King Arthur and his Knights of the Round Table
involves the concept of mission. Their vigorous search to find the Holy Grail (the legendary cup used by
Jesus and his disciples at the Last Supper) serves as an exemplar for the importance of a central mission
to guide organizational strategy and actions.
Lessons Offered by Military Strategy
Key military conflicts and events have shaped the understanding of strategic management.
Indeed, the word strategy has its roots in warfare. The Greek verb strategosmeans “army leader” and the idea
of stratego (from which we get the word strategy) refers to defeating an enemy by effectively using resources.[2]
A book written nearly five hundred years ago is still regarded by many as an insightful guide for
conquering and ruling territories. Niccolò Machiavelli’s 1532 book The Prince offers clever recipes for
success to government leaders. Some of the book’s suggestions are quite devious, and the
word Machiavellianis used today to refer to acts of deceit and manipulation.
Two wars fought on American soil provide important lessons about strategic management. In the late
1700s, the American Revolution pitted the American colonies against mighty Great Britain. The
Americans relied on nontraditional tactics, such as guerilla warfare and the strategic targeting of British
officers. Although these tactics were considered by Great Britain to be barbaric, they later became widely
used approaches to warfare. The Americans owed their success in part to help from the French navy,
illustrating the potential value of strategic alliances.
Nearly a century later, Americans turned on one another during the Civil War. After four years of
hostilities, the Confederate states were forced to surrender. Historians consider the Confederacy to have
had better generals, but the Union possessed greater resources, such as factories and railroad lines. As
many modern companies have discovered, sometimes good strategies simply cannot overcome a stronger
adversary.
Two wars fought on Russian soil also offer insights. In the 1800s, a powerful French invasion force was
defeated in part by the brutal nature of Russian winters. In the 1940s, a similar fate befell German forces
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during World War II. Against the advice of some of his leading generals, Adolf Hitler ordered his army to
conquer Russia. Like the French before them, the Germans were able to penetrate deep into Russian
territory. As George Santayana had warned, however, the forgotten past was about to repeat itself.
Horrific cold stopped the German advance. Russian forces eventually took control of the combat, and
Hitler committed suicide as the Russians approached the German capital, Berlin.
Five years earlier, Germany ironically had benefited from an opponent ignoring the strategic management
lessons of the past. In ancient times, the Romans had assumed that no army could cross a mountain range
known as the Alps. An enemy general named Hannibal put his men on elephants, crossed the mountains,
and caught Roman forces unprepared. French commanders made a similar bad assumption in 1940.
When Germany invaded Belgium (and then France) in 1940, its strategy caught French forces by surprise.
The top French commanders assumed that German tanks simply could not make it through a thickly
wooded region known as the Ardennes Forest. As a result, French forces did not bother preparing a strong
defense in that area. Most of the French army and their British allies instead protected against a small,
diversionary force that the Germans had sent as a deception to the north of the forest. German forces
made it through the forest, encircled the allied forces, and started driving them toward the ocean. Many
thousands of French and British soldiers were killed or captured. In retrospect, the French generals had
ignored an important lesson of history: Do not make assumptions about what your adversary can and
cannot do. Executives who make similar assumptions about their competitors put their organizations’
performance in jeopardy.
Strategic Management as a Field of Study
Universities contain many different fields of study, including physics, literature, chemistry, computer
science, and engineering. Some fields of study date back many centuries (e.g., literature), while others
(such as computer science) have emerged only in recent years. Strategic management has been important
throughout history, but the evolution of strategic management into a field of study has mostly taken place
over the past century. A few of the key business and academic events that have helped the field develop
are discussed next.
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The ancient Chinese strategist Sun Tzu made it clear that strategic management is part art. But it is also
part science. Major steps toward developing the scientific aspect of strategic management were taken in
the early twentieth century by Frederick W. Taylor. In 1911, Taylor published The Principles of Scientific
Management. The book was a response to Taylor’s observation that most tasks within organizations were
organized haphazardly. Taylor believed that businesses would be much more efficient if management
principles were derived through scientific investigation. In The Principles of Scientific Management,
Taylor stressed how organizations could become more efficient through identifying the “one best way” of
performing important tasks. Implementing Taylor’s principles was thought to have saved railroad
companies hundreds of millions of dollars. [3] Although many later works disputed the merits of trying to
find the “one best way,” Taylor’s emphasis on maximizing organizational performance became the core
concern of strategic management as the field developed.
Also in the early twentieth century, automobile maker Henry Ford emerged as one of the pioneers of
strategic management among industrial leaders. At the time, cars seemed to be a luxury item for wealthy
people. Ford adopted a unique strategic perspective, however, and boldly offered the vision that he would
make cars the average family could afford. Building on ideas about efficiency from Taylor and others, Ford
organized assembly lines for creating automobiles that lowered costs dramatically. Despite his wisdom,
Ford also made mistakes. Regarding his company’s flagship product, the Model T, Ford famously stated,
“Any customer can have a car painted any color that he wants so long as it is black.” When rival
automakers provided customers with a variety of color choices, Ford had no choice but to do the same.
In 1912, Harvard University became the first higher education institution to offer a course focused on how
business executives could lead their organizations to greater success. The approach to maximizing
performance within this “business policy” course was consistent with Taylor’s ideas. Specifically, the goal
of the business policy course was to identify the one best response to any given problem that an
organization confronted. By finding and pursuing this ideal solution, the organization would have the best
chance of enjoying success.
In the 1920s, A&W Root Beer became the first franchised restaurant chain. Franchising involves an
organization (called a franchisor) granting the right to use its brand name, products, and processes to
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other organizations (known as franchisees) in exchange for an up-front payment (a franchise fee) and a
percentage of franchisees’ revenues (a royalty fee). This simple yet powerful business model allows
franchisors to grow their brands rapidly and provides franchisees with the safety of a proven business
format. Within a few decades, the franchising business model would fuel incredible successes for many
franchisors and franchisees across a variety of industries. Today, for example, both Subway and
McDonald’s have more than thirty thousand restaurants carrying their brand names.
The acceptance of strategic management as a necessary element of business school programs took a major
step forward in 1959. A widely circulated report created by the Ford Foundation recommended that all
business schools offer a “capstone” course. The goal of this course would be to integrate knowledge across
different business fields such as marketing, finance, and accounting to help students devise better ideas
for addressing complex business problems. Rather than seeking a “one best way” solution, as advocated
by Taylor and Harvard’s business policy course, this capstone course would emphasize students’ critical
thinking skills in general and the notion that multiple ways of addressing a problem could be equally
successful in particular. The Ford Foundation report was a key motivator that led US universities to create
strategic management courses in their undergraduate and master of business administration programs.
In 1962, business and academic events occurred that seemed minor at the time but that would later give
rise to huge changes. Building on the business savvy that he had gained as a franchisee, Sam Walton
opened the first Walmart in Rogers, Arkansas. Relying on a strategy that emphasized low prices and high
levels of customer service, Walmart grew to 882 stores with a combined $8.4 billion dollars in annual
sales by 1985. A decade later, sales reached $93.6 billion across nearly 3,000 stores. In 2010, Walmart
was the largest company in the world. In recent years, Walmart has arguably downplayed customer
service in favor of cutting costs. Time will tell whether deviating from Sam Walton’s original strategic
positioning will hurt the company.
Also in 1962, Harvard professor Alfred Chandler published Strategy and Structure: Chapters in the
History of the Industrial Enterprise. This book describes how strategy and organizational structure need
to be consistent with each other to ensure strong firm performance, a lesson that Moses seems to have
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mastered during the Hebrews’ exodus from Egypt. Many people working in the field of strategic
management consider Chandler’s book to be the first work of strategic management research.
Two pivotal events that firmly established strategic management as a field of study took place in 1980.
One was the creation of the Strategic Management Journal. The introduction of the journal offered a
forum for researchers interested in building knowledge about strategic management. Much like important
new medical findings appear in the Journal of the American Medical Association and the New England
Journal of Medicine, the Strategic Management Journal publishes pathbreaking insights about strategic
management.
The second pivotal event in 1980 was the publication of Competitive Strategy: Techniques for Analyzing
Industries and Competitors by Harvard professor Michael Porter. This book offers concepts such as five
forces analysis and generic strategies that continue to strongly influence how executives choose strategies
more than thirty years after the book’s publication. Given the importance of these concepts, both five
forces analysis and generic strategies are discussed in detail in Chapter 3, “Evaluating the External
Environment” and Chapter 5, “Selecting Business-Level Strategies”, respectively.
Many consumers today take web-based shopping for granted, but this channel for commerce was created
less than two decades ago. The 1995 launch of Amazon by founder Jeff Bezos was perhaps the pivotal
event in creating Internet-based commerce. In pursuit of its vision “to be earth’s most customer-centric
company,” Amazon has diversified far beyond its original focus on selling books and has evolved into a
dominant retailer. Powerful giants have stumbled badly in Amazon’s wake. Sears had sold great varieties
of goods (even including entire houses) through catalogs for many decades, as had JCPenney. Neither
firm created a strong online sales presence to keep pace with Amazon, and both eventually dropped their
catalog businesses. As often happens with old and large firms, Sears and JCPenney were outmaneuvered
by a creative and versatile upstart.
Ethics have long been an important issue within the strategic management field. Attention to the need for
executives to act ethically when creating strategies increased dramatically in the early 2000s when a series
of companies such as Enron Corporation, WorldCom, Tyco, Qwest, and Global Crossing were found to
have grossly exaggerated the strength of their performance. After a series of revelations about fraud and
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corruption, investors in these firms and others lost billions of dollars, tens of thousands of jobs were lost,
and some executives were sent to prison.
Like ethics, the implications of international competition are of central interest to strategic management.
Provocative new thoughts on the nature of the international arena were offered in 2005 by Thomas L.
Friedman. In his book The World Is Flat: A Brief History of the Twenty-First Century, Friedman argues
that many of the advantages that firms in developed countries such as the United States, Japan, and Great
Britain take for granted are disappearing. One implication is that these firms will need to improve their
strategies if they are to remain successful.
Looking to the future, it appears likely that strategic management will prove to be more important than
ever. In response, researchers who are interested in strategic management will work to build additional
knowledge about how organizations can maximize their performance. Executives will need to keep track
of the latest scientific findings. Meanwhile, they also must leverage the insights that history offers on how
to be successful while trying to avoid history’s mistakes.
K E Y T A K E A W A Y
x Although strategic management as a field of study has developed mostly over the last century, the
concept of strategy is much older. Understanding strategic management can benefit greatly by learning
the lessons that ancient history and military strategy provide.
E X E R C I S E S
1. What do you think was the most important event related to strategy in ancient times?
2. In what ways are the strategic management of business and military strategy alike? In what ways are they
different?
3. Do you think executives are more ethical today as a result of the scandals in the early 2000s? Why or why
not?
[1] Bracker, J. 1980. The historical development of the strategic management concept.Academy of Management
Review, 5(2), 219–224.
[2] Bracker, J. 1980. The historical development of the strategic management concept.Academy of Management
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1.4 Understanding the Strategic Management Process
L E A R N I N G O B J E C T I V E S
1. Learn the strategic management process.
2. Understand the four steps in the strategic management process.
Modeling the Strategy Process
Strategic management is a process that involves building a careful understanding of how the world is
changing, as well as a knowledge of how those changes might affect a particular firm. CEOs, such as late
Apple-founder Steve Jobs, must be able to carefully manage the possible actions that their firms might
take to deal with changes that occur in their environment. We present a model of the strategic
management process in Figure 1.7 “Overall Model of the Strategic Management Process”. This model also
guides our presentation of the chapters contained in this book.
Figure 1.7 Overall Model of the Strategic Management Process
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The strategic management process begins with an understanding of strategy and performance. As we have
noted in this introductory chapter, strategic management is both an art and a science, and it involves
multiple conceptualizations of the notion of strategy drawn from recent and ancient history. In Chapter 2
“Leading Strategically”, we focus on how leading strategically is needed if the firm is to achieve the long-
term strong performance companies such as Apple have attained. Consequently, how managers
understand and interpret the performance of their firms is often central to understanding strategy.
Environmental and internal scanning is the next stage in the process. Managers must constantly scan the
external environment for trends and events that affect the overall economy, and they must monitor
changes in the particular industry in which the firm operates. For example, Apple’s decision to create the
iPhone demonstrates its ability to interpret that traditional industry boundaries that distinguished the
cellular phone industry and the computer industry were beginning to blur. At the same time, firms must
evaluate their own resources to understand how they might react to changes in the environment. For
example, intellectual property is a vital resource for Apple. Between 2008 and 2010, Apple filed more
than 350 cases with the US Patent and Trademark Office to protect its use of such terms as apple, pod,
and safari. [1]
A classic management tool that incorporates the idea of scanning elements both external and internal to
the firm is SWOT (strengths, weaknesses, opportunities, and threats) analysis. Strengths and weaknesses
are assessed by examining the firm’s resources, while opportunities and threats refer to external events
and trends. The value of SWOT analysis parallels ideas from classic military strategists such as Sun Tzu,
who noted the value of knowing yourself as well as your opponent. Chapter 3 “Evaluating the External
Environment” examines the topic of evaluating the external environment in detail, and Chapter 4
“Managing Firm Resources” presents concepts and tools for managing firm resources.
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The importance of knowing yourself and your opponent is applicable to the knowledge of strategic
management for business, military strategy, and classic strategy games such as chess.
Strategy formulation is the next step in the strategic management process. This involves developing
specific strategies and actions. Certainly, part of Apple’s success is due to the unique products it offers the
market, as well as how these products complement one another. A customer can buy an iPod that plays
music from iTunes—all of which can be stored in Apple’s Mac computer. [2] In Chapter 5 “Selecting
Business-Level Strategies”, we discuss how selecting business-level strategies helps to provide firms with
a recipe that can be followed that will increase the likelihood that their strategies will be successful.
In Chapter 6 “Supporting the Business-Level Strategy: Competitive and Cooperative Moves”, we present
insights on how firms can support the business-level strategy through competitive and cooperative
moves. Chapter 7 “Competing in International Markets” presents possibilities for firms competing in
international markets, and Chapter 8 “Selecting Corporate-Level Strategies” focuses on selecting
corporate-level strategies.
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Strategy implementation is the final stage of the process. One important element of strategy
implementation entails crafting an effective organizational structure and corporate culture. For example,
part of Apple’s success is due to its consistent focus on innovation and creativity that Steve Jobs described
as similar to that of a start-up. Chapter 9 “Executing Strategy through Organizational Design” offers ideas
on how to manage these elements of implementation. The final chapter explores how to lead an ethical
organization through corporate governance, social responsibility, and sustainability.
K E Y T A K E A W A Y
x Strategic management is a process that requires the ability to manage change. Consequently, executives
must be careful to monitor and to interpret the events in their environment, to take appropriate actions
when change is needed, and to monitor their performance to ensure that their firms are able to survive
and, it is hoped, thrive over time.
E X E R C I S E S
1. Who makes the strategic decisions for most organizations?
2. Why is it important to view strategic management as a process?
3. What are the four steps of the strategic management process?
4. How is chess relevant to the study of strategic management? What other games might help teach
strategic thinking?
[1] Apple Inc. litigation. Wikipedia. Retrieved from en.wikipedia.org/wiki/Apple_Inc._ litigation
[2] Inside CRM Editors. Effective strategies Apple uses to create loyal customers [Online article]. Retrieved
from http://www.insidecrm.com/features/strategies-apple-loyal -customers
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1.5 Conclusion
This chapter provides an overview of strategic management and strategy. Ideas about strategy span
many centuries, and modern understanding of strategy borrows from ancient strategies as well as
classic militaries strategies. You should now understand that there are numerous ways to
conceptualize the idea of strategy and that effective strategic management is needed to ensure the
long-term success of firms. The study of strategic management provides tools to effectively manage
organizations, but it also involves the art of knowing how and when to apply creative thinking.
Knowledge of both the art and the science of strategic management is needed to help guide
organizations as their strategies emerge and evolve over time. Such tools will also help you effectively
chart a course for your career as well as to understand the effective strategic management of the
organizations for which you will work.
E X E R C I S E S
1. Think about the best and worst companies you know. What is extraordinary (or extraordinarily bad) about
these firms? Are their strategies clear and focused or difficult to define?
2. If you were to write a “key takeaway” section for this chapter, what would you include as the material
you found most interesting?
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Chapter 2
Leading Strategically
L E A R N I N G O B J E C T I V E S
After reading this chapter, you should be able to understand and articulate answers to the following
questions:
1. What are vision, mission, and goals, and why are they important to organizations?
2. How should executives analyze the performance of their organizations?
3. In what ways can having a celebrity CEO and a strong entrepreneurial orientation help or harm an
organization?
Questions Are Brewing at Starbucks
Starbucks’s global empire includes this store in Seoul, South Korea.
Image courtesy of Wikimedia,http://commons.wikimedia.org/wiki/File:Starbucks-seoul.JPG.
Chapter 2 from Mastering Strategic Management was adapted by The Saylor Foundation under
a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested
by the work’s original creator or licensee. © 2014, The Saylor Foundation.
http://www.saylor.org/site/textbooks/Mastering%20Strategic%20Management
http://creativecommons.org/licenses/by-nc-sa/3.0/
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March 30, 2011, marked the fortieth anniversary of Starbucks first store opening for business in Seattle,
Washington. From its humble beginnings, Starbucks grew to become the largest coffeehouse company in
the world while stressing the importance of both financial and social goals. As it created thousands of
stores across dozens of countries, the company navigated many interesting periods. The last few years
were a particularly fascinating era.
In early 2007, Starbucks appeared to be very successful, and its stock was worth more than $35 per share.
By 2008, however, the economy was slowing, competition in the coffee business was heating up, and
Starbucks’s performance had become disappointing. In a stunning reversal of fortune, the firm’s stock was
worth less than $10 per share by the end of the year. Anxious stockholders wondered whether Starbucks’s
decline would continue or whether the once high-flying company would return to its winning ways.
Riding to the rescue was Howard Schultz, the charismatic and visionary founder of Starbucks who had
stepped down as chief executive officer eight years earlier. Schultz again took the helm and worked to turn
the company around by emphasizing its mission statement: “to inspire and nurture the human spirit—one
person, one cup and one neighborhood at a time.” [1]About a thousand underperforming stores were shut
down permanently. Thousands of other stores closed for a few hours so that baristas could be retrained to
make inspiring drinks. Food offerings were revamped to ensure that coffee—not breakfast sandwiches—
were the primary aroma that tantalized customers within Starbucks’s outlets.
By the time Starbucks’s fortieth anniversary arrived, Schultz had led his company to regain excellence,
and its stock price was back above $35 per share. In March 2011, Schultz summarized the situation by
noting that “over the last three years, we’ve completely transformed the company, and the health of
Starbucks is quite good. But I don’t think this is a time to celebrate or run some victory lap. We’ve got a lot
of work to do.” [2] Indeed, important questions loomed. Could performance improve further? How long
would Schultz remain with the company? Could Schultz’s eventual successor maintain Schultz’s
entrepreneurial approach as well as keep Starbucks focused on its mission?
[1] Our Starbucks mission statement. Retrieved from http://www.starbucks.com/about-us/company-
information/mission-statement. Accessed March 31, 2011.
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[2] Starbucks CEO: Can you “get big and stay small” [Review of the book Onward: How Starbucks fought for its life
without losing its soul by Howard Schultz]. 2011, March 28. NPR Books. Retrieved
from http://www.npr.org/2011/03/28/134738487/starbucks-ceo-can-you-get-big-and-stay-small.
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2.1 Vision, Mission, and Goals
L E A R N I N G O B J E C T I V E S
1. Define vision and mission and distinguish between them.
2. Know what the acronym SMART represents.
3. Be able to write a SMART goal.
The Importance of Vision
Good business leaders create a vision, articulate the vision, passionately own the vision, and relentlessly
drive it to completion.
– Jack Welch, former CEO of General Electric
Many skills and abilities separate effective strategic leaders like Howard Schultz from poor strategic
leaders. One of them is the ability to inspire employees to work hard to improve their organization’s
performance. Effective strategic leaders are able to convince employees to embrace lofty ambitions and
move the organization forward. In contrast, poor strategic leaders struggle to rally their people and
channel their collective energy in a positive direction.
As the quote from Jack Welch suggests, a vision is one key tool available to executives to inspire the
people in an organization. An organization’s vision describes what the organization hopes to become
in the future. Well-constructed visions clearly articulate an organization’s aspirations. Avon’s vision is
“to be the company that best understands and satisfies the product, service, and self-fulfillment needs
of women—globally.” This brief but powerful statement emphasizes several aims that are important to Avon,
including excellence in customer service, empowering women, and the intent to be a worldwide player.
Like all good visions, Avon sets a high standard for employees to work collectively toward.
Perhaps no vision captures high standards better than that of aluminum maker Alcoa. This firm’s very ambitious
vision is “to be the best company in the world—in the eyes of our customers, shareholders, communities
and people.” By making clear their aspirations, Alcoa’s executives hope to inspire employees to act in ways that
help the firm become the best in the world.
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The results of a survey of one thousand five hundred executives illustrate how the need to create an
inspiring vision creates a tremendous challenge for executives. When asked to identify the most important
characteristics of effective strategic leaders, 98 percent of the executives listed “a strong sense of vision”
first. Meanwhile, 90 percent of the executives expressed serious doubts about their own ability to create a
vision. [1] Not surprisingly, many organizations do not have formal visions. Many organizations that do
have visions find that employees do not embrace and pursue the visions. Having a well-formulated vision
employees embrace can therefore give an organization an edge over its rivals.
Mission Statements
In working to turnaround Starbucks, Howard Schultz sought to renew Starbucks’s commitment to
its mission statement: “to inspire and nurture the human spirit—one person, one cup and one
neighborhood at a time.” A mission such as Starbucks’s states the reasons for an organization’s existence.
Well-written mission statements effectively capture an organization’s identity and provide answers to the
fundamental question “Who are we?” While a vision looks to the future, a mission captures the key
elements of the organization’s past and present.
Organizations need support from their key stakeholders, such as employees, owners, suppliers, and
customers, if they are to prosper. A mission statement should explain to stakeholders why they should
support the organization by making clear what important role or purpose the organization plays in
society. Google’s mission, for example, is “to organize the world’s information and make it universally
accessible and useful.” Google pursued this mission in its early days by developing a very popular Internet
search engine. The firm continues to serve its mission through various strategic actions, including offering
its Internet browser Google Chrome to the online community, providing free e-mail via its Gmail service,
and making books available online for browsing.
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Many consider Abraham Lincoln to have been one of the
greatest strategic leaders in modern history.
Image courtesy of Alexander Gardner,
http://wikimediafoundation.org/wiki/File:Abraham_Li
ncoln_head_on_shoulders_photo_portrait .
One of Abraham Lincoln’s best-known statements is that “a house divided against itself cannot stand.”
This provides a helpful way of thinking about the relationship between vision and mission. Executives ask
for trouble if their organization’s vision and mission are divided by emphasizing different domains. Some
universities have fallen into this trap. Many large public universities were established in the late 1800s
with missions that centered on educating citizens. As the twentieth century unfolded, however, creating
scientific knowledge through research became increasingly important to these universities. Many
university presidents responded by creating visions centered on building the scientific prestige of their
schools. This created a dilemma for professors: Should they devote most of their time and energy to
teaching students (as the mission required) or on their research studies (as ambitious presidents
demanded via their visions)? Some universities continue to struggle with this trade-off today and remain
houses divided against themselves. In sum, an organization is more effective to the extent that its vision
and its mission target employees’ effort in the same direction.
Pursuing the Vision and Mission through SMART Goals
An organization’s vision and mission offer a broad, overall sense of the organization’s direction. To work
toward achieving these overall aspirations, organizations also need to create goals—narrower aims that
should provide clear and tangible guidance to employees as they perform their work on a daily basis. The
most effective goals are those that are specific, measurable, aggressive, realistic, and time-bound. An easy
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way to remember these dimensions is to combine the first letter of each into one word: SMART.
Employees are put in a good position to succeed to the extent that an organization’s goals are SMART.
A goal is specific if it is explicit rather than vague. In May 1961, President John F. Kennedy proposed a
specific goal in a speech to the US Congress: “I believe that this nation should commit itself to achieving
the goal, before this decade is out, of landing a man on the moon and returning him safely to the
earth.” [2]Explicitness such as was offered in this goal is helpful because it targets people’s energy. A few
moments later, Kennedy made it clear that such targeting would be needed if this goal was to be reached.
Going to the moon, he noted, would require “a major national commitment of scientific and technical
manpower, materiel and facilities, and the possibility of their diversion from other important activities
where they are already thinly spread.” While specific goals make it clear how efforts should be directed,
vague goals such as “do your best” leave individuals unsure of how to proceed.
A goal is measurable to the extent that whether the goal is achieved can be quantified. President
Kennedy’s goal of reaching the moon by the end of the 1960s offered very simple and clear measurability:
Either Americans would step on the moon by the end of 1969 or they would not. One of Coca-Cola’s
current goals is a 20 percent improvement to its water efficiency by 2012 relative to 2004 water usage.
Because water efficiency is easily calculated, the company can chart its progress relative to the 20 percent
target and devote more resources to reaching the goal if progress is slower than planned.
A goal is aggressive if achieving it presents a significant challenge to the organization. A series of
research studies have demonstrated that performance is strongest when goals are challenging but
attainable. Such goals force people to test and extend the limits of their abilities. This can result in
reaching surprising heights. President Kennedy captured this theme in a speech in September 1962: “We
choose to go to the moon. We choose to go to the moon in this decade…not because [it is] easy, but
because [it is] hard, because that goal will serve to organize and measure the best of our energies and
skills.”
In the case of Coca-Cola, reaching a 20 percent improvement will require a concerted effort, but the goal
can be achieved. Meanwhile, easily achievable goals tend to undermine motivation and effort. Consider a
situation in which you have done so well in a course that you only need a score of 60 percent on the final
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exam to earn an A for the course. Understandably, few students would study hard enough to score 90
percent or 100 percent on the final exam under these circumstances. Similarly, setting organizational
goals that are easy to reach encourages employees to work just hard enough to reach the goals.
It is tempting to extend this thinking to conclude that setting nearly impossible goals would encourage
even stronger effort and performance than does setting aggressive goals. People tend to get discouraged
and give up, however, when faced with goals that have little chance of being reached. If, for example,
President Kennedy had set a time frame of one year to reach the moon, his goal would have attracted
scorn. The country simply did not have the technology in place to reach such a goal. Indeed, Americans
did not even orbit the moon until seven years after Kennedy’s 1961 speech. Similarly, if Coca-Cola’s water
efficiency goal was 95 percent improvement, Coca-Cola’s employees would probably not embrace it. Thus
goals must also be realistic, meaning that their achievement is feasible.
You have probably found that deadlines are motivating and that they help you structure your work time.
The same is true for organizations, leading to the conclusion that goals should be time-bound through
the creation of deadlines. Coca-Cola has set a deadline of 2012 for its water efficiency goal, for example.
The deadline for President Kennedy’s goal was the end of 1969. The goal was actually reached a few
months early. On July 20, 1969, Neil Armstrong became the first human to step foot on the moon.
Incredibly, the pursuit of a well-constructed goal had helped people reach the moon in just eight years.
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Americans landed on the moon eight years after President Kennedy set a moon landing as a key
goal for the United States.
Image courtesy of NASA Apollo Archive,
http://upload.wikimedia.org/wikipedia/commons/8/8b/5927_NASA .
The period after an important goal is reached is often overlooked but is critical. Will an organization rest
on its laurels or will it take on new challenges? The US space program again provides an illustrative
example. At the time of the first moon landing, Time magazine asked the leader of the team that built the
moon rockets about the future of space exploration. “Given the same energy and dedication that took
them to the moon,” said Wernher von Braun, “Americans could land on Mars as early as 1982.” [3] No new
goal involving human visits to Mars was embraced, however, and human exploration of space was de-
emphasized in favor of robotic adventurers. Nearly three decades after von Braun’s proposed timeline for
reaching Mars expired, President Barack Obama set in 2010 a goal of creating by 2025 a new space
vehicle capable of taking humans beyond the moon and into deep space. This would be followed in the
mid-2030s by a flight to orbit Mars as a prelude to landing on Mars. [4] Time will tell whether these goals
inspire the scientific community and the country in general.
K E Y T A K E A W A Y
Strategic leaders need to ensure that their organizations have three types of aims. A vision states what
the organization aspires to become in the future. A mission reflects the organization’s past and present by
stating why the organization exists and what role it plays in society. Goals are the more specific aims that
organizations pursue to reach their visions and missions. The best goals are SMART: specific, measurable,
aggressive, realistic, and time-bound.
E X E R C I S E S
1. Take a look at the website of your college or university. What is the organization’s vision and mission?
Were they easy or hard to find?
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2. As a member of the student body, do you find the vision and mission of your college or university to be
motivating and inspirational? Why or why not?
3. What is an important goal that you have established for your career? Could this goal be improved by
applying the SMART goal concept?
[1] Quigley, J. V. 1994. Vision: How leaders develop it, share it, and sustain it. Business Horizons, 37(5), 37–41.
[2] Key documents in the history of space policy: 1960s. National Aeronautics and Space Administration. Retrieved
from http://history.nasa.gov/spdocs.html#1960s
[3] The Moon: Next, Mars and beyond. 1969, July 15. Time. Retrieved
fromhttp://www.time.com/time/magazine/article/0,9171,901107,00.html
[4] Amos, J. 2010, April 15. Obama sets Mars goal for America. BBC News. Retrieved from
http://news.bbc.co.uk/2/hi/8623691.stm
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2.2 Assessing Organizational Performance
L E A R N I N G O B J E C T I V E S
1. Understand the complexities associated with assessing organizational performance.
2. Learn each of the dimensions of the balanced scorecard framework.
3. Learn what is meant by a “triple bottom line.”
Organizational Performance: A Complex Concept
Organizational performance refers to how well an organization is doing to reach its vision, mission, and
goals. Assessing organizational performance is a vital aspect of strategic management. Executives must
know how well their organizations are performing to figure out what strategic changes, if any, to make.
Performance is a very complex concept, however, and a lot of attention needs to be paid to how it is
assessed.
Two important considerations are (1) performance measures and (2) performance referents (Figure 2.5
“How Organizations and Individuals Can Use Financial Performance Measures and Referents”).
A performance measure is a metric along which organizations can be gauged. Most executives examine
measures such as profits, stock price, and sales in an attempt to better understand how well their
organizations are competing in the market. But these measures provide just a glimpse of organizational
performance. Performance referents are also needed to assess whether an organization is doing well. A
performance referent is a benchmark used to make sense of an organization’s standing along a
performance measure. Suppose, for example, that a firm has a profit margin of 20 percent in 2011. This
sounds great on the surface. But suppose that the firm’s profit margin in 2010 was 35 percent and that the
average profit margin across all firms in the industry for 2011 was 40 percent. Viewed relative to these two
referents, the firm’s 2011 performance is cause for concern.
Using a variety of performance measures and referents is valuable because different measures and
referents provide different information about an organization’s functioning. The parable of the blind men
and the elephant—popularized in Western cultures through a poem by John Godfrey Saxe in the
nineteenth century—is useful for understanding the complexity associated with measuring organizational
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performance. As the story goes, six blind men set out to “see” what an elephant was like. The first man
touched the elephant’s side and believed the beast to be like a great wall. The second felt the tusks and
thought elephants must be like spears. Feeling the trunk, the third man thought it was a type of snake.
Feeling a limb, the fourth man thought it was like a tree trunk. The fifth, examining an ear, thought it was
like a fan. The sixth, touching the tail, thought it was like a rope. If the men failed to communicate their
different impressions they would have all been partially right but wrong about what ultimately mattered.
Figure 2.5 How Organizations and Individuals Can Use Financial Performance Measures and
Referents
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This story parallels the challenge involved in understanding the multidimensional nature of organization
performance because different measures and referents may tell a different story about the organization’s
performance. For example, the Fortune 500 lists the largest US firms in terms of sales. These firms are
generally not the strongest performers in terms of growth in stock price, however, in part because they are
so big that making major improvements is difficult. During the late 1990s, a number of Internet-centered
businesses enjoyed exceptional growth in sales and stock price but reported losses rather than profits.
Many investors in these firms who simply fixated on a single performance measure—sales growth—
absorbed heavy losses when the stock market’s attention turned to profits and the stock prices of these
firms plummeted.
The story of the blind men and the elephant provides a metaphor for understanding the
complexities of measuring organizational performance.
Image courtesy of Hanabusa Itcho,
http://en.wikipedia.org/wiki/File:Blind_monks_examining_an_elephant .
The number of performance measures and referents that are relevant for understanding an organization’s
performance can be overwhelming, however. For example, a study of what performance metrics were used
within restaurant organizations’ annual reports found that 788 different combinations of measures and
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referents were used within this one industry in a single year. [1]Thus executives need to choose a rich yet
limited set of performance measures and referents to focus on.
The Balanced Scorecard
To organize an organization’s performance measures, Professor Robert Kaplan and Professor David
Norton of Harvard University developed a tool called the balanced scorecard. Using the scorecard helps
managers resist the temptation to fixate on financial measures and instead monitor a diverse set of
important measures.
Indeed, the idea behind the framework is to provide a “balance” between financial measures
and other measures that are important for understanding organizational activities that lead to sustained,
long-term performance. The balanced scorecard recommends that managers gain an overview of the
organization’s performance by tracking a small number of key measures that collectively reflect four
dimensions: (1) financial, (2) customer, (3) internal business process, and (4) learning and growth. [2]
Financial Measures
Financial measures of performance relate to organizational effectiveness and profits. Examples include
financial ratios such as return on assets, return on equity, and return on investment. Other common
financial measures include profits and stock price. Such measures help answer the key question “How do
we look to shareholders?”
Financial performance measures are commonly articulated and emphasized within an organization’s
annual report to shareholders. To provide context, such measures should be objective and be coupled with
meaningful referents, such as the firm’s past performance. For example, Starbucks’s 2009 annual report
highlights the firm’s performance in terms of net revenue, operating income, and cash flow over a five-
year period.
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Customer Measures
Customer measures of performance relate to customer attraction, satisfaction, and retention. These
measures provide insight to the key question “How do customers see us?” Examples might include the
number of new customers and the percentage of repeat customers.
Starbucks realizes the importance of repeat customers and has taken a number of steps to satisfy and to
attract regular visitors to their stores. For example, Starbucks rewards regular customers with free drinks
and offers all customers free Wi-Fi access. [3] Starbucks also encourages repeat visits by providing cards
with codes for free iTunes downloads. The featured songs change regularly, encouraging frequent repeat
visits.
Internal Business Process Measures
Internal business process measures of performance relate to organizational efficiency. These measures
help answer the key question “What must we excel at?” Examples include the time it takes to manufacture
the organization’s good or deliver a service. The time it takes to create a new product and bring it to
market is another example of this type of measure.
Organizations such as Starbucks realize the importance of such efficiency measures for the long-term
success of its organization, and Starbucks carefully examines its processes with the goal of decreasing
order fulfillment time. In one recent example, Starbucks efficiency experts challenged their employees to
assemble a Mr. Potato Head to understand how work could be done more quickly. [4] The aim of this
exercise was to help Starbucks employees in general match the speed of the firm’s high performers, who
boast an average time per order of twenty-five seconds.
Learning and Growth Measures
Learning and growth measures of performance relate to the future. Such measures provide insight to tell
the organization, “Can we continue to improve and create value?” Learning and growth measures focus on
innovation and proceed with an understanding that strategies change over time. Consequently,
developing new ways to add value will be needed as the organization continues to adapt to an evolving
environment. An example of a learning and growth measure is the number of new skills learned by
employees every year.
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One way Starbucks encourages its employees to learn skills that may benefit both the firm and individuals
in the future is through its tuition reimbursement program. Employees who have worked with Starbucks
for more than a year are eligible. Starbucks hopes that the knowledge acquired while earning a college
degree might provide employees with the skills needed to develop innovations that will benefit the
company in the future. Another benefit of this program is that it helps Starbucks reward and retain high-
achieving employees.
Measuring Performance Using the Triple Bottom Line
Ralph Waldo Emerson once noted, “Doing well is the result of doing good. That’s what capitalism is all
about.” While the balanced scorecard provides a popular framework to help executives understand an
organization’s performance, other frameworks highlight areas such as social responsibility. One such
framework, the triple bottom line, emphasizes the three Ps of people (making sure that the actions of the
organization are socially responsible), the planet (making sure organizations act in a way that promotes
environmental sustainability), and traditional organization profits. This notion was introduced in the
early 1980s but did not attract much attention until the late 1990s.
The triple bottom line emphasizes the three Ps of people (social concerns), planet (environmental
concerns), and profits (economic concerns).
In the case of Starbucks, the firm has made clear the importance it attaches to the planet by creating an
environmental mission statement (“Starbucks is committed to a role of environmental leadership in all
facets of our business”) in addition to its overall mission.[5]In terms of the “people” dimension of the
triple bottom line, Starbucks strives to purchase coffee beans harvested by farmers who work under
humane conditions and are paid reasonable wages. The firm works to be profitable as well, of course.
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K E Y T A K E A W A Y
Organizational performance is a multidimensional concept, and wise managers rely on multiple measures
of performance when gauging the success or failure of their organizations. The balanced scorecard
provides a tool to help executives gain a general understanding of their organization’s current level of
achievement across a set of four important dimensions. The triple bottom line provides another tool to
help executives focus on performance targets beyond profits alone; this approach stresses the
importance of social and environmental outcomes.
E X E R C I S E S
1. How might you apply the balanced scorecard framework to measure performance of your college or
university?
2. Identify a measurable example of each of the balanced scorecard dimensions other than the examples
offered in this section.
3. Identify a mission statement from an organization that emphasizes each of the elements of the triple
bottom line.
[1] Short, J. C., & Palmer, T. B. 2003. Organizational performance referents: An empirical examination of their
content and influences. Organizational Behavior and Human Decision Processes, 90, 209–224.
[2] Kaplan, R. S., & Norton, D. 1992, February. The balanced scorecard: Measures that drive performance. Harvard
Business Review, 70–79.
[3] Miller, C. 2010, June 15. Aiming at rivals, Starbucks will offer free Wi-Fi. New York Times. Section B, p. 1.
[4] Jargon, J. 2009, August 4. Latest Starbucks buzzword: “Lean” Japanese techniques. Wall Street Journal, p. A1.
[5] Our Starbucks mission statement. Retrieved on March 31, 2011, fromhttp://www.starbucks.com/about-
us/company-information/mission-statement. Accessed March 31, 2011.
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2.3 The CEO as Celebrity
L E A R N I N G O B J E C T I V E S
1. Understand the benefits and costs of CEO celebrity status.
2. List and define the four types of CEOs based on differences in fame and reputation.
3. Be able to offer an example of each of the four types of CEOs
Benefits and Costs of CEO Celebrity
The nice thing about being a celebrity is that when you bore people, they think it’s their fault.
Henry Kissinger, former US Secretary of State
The word celebrity quickly brings to mind actors, sports stars, and musicians. Some CEOs, such as Bill
Gates, Oprah Winfrey, Martha Stewart, and Donald Trump, also achieve celebrity status. Celebrity CEOs
are not a new phenomenon. In the early twentieth century, industrial barons such as Henry Ford, John D.
Rockefeller, and Cornelius Vanderbilt were household names. However, in the current era of mass and
instant media, celebrity CEOs have become more prevalent and visible (Figure 2.7 “CEO”). [1]
Cornelius Vanderbilt was one of the earliest celebrity CEOs; Vanderbilt University serves as his
legacy.
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Image courtesy of Mathew Brady and Michel Vuijlsteke,
http://en.wikipedia.org/wiki/File:Cornelius_Vanderbilt_Daguerrotype2 .
Both benefits and costs are associated with CEO celebrity. As the quote from Henry Kissinger suggests,
celebrity confers a mystique and reverence that can be leveraged in a variety of ways. CEO celebrity can
serve as an intangible asset for the CEO’s firm and may increase opportunities available to the firm.
Hiring or developing a celebrity CEO may increase stock price, enhance a firm’s image, and improve the
morale of employees and other stakeholders. However, employing a celebrity CEO also entails risks for an
organization. Increased attention to the firm via the celebrity CEO means any gaps between actual and
expected firm performance are magnified. Further, if a celebrity CEO acts in an unethical or illegal
manner, chances are that the CEO’s firm will receive much more media attention than will other firms
with similar problems. [2]
There are also personal benefits and risks associated with celebrity for the CEO. Celebrity CEOs tend to
receive higher compensation and job perks than their colleagues. Celebrity CEOs are likely to enjoy
increased prestige power, which facilitates invitations to serve on the boards of directors of other firms
and creates opportunities to network with other “managerial elites.” Celebrity also can provide CEOs with
a “benefit of the doubt” effect that protects against quick sanctions for downturns in firm performance
and stock price. However, celebrity also creates potential costs for individuals. Celebrity CEOs face larger
and more lasting reputation erosion if their job performance and behavior is inconsistent with their
celebrity image. Celebrity CEOs face increased personal media scrutiny, and their friends and family must
often endure increased attention into their personal and public lives. Accordingly, wise CEOs will attempt
to understand and manage their celebrity status. [3]
Types of CEOs
Icons are CEOs possessing both fame and strong reputations. The icon CEO combines style and substance
in the execution of his or her job responsibilities. Mary Kay Ash, Richard Branson, Bill Gates, and Warren
Buffett are good examples of icons. The late Mary Kay Ash founded Mary Kay Cosmetics Corporation. The
firm’s great success and Ash’s unconventional motivational methods, such as rewarding sales
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representatives with pink Cadillacs, made her famous. Partly because she emphasized helping other
women succeed and ethical business practices, Mary Kay Ash also had a very positive reputation. Richard
Branson has created an empire with more than four hundred companies, including Virgin Atlantic
Airways and Virgin Records. Branson’s celebrity status led him to star in his own reality-based show. He
has also appeared on television series such as Baywatch and Friends, in addition to several cameo
appearances in major motion pictures. Bill Gates, founder and former CEO of Microsoft, also has fame
and a largely positive reputation. Gates is a proverbial “household name” in the tradition of Ford,
Rockefeller, and Vanderbilt. He also is routinely listed among Time magazine’s “100 Most Influential
People” and has received “rock star” receptions in India and Vietnam in recent years.
Former Microsoft CEO Bill Gates exemplifies a CEO who has reached icon
status.
Image courtesy of World Economic Forum,
http://en.wikipedia.org/wiki/File:Bill_Gates_in_WEF_,2007 .
Warren Buffett is perhaps the best-known executive in the United States. As CEO of Berkshire Hathaway,
he has accumulated wealth estimated at $62 billion and was the richest person in the world as of March
2008. Buffett’s business insights command a level of respect that is perhaps unrivaled. Many in the
investment and policymaking communities pay careful attention to his investment choices and his
commentary on economic conditions. Despite Buffett’s immense wealth and success, his reputation
centers on humility and generosity. Buffett avoids the glitz of Wall Street and has lived for fifty years in a
house he bought in Omaha, Nebraska, for $31,000. Meanwhile, his 2006 donation of approximately $30
billion to the Bill and Melinda Gates Foundation was the largest charitable gift in history.
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CEOs who display high levels of relative fame but low levels of reputation are in the group called
scoundrels. These CEOs are well known but vilified. The late Leona Helmsley was a prototypical
scoundrel. Leona Helmsley’s life was a classic rags-to-riches story. Born to immigrant parents, Helmsley
became a billionaire through her work as the head of an extensive hotel and real estate empire. While
certainly famous, her reputation was anything but positive, as reflected by her nickname: the Queen of
Mean. During Helmsley’s trial for tax fraud, her housekeeper quoted her as proclaiming, “We don’t pay
taxes. Only the little people pay taxes.” Following twenty-one months in jail, Helmsley was required to
perform 750 hours of community service. One hundred fifty hours were added to this sentence after it was
discovered that employees had performed some of her service hours. Helmsley’s apparent arrogance,
combined with her cruelty to employees and her reputation as the ultimate workplace bully, cemented her
position as a scoundrel.
The corporate governance scandals of the early 2000s revealed several CEOs as scoundrels. Perhaps the
best known were Kenneth Lay and Dennis Kozlowski. Both men rose to prominence as their firms’ success
and stock prices soared but were undone by dubious activities. Lay was once revered as the son of a poor
minister who founded Enron and built it into a giant in the energy business. In 2001, however, he became
the face of corporate abuses in the United States after Enron’s collapse led to scenes, captured on
television, of employees left jobless and with retirement accounts full of worthless Enron stock. Lay was
convicted of fraud in 2006 but died before sentencing.
Also born to a poor family, Kozlowski started at Tyco as an accountant and worked his way up to the
executive suite. In May 2001, a BusinessWeek cover story lauded Kozlowski as “the most aggressive CEO”
in the country and detailed his strategy for building Tyco into the next General Electric by using
acquisitions to gain the first or second position in all the industries in which it competed. By 2002,
Kozlowski’s reputation was in jeopardy. He was indicted for avoiding more than $1 million in sales taxes
on art purchases. Media stories described in detail a $2 million birthday party Kozlowski threw for his
wife (billing half of it to Tyco as a company function), a $19 million apartment Tyco purchased for him,
and $11 million worth of furnishings for the apartment (including an infamous $6,000 shower curtain).
Accusations that Kozlowski and another Tyco executive stole hundreds of millions of dollars from the firm
ultimately led to a prison sentence of eight to twenty-five years.
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Hidden gems are CEOs who lack fame but possess positive reputations. These CEOs toil in relative
obscurity while leading their firms to success. Their skill as executives is known mainly by those in their
own firm and by their competitors. In many cases, the firm has some renown due to its success, but the
CEO stays unknown. For example, consider the case of Anne Mulcahy. Mulcahy, CEO of Xerox, started
her career at Xerox as a copier salesperson. Despite building an excellent reputation by rescuing Xerox
from near bankruptcy, Mulcahy eschews fame and publicity. While being known for successfully leading
Xerox by example and being willing to fly anywhere to meet a customer, she avoids stock analysts and
reporters.
Silent killers are the fourth and final group of CEOs. These CEOs are overlooked and ignored sources of
harm to their firms. While scoundrels are closely monitored and scrutinized by the media, it may be too
late before the poor ethics or incompetence of the silent killers is detected. In this sense, silent killers are
sometimes worse than scoundrels. One example of a silent killer is Harding Lawrence, former CEO of
defunct Braniff International. Lawrence initiated a massive expansion of the airline following industry
deregulation in the late 1970s. The result was a bloated firm, ill-equipped to survive the extremely
competitive setting that evolved in the early 1980s. Howard Putnam, the CEO of a small regional carrier
named Southwest Airlines, was hired in a failed effort to save the company. By the time Braniff went
bankrupt, Putnam was left to explain its demise, and the name of the main culprit was all but forgotten.
Ironically, had Putnam declined the opportunity to try to save Braniff, perhaps he and not Herb Kelleher
would have become an icon at the helm of Southwest.
Strategy at the Movies
Iron Man
Has Tony Stark gone crazy? This was the question that many stakeholders of Stark Industries were asking
themselves in the 2008 blockbuster Iron Man. Tony Stark, CEO of Stark Industries, stunned his
shareholders, employees, and the world when he announced that he was changing Stark Industries’
mission from being one of the world’s leading weapons manufacturers to being a socially responsible,
clean energy producer. Following his announcement, Stark faced fierce opposition from his board of
directors, employees, the media, and clients such as the US military. The changes at Stark Industries
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attracted tremendous attention in part because of the glamorous Stark’s status as a celebrity CEO.
Initially, Stark is seen by the public as a scoundrel that pays little attention to the social impact his
company makes. After shifting the direction of Stark Industries, however, Stark is viewed as an icon that
is just as attentive to the social performance of the company as he is to its financial performance. Iron
Man illustrates that while changing elements such as firm mission and CEO status is difficult, it is not
impossible.
Iron Man: The Greatest Creation of Fictional Celebrity CEO Tony Stark
Image courtesy of Pop Culture Geek, http://www.flickr.com/photos/popculturegeek/4858995531.
Celebrity Rehabilitation
Anything I say or do is now at risk of showing up on the front page of a national daily newspaper and
therefore, I need to be much more conscious about the implications of everything that I say or do in all
situations.
John Mackey, CEO of Whole Foods Market
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Achieving the level of success that brings about celebrity is seldom a completely smooth process. Even
well-regarded celebrity CEOs seldom have totally untarnished reputations. Bill Gates has been portrayed
as a ruthless and devious genius, for example, while General Electric CEO Jack Welch was attacked in
media outlets for an extramarital affair.
One of the more interesting recent cases of a tarnished reputation centers on John Mackey, founder and
CEO of Whole Foods Market. His strategy of offering organic food and high levels of service allowed
Whole Foods to carve out a profitable and growing niche in an industry whose overall margins have been
squeezed as Walmart’s Supercenters have gained market share. Under Mackey’s leadership, Whole Food’s
stock price tripled from 2001 to 2006. Mackey’s efforts to make food supplies healthier and his teamwork-
centered management approach attracted publicity, and he appeared headed for icon status.
But in 2007 Mackey and Whole Foods were embarrassed by the revelation that Mackey had been
anonymously posting negative information about a rival, Wild Oats, online. Through his online persona
“rahodeb” (a scrambling of his wife’s name), Mackey asserted that Wild Oats’ stock was overpriced and
that the firm was headed toward bankruptcy. This was viewed by some observers as a possible effort to
manipulate Wild Oats’ stock price prior to a proposed acquisition by Whole Foods. Meanwhile, in e-mails
to other Whole Foods executives, Mackey noted that the acquisition of Wild Oats could allow them to
avoid “nasty price wars.” This caught the eye of Federal Trade Commission (FTC) regulators who were
concerned about the antitrust implications of the acquisition.
Whole Foods CEO John Mackey’s celebrity status was amplified when it was revealed that he had posted negative
information online about competitor Wild Oats.
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Image courtesy of Joe M500, http://en.wikipedia.org/wiki/File:John_Mackey,_of_Whole_Foods_in_2009 .
What should a CEO do when his or her reputation takes a hit? As the old saying goes, honesty is the best
policy. An example is offered by David Neeleman, founder and CEO of JetBlue. The reputations of JetBlue
and Neeleman took a severe blow after a widely reported February 2007 debacle in which travelers were
stranded in airplanes for excessive periods of time during a busy holiday weekend. Neeleman took a giant
step toward restoring both his and JetBlue’s reputation by issuing a public, heartfelt apology. He not only
issued a written apology to customers but also bought full-page advertisements in newspapers, posted a
video apology online, and created a new “bill of rights” for JetBlue customers.
Mackey apologized for his actions via his blog in 2008. As part of this apology, Mackey acknowledged that
he had failed to recognize how expectations change when one becomes a celebrity. Mackey noted that
when Whole Foods was a smaller company, “I was seldom interviewed and few people knew or cared who
I was. I wasn’t a public figure and had no desire to become one.” As his company grew, however, Mackey
became subject to more scrutiny. As Mackey put it, “At some point in the past 10 years I went from being a
relatively unknown person to becoming a public figure. I regret not having the wisdom to recognize this
fact until very recently.”[4] A big part of managing celebrity status is realizing that one is in fact a celebrity.
K E Y T A K E A W A Y
The media exposure common to modern CEOs provides the opportunity for such top executives to reach
celebrity status. While this status can provide positive benefits to their firms such as increased
performance, CEOs should be aware of and manage the potential for increased scrutiny associated with
this status.
E X E R C I S E S
1. Can you identify another example of a celebrity CEO, such as Cornelius Vanderbilt, that existed prior to
the 1900s?
2. Identify examples of icons, scoundrels, hidden gems, and silent killers other than the examples offered in
this section.
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3. Would you enjoy the media attention associated with CEO celebrity, or would you prefer to hide from the
limelight? Does your answer have implications for your future career choices?
[1] This section of the chapter is adapted from Ketchen, D., Adams, G., & Shook, C. 2008. Understanding and
managing CEO celebrity. Business Horizons, 51(6), 529–534.
[2] Ranft, A. L., Zinko, R., Ferris, G. R., & Buckley, M. R. 2006. Marketing the image of management: The costs and
benefits of CEO reputation. Organizational Dynamics, 35(3), 279–290.
[3] Wade, J. B., Porac, J. F., Pollock, T. G., & Graffin, S. D. 2008. Star CEOs: Benefit or burden? Organizational
Dynamics, 37(2), 203–210.
[4] John Mackey’s blog. 2008, May 21. Re: Apology. Retrieved
fromhttp://www2.wholefoodsmarket.com/blogs/jmackey/2008/05/21/back-to-blogging/#more-26.
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2.4 Entrepreneurial Orientation
L E A R N I N G O B J E C T I V E S
1. Understand how thinking and acting entrepreneurially can help organizations and individuals.
2. List and define the five dimensions of an entrepreneurial orientation.
The Value of Thinking and Acting Entrepreneurially
When asked to think of an entrepreneur, people typically offer examples such as Howard Schultz, Estée
Lauder, and Michael Dell—individuals who have started their own successful businesses from the bottom
up that generated a lasting impact on society. But entrepreneurial thinking and doing are not limited to
those who begin in their garage with a new idea, financed by family members or personal savings. Some
people in large organizations are filled with passion for a new idea, spend their time championing a new
product or service, work with key players in the organization to build a constituency, and then find ways
to acquire the needed resources to bring the idea to fruition. Thinking and behaving entrepreneurially can
help a person’s career too. Some enterprising individuals successfully navigate through the environments
of their respective organizations and maximize their own career prospects by identifying and seizing new
opportunities.[1]
As a college student, Michael Dell demonstrated an entrepreneurial
orientation by starting a computer-upgrading business in his dorm room.
He later founded Dell Inc.
Image courtesy of Ilan Costica,
http://en.wikipedia.org/wiki/File:Michael_Dell_at_Oracle_OpenWorld.J
PG.
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In the 1730s, Richard Cantillon used the French term entrepreneur, or literally “undertaker,” to refer to
those who undertake self-employment while also accepting an uncertain return. In subsequent years,
entrepreneurs have also been referred to as innovators of new ideas (Thomas Edison), individuals who
find and promote new combinations of factors of production (Bill Gates’ bundling of Microsoft’s
products), and those who exploit opportunistic ideas to expand small enterprises (Mark Zuckerberg at
Facebook). The common elements of these conceptions of entrepreneurs are that they do something new
and that some individuals can make something out of opportunities that others cannot.
Entrepreneurial orientation (EO) is a key concept when executives are crafting strategies in the hopes of
doing something new and exploiting opportunities that other organizations cannot exploit. EO refers to
the processes, practices, and decision-making styles of organizations that act entrepreneurially. [2] Any
organization’s level of EO can be understood by examining how it stacks up relative to five dimensions: (1)
autonomy, (2) competitive aggressiveness, (3) innovativeness, (4) proactiveness, (5) and risk taking.
These dimensions are also relevant to individuals.
Autonomy
Autonomy refers to whether an individual or team of individuals within an organization has the freedom
to develop an entrepreneurial idea and then see it through to completion. In an organization that offers
high autonomy, people are offered the independence required to bring a new idea to fruition, unfettered
by the shackles of corporate bureaucracy. When individuals and teams are unhindered by organizational
traditions and norms, they are able to more effectively investigate and champion new ideas.
Some large organizations promote autonomy by empowering a division to make its own decisions, set its
own objectives, and manage its own budgets. One example is Sony’s PlayStation group, which was created
by chief operating officer (COO) Ken Kutaragi, largely independent of the Sony bureaucracy. In time, the
PlayStation business was responsible for nearly all Sony’s net profit. Because of the success generated by
the autonomous PlayStation group, Kutaragi later was tapped to transform Sony’s core consumer
electronics business into a PlayStation clone. In some cases, an autonomous unit eventually becomes
completely distinct from the parent company, such as when Motorola spun off its successful
semiconductor business to create Freescale.
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Competitive Aggressiveness
Competitive aggressiveness is the tendency to intensely and directly challenge competitors rather than
trying to avoid them. Aggressive moves can include price-cutting and increasing spending on marketing,
quality, and production capacity. An example of competitive aggressiveness can be found in Ben & Jerry’s
marketing campaigns in the mid-1980s, when Pillsbury’s Häagen-Dazs attempted to limit distribution of
Ben & Jerry’s products. In response, Ben & Jerry’s launched their “What’s the Doughboy Afraid Of?”
advertising campaign to challenge Pillsbury’s actions. This marketing action was coupled with a series of
lawsuits—Ben & Jerry’s was competitively aggressive in both the marketplace and the courtroom.
Although aggressive moves helped Ben & Jerry’s, too much aggressiveness can undermine an
organization’s success. A small firm that attacks larger rivals, for example, may find itself on the losing
end of a price war. Establishing a reputation for competitive aggressiveness can damage a firm’s chances
of being invited to join collaborative efforts such as joint ventures and alliances. In some industries, such
as the biotech industry, collaboration is vital because no single firm has the knowledge and resources
needed to develop and deliver new products. Executives thus must be wary of taking competitive actions
that destroy opportunities for future collaborating.
Innovativeness
Innovativeness is the tendency to pursue creativity and experimentation. Some innovations build on
existing skills to create incremental improvements, while more radical innovations require brand-new
skills and may make existing skills obsolete. Either way, innovativeness is aimed at developing new
products, services, and processes. Those organizations that are successful in their innovation efforts tend
to enjoy stronger performance than those that do not.
Known for efficient service, FedEx has introduced its Smart Package, which allows both shippers and
recipients to monitor package location, temperature, and humidity. This type of innovation is a welcome
addition to FedEx’s lineup for those in the business of shipping delicate goods, such as human organs.
How do firms generate these types of new ideas that meet customers’ complex needs? Perennial
innovators 3M and Google have found a few possible answers. 3M sends nine thousand of its technical
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personnel in thirty-four countries into customers’ workplaces to experience firsthand the kinds of
problems customers encounter each day. Google’s two most popular features of its Gmail, thread sorting
and unlimited e-mail archiving, were first suggested by an engineer who was fed up with his own e-mail
woes. Both firms allow employees to use a portion of their work time on projects of their own choosing
with the goal of creating new innovations for the company. This latter example illustrates how multiple
EO dimensions—in this case, autonomy and innovativeness—can reinforce one another.
Ben & Jerry’s displays innovativeness by developing a series of offbeat and creative flavors over time.
Image courtesy of theimpulsivebuy,
Proactiveness
Proactiveness is the tendency to anticipate and act on future needs rather than reacting to events after
they unfold. A proactive organization is one that adopts an opportunity-seeking perspective. Such
organizations act in advance of shifting market demand and are often either the first to enter new markets
or “fast followers” that improve on the initial efforts of first movers.
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Consider Proactive Communications, an aptly named small firm in Killeen, Texas. From its beginnings in
2001, this firm has provided communications in hostile environments, such as Iraq and areas impacted by
Hurricane Katrina. Being proactive in this case means being willing to don a military helmet or sleep
outdoors—activities often avoided by other telecommunications firms. By embracing opportunities that
others fear, Proactive’s executives have carved out a lucrative niche in a world that is technologically,
environmentally, and politically turbulent. [3]
Risk Taking
Risk taking refers to the tendency to engage in bold rather than cautious actions. Starbucks, for example,
made a risky move in 2009 when it introduced a new instant coffee called VIA Ready Brew. Instant coffee
has long been viewed by many coffee drinkers as a bland drink, but Starbucks decided that the
opportunity to distribute its product in a different format was worth the risk of associating its brand name
with instant coffee.
Although a common belief about entrepreneurs is that they are chronic risk takers, research suggests that
entrepreneurs do not perceive their actions as risky, and most take action only after using planning and
forecasting to reduce uncertainty. [4] But uncertainty seldom can be fully eliminated. A few years ago,
Jeroen van der Veer, CEO of Royal Dutch Shell PLC, entered a risky energy deal in Russia’s Far East. At
the time, van der Veer conceded that it was too early to know whether the move would be
successful. [5] Just six months later, however, customers in Japan, Korea, and the United States had
purchased all the natural gas expected to be produced there for the next twenty years. If political
instabilities in Russia and challenges in pipeline construction do not dampen returns, Shell stands to post
a hefty profit from its 27.5 percent stake in the venture.
Building an Entrepreneurial Orientation
Steps can be taken by executives to develop a stronger entrepreneurial orientation throughout an
organization and by individuals to become more entrepreneurial themselves. For executives, it is
important to design organizational systems and policies to reflect the five dimensions of EO. As an
example, how an organization’s compensation systems encourage or discourage these dimensions should
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be considered. Is taking sensible risks rewarded through raises and bonuses, regardless of whether the
risks pay off, for example, or does the compensation system penalize risk taking? Other organizational
characteristics such as corporate debt level may influence EO. Do corporate debt levels help or impede
innovativeness? Is debt structured in such a way as to encourage risk taking? These are key questions for
executives to consider.
Examination of some performance measures can assist executives in assessing EO within their
organizations. To understand how the organization develops and reinforces autonomy, for example, top
executives can administer employee satisfaction surveys and monitor employee turnover rates.
Organizations that effectively develop autonomy should foster a work environment with high levels of
employee satisfaction and low levels of turnover. Innovativeness can be gauged by considering how many
new products or services the organization has developed in the last year and how many patents the firm
has obtained.
Similarly, individuals should consider whether their attitudes and behaviors are consistent with the five
dimensions of EO. Is an employee making decisions that focus on competitors? Does the employee
provide executives with new ideas for products or processes that might create value for the organization?
Is the employee making proactive as opposed to reactive decisions? Each of these questions will aid
employees in understanding how they can help to support EO within their organizations.
K E Y T A K E A W A Y
Building an entrepreneurial orientation can be valuable to organizations and individuals alike in
identifying and seizing new opportunities. Entrepreneurial orientation consists of five dimensions: (1)
autonomy, (2) competitive aggressiveness, (3) innovativeness, (4) proactiveness, and (5) risk taking.
E X E R C I S E S
1. Can you name three firms that have suffered because of lack of an entrepreneurial orientation?
2. Identify examples of each dimension of entrepreneurial orientation other than the examples offered in
this section.
3. How does developing an entrepreneurial orientation have implications for your future career choices?
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4. How could you apply the dimensions of entrepreneurial orientation to a job search?
[1] This section is adapted from Certo, S. T., Moss, T. W., & Short, J. C. 2009. Entrepreneurial orientation: An
applied perspective. Business Horizons, 52, 319–324.
[2] Lumpkin, G. T., & Dess, G. G. 1996. Clarifying the entrepreneurial orientation construct and linking it to
performance. Academy of Management Review, 21, 135–172.
[3] Choi, A. S. 2008, April 16. PCI builds telecommunications in Iraq. Bloomberg Businessweek. Retrieved
fromhttp://www.businessweek.com/magazine/content/08_64/s0804065916656.htm.
[4] Simon, M., Houghton, S. M., & Aquino, K. 2000. Cognitive biases, risk perception, and venture formation: How
individuals decide to start companies. Journal of Business Venturing, 14, 113–134.
[5] Certo, S. T., Connelly, B., & Tihanyi, L. 2008. Managers and their not-so-rational decisions. Business
Horizons, 51(2), 113–119.
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2.5 Conclusion
This chapter explains several challenges that executives face in attempting to lead their organizations
strategically. Executives must ensure that their organizations have visions, missions, and goals in
place that help move these organizations forward. Measures and referents for assessing performance
must be thoughtfully chosen. Some executives become celebrities, thereby creating certain
advantages and disadvantages for themselves and for their firms. Finally, executives must monitor
the degree of entrepreneurial orientation present within their organizations and make adjustments
when necessary. When executives succeed at leading strategically, an organization has an excellent
chance of success.
E X E R C I S E S
1. Divide your class into four or eight groups, depending on the size of the class. Assign each group to
develop arguments that one of the key issues discussed in this chapter (vision, mission, goals; assessing
organizational performance; CEO celebrity; entrepreneurial orientation) is the most important within
organizations. Have each group present their case, and then have the class vote individually for the
winner. Which issue won and why?
2. This chapter discussed Howard Schultz and Starbucks on several occasions. Based on your reading of the
chapter, how well has Schultz done in dealing with setting a vision, mission, and goals, assessing
organizational performance, CEO celebrity, and entrepreneurial orientation?
3. Write a vision and mission for an organization or firm that you are currently associated with. How could
you use the balanced scorecard to assess how well that organization is fulfilling the mission you wrote?
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Chapter 3
Evaluating the External Environment
L E A R N I N G O B J E C T I V E S
After reading this chapter, you should be able to understand and articulate answers to the following
questions:
1. What is the general environment and why is it important to organizations?
2. What are the features of Porter’s five forces industry analysis?
3. What are strategic groups and how are they useful to evaluating the environment?
Subway Is on a Roll
As shown in the highlighted countries, Subway is well on its way to building a worldwide sandwich
empire.
Image courtesy of Nomi887,http://en.wikipedia.org/wiki/File:Subway_world_map1edit .
Many observers were stunned in March 2011 when news broke that Subway had surpassed McDonald’s as
the biggest restaurant chain in the world. At the time of the announcement, Subway had 33,749 units
under its banner while McDonald’s had 32,737. [1] Despite its meteoric growth, many opportunities
remained. In China, for example, Subway had fewer than two hundred stores. In contrast, China hosts
Chapter 3 from Mastering Strategic Management was adapted by The Saylor Foundation under
a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested
by the work’s original creator or licensee. © 2014, The Saylor Foundation.
http://www.saylor.org/site/textbooks/Mastering%20Strategic%20Management
http://creativecommons.org/licenses/by-nc-sa/3.0/
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Chapter 4
Managing Firm Resources
L E A R N I N G O B J E C T I V E S
After reading this chapter, you should be able to understand and articulate answers to the following
questions:
1. What is resource-based theory, and why is it important to organizations?
2. In what ways can intellectual property serve as a value-added resource for organizations?
3. How should executives use the value chain to maximize the performance of their organizations?
4. What is SWOT analysis and how can it help an organization?
Southwest Airlines: Let Your LUV Flow
Southwest Airlines’ acquisition of AirTran in 2011 may lead the firm into stormy skies.
Chapter 4 from Mastering Strategic Management was adapted by The Saylor Foundation under
a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested
by the work’s original creator or licensee. © 2014, The Saylor Foundation.
http://www.saylor.org/site/textbooks/Mastering%20Strategic%20Management
http://creativecommons.org/licenses/by-nc-sa/3.0/
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Image courtesy of Stuart Seeger,http://en.wikipedia.org/wiki/File:Southwest_737_At_Burbank
In 1971, an upstart firm named Southwest Airlines opened for business by offering flights between
Houston, San Antonio, and its headquarters at Love Field in Dallas. From its initial fleet of three airplanes
and three destinations, Southwest has grown to operate hundreds of airplanes in scores of cities. Despite
competing in an industry that is infamous for bankruptcies and massive financial losses, Southwest
marked its thirty-eighth profitable year in a row in 2010.
Why has Southwest succeeded while many other airlines have failed? Historically, the firm has differed
from its competitors in a variety of important ways. Most large airlines use a “hub and spoke” system.
This type of system routes travelers through a large hub airport on their way from one city to another.
Many Delta passengers, for example, end a flight in Atlanta and then take a connecting flight to their
actual destination. The inability to travel directly between most pairs of cities adds hours to a traveler’s
itinerary and increases the chances of luggage being lost. In contrast, Southwest does not have a hub
airport; preferring instead to connect cities directly. This helps make flying on Southwest attractive to
many travelers.
Southwest has also been more efficient than its rivals. While most airlines use a variety of different
airplanes, Southwest operates only one type of jet: the Boeing 737. This means that Southwest can service
its fleet much more efficiently than can other airlines. Southwest mechanics need only the know-how to
fix one type of airplane, for example, while their counterparts with other firms need a working knowledge
of multiple planes. Southwest also gains efficiency by not offering seat assignments in advance, unlike its
competitors. This makes the boarding process move more quickly, meaning that Southwest’s jets spend
more time in the air transporting customers (and making money) and less time at the gate relative to its
rivals’ planes.
Organizational culture is the dimension along which Southwest perhaps has differed most from its rivals.
The airline industry as a whole suffers from a reputation for mediocre (or worse) service and indifferent
(sometimes even surly) employees. In contrast, Southwest enjoys strong loyalty and a sense of teamwork
among its employees.
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One tangible indicator of this culture is Southwest’s stock ticker symbol. Most companies choose stock
ticker symbols that evoke their names. Ford’s ticker symbol is F, for example, and Walmart’s symbol is
WMT. When Southwest became a publicly traded company in 1977, executives chose LUV as its ticker
symbol. LUV pays a bit of homage to the firm’s humble beginnings at Love Field. More important,
however, LUV represents the love that executives have created among employees, between employees and
the company, and between customers and the company. This “LUV affair” has long been and remains a
huge success. As recently as March 2011, for example, Southwest was ranked fourth
on Fortune magazine’s World’s Most Admired Company list.
In September 2010, Southwest surprised many observers when it announced that it was acquiring
AirTran Airways for $1.4 billion. Southwest and AirTran both emphasized low fares, but they differed in
many ways. AirTran routed most of its passengers through a hub-and-spoke system, and it relied on a
different plane than Southwest, the Boeing 717. The acquisition of AirTran thus raised important
questions about Southwest’s future. [1] How would AirTran’s hub-and-spoke system be integrated with
Southwest’s nonhub approach? Could the airlines’ respective fleets of 737s and 717s be joined without
losing efficiency? Perhaps most important, could Southwest maintain its legendary organizational culture
while taking over a sizable rival and integrating AirTran’s thousands of employees? When the acquisition
was finalized on May 2, 2011, it remained unclear whether Southwest was flying off course or whether
Southwest’s “LUV story” would continue for many years.
[1] Schlangenstein, M., & Hughes, J. 2010, September 28. Southwest risks keep-it-simple focus to spur growth.
Retrieved from http://www.washingtonpost.com/wp-dyn/content/article/2010/09/28/AR2010092801578.html
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4.1 Resource-Based Theory
L E A R N I N G O B J E C T I V E S
1. Define the four characteristics of resources that lead to sustained competitive advantage as articulated by
the resource-based theory of the firm.
2. Understand the difference between resources and capabilities.
3. Be able to explain the difference between tangible and intangible resources.
4. Know the elements of the marketing mix.
Four Characteristics of Strategic Resources
Southwest Airlines provides an illustration of resource-based theory in action. Resource-
based theory contends that the possession of strategic resources provides an organization with a golden
opportunity to develop competitive advantages over its rivals. These competitive advantages in turn
can help the organization enjoy strong profits.[1]
A strategic resource is an asset that is valuable, rare, difficult to imitate, and nonsubstitutable. [2] A
resource is valuable to the extent that it helps a firm create strategies that capitalize on opportunities and
ward off threats. Southwest Airlines’ culture fits this standard well. Most airlines struggle to be profitable,
but Southwest makes money virtually every year. One key reason is a legendary organizational culture
that inspires employees to do their very best. This culture is also rare in that strikes, layoffs, and poor
morale are common within the airline industry.
Competitors have a hard time duplicating resources that are difficult to imitate. Some difficult to imitate
resources are protected by various legal means, including trademarks, patents, and copyrights. Other
resources are hard to copy because they evolve over time and they reflect unique aspects of the firm.
Southwest’s culture arose from its very humble beginnings. The airline had so little money that at times it
had to temporarily “borrow” luggage carts from other airlines and put magnets with the Southwest logo
on top of the rivals’ logo. Southwest is a “rags to riches” story that has evolved across several decades.
Other airlines could not replicate Southwest’s culture, regardless of how hard they might try, because of
Southwest’s unusual history.
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A resource is nonsubstitutable when competitors cannot find alternative ways to gain the benefits that a
resource provides. A key benefit of Southwest’s culture is that it leads employees to treat customers well,
which in turn creates loyalty to Southwest among passengers. Executives at other airlines would love to
attract the customer loyalty that Southwest enjoys, but they have yet to find ways to inspire the kind of
customer service that the Southwest culture encourages.
Southwest Airlines’ unique culture is reflected in the customization of their aircraft over the years, such as the “Lone Star
One” design.
Image courtesy of planephotoman,http://en.wikipedia.org/wiki/File:Southwest_737_Lonestar_One .
Ideally, a firm will have a culture that embraces the four qualities. If so, these resources can provide
not only a competitive advantage but also a sustained competitive advantage—one that
will endure over time and help the firm stay successful far into the future. Resources that do not
have all four qualities can still be very useful, but they are unlikely to provide long-term advantages.
A resource that is valuable and rare but that can be imitated, for example, might provide an edge in the
short term, but competitors can overcome such an advantage eventually.
Resource-based theory also stresses the merit of an old saying: the whole is greater than the sum of its
parts. Specifically, it is also important to recognize that strategic resources can be created by taking
several strategies and resources that each could be copied and bundling them together in a way that
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cannot be copied. For example, Southwest’s culture is complemented by approaches that individually
could be copied—the airline’s emphasis on direct flights, its reliance on one type of plane, and its unique
system for passenger boarding—to create a unique business model whose performance is without peer in
the industry.
Resource-based theory can be confusing because the term resources is used in many different ways within
everyday common language. It is important to distinguish strategic resources from other resources. To
most individuals, cash is an important resource. Tangible goods such as one’s car and home are also vital
resources. When analyzing organizations, however, common resources such as cash and vehicles are not
considered to be strategic resources. Resources such as cash and vehicles are valuable, of course, but an
organization’s competitors can readily acquire them. Thus an organization cannot hope to create an
enduring competitive advantage around common resources.
On occasion, events in the environment can turn a common resource into a strategic resource. Consider,
for example, a very generic commodity: water. Humans simply cannot live without water, so water has
inherent value. Also, water cannot be imitated (at least not on a large scale), and no other substance can
substitute for the life-sustaining properties of water. Despite having three of the four properties of
strategic resources, water in the United States has remained cheap. Yet this may be changing. Major cities
in hot climates such as Las Vegas, Los Angeles, and Atlanta are confronted by dramatically shrinking
water supplies. As water becomes more and more rare, landowners in Maine stand to benefit. Maine has
been described as “the Saudi Arabia of water” because its borders contain so much drinkable water. It is
not hard to imagine a day when companies in Maine make huge profits by sending giant trucks filled with
water south and west or even by building water pipelines to service arid regions.
From Resources to Capabilities
The tangibility of a firm’s resources is an important consideration within resource-based
theory. Tangible resources are resources that can be readily seen, touched, and quantified. Physical assets
such as a firm’s property, plant, and equipment, as well as cash, are considered to be tangible resources.
In contrast, intangible resources are quite difficult to see, to touch, or to quantify. Intangible resources
include, for example, the knowledge and skills of employees, a firm’s reputation, and a firm’s culture. In
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comparing the two types of resources, intangible resources are more likely to meet the criteria for
strategic resources (i.e., valuable, rare, difficult to imitate, and nonsubstitutable) than are tangible
resources. Executives who wish to achieve long-term competitive advantages should therefore place a
premium on trying to nurture and develop their firms’ intangible resources.
Capabilities are another key concept within resource-based theory. A good and easy-to-remember way to
distinguish resources and capabilities is this: resources refer to what an organization owns, capabilities
refer to what the organization can do. Capabilities tend to arise over time as a firm takes actions that build on
its strategic resources. Southwest Airlines, for example, has developed the capability of providing excellent
customer service by building on its strong organizational culture. Capabilities are important in part because
they are how organizations capture the potential value that resources offer. Customers do not simply
send money to an organization because it owns strategic resources. Instead, capabilitiesare needed to bundle,
to manage, and otherwise to exploit resources in a manner that provides value added to customers
and creates advantages over competitors.
Some firms develop a dynamic capability. This means that a firm has a unique capability of creating new
capabilities. Said differently, a firm that enjoys a dynamic capability is skilled at continually updating its
array of capabilities to keep pace with changes in its environment. General Electric, for example, buys and
sells firms to maintain its market leadership over time, while Coca-Cola has an uncanny knack for
building new brands and products as the soft-drink market evolves. Not surprisingly, both of these firms
rank among the top thirteen among the “World’s Most Admired Companies” for 2011.
Strategy at the Movies
That Thing You Do!
How can the members of an organization reach success “doing that thing they do”? According to resource-
based theory, one possible road to riches is creating—on purpose or by accident—a unique combination of
resources. In the 1996 movie That Thing You Do!, unwittingly assembling a unique bundle of resources
leads a 1960s band called The Wonders to rise from small-town obscurity to the top of the music charts.
One resource is lead singer Jimmy Mattingly, who possesses immense musical talent. Another is guitarist
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Lenny Haise, whose fun attitude reigns in the enigmatic Mattingly. Although not a formal band member,
Mattingly’s girlfriend Faye provides emotional support to the group and even suggests the group’s name.
When the band’s usual drummer has to miss a gig due to injury, the door is opened for charismatic
drummer Guy Patterson, whose energy proves to be the final piece of the puzzle for The Wonders.
Despite Mattingly’s objections, Guy spontaneously adds an up-tempo beat to a sleepy ballad called “That
Thing You Do!” during a local talent contest. When the talent show audience goes crazy in response, it
marks the beginning of a meteoric rise for both the song and the band. Before long, The Wonders perform
on television and “That Thing You Do!” is a top-ten hit record. The band’s magic vanishes as quickly as it
appeared, however. After their bass player joins the Marines, Lenny elopes on a whim, and Jimmy’s diva
attitude runs amok, the band is finished and Guy is left to “wonder” what might have been. That Thing
You Do! illustrates that while bundling resources in a unique way can create immense success, preserving
and managing these resources over time can be very difficult.
Liv Tyler plays Faye Dolan, the love interest of drummer Guy Patterson, in That Thing You Do!
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Image courtesy of Daniel Dormann,http://en.wikipedia.org/wiki/File:LivTylerJune08 .
Is Resource-Based Theory Old News?
Resource-based theory has evolved in recent years to provide a way to understand how strategic resources
and capabilities allow firms to enjoy excellent performance. But more than one wry observer has
wondered aloud, “Is resource-based theory just old wine in a new bottle?” This is a question worth
considering because the role of resources in shaping success and failure has been discussed for many
centuries.
Aesop was a Greek storyteller who lived approximately 2,500 years ago. Aesop is known in particular for
having created a series of fables—stories that appear on the surface to be simply children’s tales but that
offer deep lessons for everyone. One of Aesop’s fables focuses on an ass (donkey) and some grasshoppers.
When the ass tries to duplicate the sweet singing of the grasshoppers by copying their diet, he soon dies of
starvation. Attempting to replicate the grasshoppers’ unique singing capability proved to be a fatal
mistake. The fable illustrates a central point of resource-based theory: it is an array of resources and
capabilities that fuels enduring success, not any one resource alone.
In a far more recent example, sociologist Philip Selznick developed the concept
of distinctive competence through a series of books in the 1940s and 1950s.[3] A distinctive competence is
a set of activities that an organization performs especially well. Southwest Airlines, for example, appears
to have a distinctive competency in operations, as evidenced by how quickly it moves its flights in and out
of airports. Further, Selznick suggested that possessing a distinctive competency creates a competitive
advantage for a firm. Certainly, there is plenty of overlap between the concept of distinctive competency,
on the one hand, and capabilities, on the other.
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So is resource-based theory in fact old wine in a new bottle? Not really. Resource-based theory builds on
past ideas about resources, but it represents a big improvement on past ideas in at least two ways. First,
resource-based theory offers a complete framework for analyzing organizations, not just snippets of
valuable wisdom like Aesop and Selznick provided. Second, the ideas offered by resource-based theory
have been developed and refined through scores of research studies involving thousands of organizations.
In other words, there is solid evidence backing it up.
The Marketing Mix
Leveraging resources and capabilities to create desirable products and services is important, but
customers must still be convinced to purchase these goods and services. The marketing mix—also known
as the four Ps of marketing—provides important insights into how to make this happen. A master of the
marketing mix was circus impresario P. T. Barnum, who is famous in part for his claim that “there’s a
sucker born every minute.” The real purpose of the marketing mix is not to trick customers but rather to
provide a strong alignment among the four Ps (product, price, place, and promotion) to offer customers a
coherent and persuasive message.
A firm’s product is what it sells to customers. Southwest Airlines sells, of course, airplane flights. The
airline tries to set its flights apart from those of airlines by making flying fun. This can include, for
example, flight attendants offering preflight instructions as a rap. The price of a good or service should
provide a good match with the value offered. Throughout its history, Southwest has usually charged lower
airfares than its rivals. Place can refer to a physical purchase point as well as a distribution channel.
Southwest has generally operated in cities that are not served by many airlines and in secondary airports
in major cities. This has allowed the firm to get favorable lease rates at airports and has helped it create
customer loyalty among passengers who are thankful to have access to good air travel.
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Finally, promotion consists of the communications used to market a product, including advertising, public
relations, and other forms of direct and indirect selling. Southwest is known for its clever advertising. In a
recent television advertising campaign, for example, Southwest lampooned the baggage fees charged by
most other airlines while highlighting its more customer-friendly approach to checked luggage. Given the
consistent theme of providing a good value plus an element of fun to passengers that is developed across
the elements of the marketing mix, it is no surprise that Southwest has been so successful within a very
challenging industry.
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Few executives in history have had the marketing savvy of P. T. Barnum.
Image courtesy of The Strobridge Litho. Co., Cincinnati & New York,
http://en.wikipedia.org/wiki/File:Barnum_%26_Bailey_clowns_and_geese2 .
K E Y T A K E A W A Y
x Resource-based theory suggests that resources that are valuable, rare, difficult to imitate, and
nonsubstitutable best position a firm for long-term success. These strategic resources can provide the
foundation to develop firm capabilities that can lead to superior performance over time. Capabilities are
needed to bundle, to manage, and otherwise to exploit resources in a manner that provides value added
to customers and creates advantages over competitors.
E X E R C I S E S
1. Does your favorite restaurant have the four qualities of resources that lead to success as articulated by
resource-based theory?
2. If you were hired by your college or university to market your athletic department, what element of the
marketing mix would you focus on first and why?
3. What other classic stories or fables could be applied to discuss the importance of firm resources and
superior performance?
[1] Barney, J. B. 1991. Firm resources and sustained competitive advantage. Journal of Management, 17, 99–120;
Wernerfelt, B. 1984. A resource-based view of the firm. Strategic Management Journal, 5, 171–180.
[2] Barney, J. B. 1991. Firm resources and sustained competitive advantage. Journal of Management, 17, 99–120;
Chi, T. 1994. Trading in strategic resources: Necessary conditions, transaction cost problems, and choice of
exchange structure. Strategic Management Journal, 15(4), 271–290.
[3] Selznick, P. 1957. Leadership in administration. New York: Harper; Selznick, P. 1952. The organizational weapon.
New York, NY: McGraw-Hill; Selznick, P. 1949. TVA and the grass roots. Berkeley, CA: University of California Press.
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4.2 Intellectual Property
L E A R N I N G O B J E C T I V E S
1. Define the four major types of intellectual property.
2. Be able to provide examples of each intellectual property type.
3. Understand how intellectual property can be a valuable resource for firms.
Defining Intellectual Property
The inability of competitors to imitate a strategic resource is a key to leveraging the resource to achieve
long–term competitive advantages. Companies are clever, and effective imitation is often very possible.
But resources that involve intellectual property reduce or even eliminate this risk. As a result, developing
intellectual property is important to many organizations.
Intellectual property refers to creations of the mind, such as inventions, artistic products, and symbols.
The four main types of intellectual property are patents, trademarks, copyrights, and trade secrets.
If a piece of intellectual property is also valuable, rare, and nonsubstitutable, it constitutes
a strategic resource. Even if a piece of intellectual property does not meet all four criteria for serving as a
strategic resource, it can be bundled with other resources and activities to create a resource.
A variety of formal and informal methods are available to protect a firm’s intellectual property from
imitation by rivals. Some forms of intellectual property are best protected by legal means, while defending
others depends on surrounding them in secrecy. This can be contrasted with Southwest Airlines’ well-
known culture, which rivals are free to attempt to copy if they wish. Southwest’s culture thus is not
intellectual property, although some of its complements such as Southwest’s logo and unique color
schemes are.
Patents
Patents are legal decrees that protect inventions from direct imitation for a limited period of time.
Obtaining a patent involves navigating a challenging process. To earn a patent from the US
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Patent and Trademark Office, an inventor must demonstrate than an invention is new, nonobvious, and
useful. If the owner of a patent believes that a company or person has infringed on the patent, the owner
can sue for damages. In 2011, for example, a private company named EBSCO alleged that retailer Bass Pro
Shops sold a product that violated EBSCO’s patent on a deer-hunting stand that helps prevent hunters
from falling out of trees. Rather than endure a costly legal fight, the two sides agreed to settle EBSCO’s
complaint out of court.
Patenting an invention is important because patents can fuel enormous profits. Imagine, for example, the
potential for lost profits if the Slinky had not been patented. Shipyard engineer Richard James came up
with the idea for the Slinky by accident in 1943 while he was trying to create springs for use in ship
instruments. When James accidentally tipped over one of his springs, he noticed that it moved downhill in
a captivating way. James spent his free time perfecting the Slinky and then applied for a patent in 1946.
To date, more than three hundred million Slinkys have been sold by the company that Richard James and
his wife Betty created.
Patenting inventions such as the Slinky helps ensure that the invention is protected from imitation.
Image courtesy of Roger McLassus,http://upload.wikimedia.org/wikipedia/commons/f/f3/2006-
02-04_Metal_spiral .
Trademarks
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Trademarks are phrases, pictures, names, or symbols used to identify a particular organization.
Trademarks are important because they help an organization stand out and build an identity in the
marketplace. Some trademarks are so iconic that almost all consumers recognize them, including
McDonald’s golden arches, the Nike swoosh, and Apple’s outline of an apple.
Other trademarks help rising companies carve out a unique niche for themselves. For example, French
shoe designer Christian Louboutin has trademarked the signature red sole of his designer shoes. Because
these shoes sell for many hundreds of dollars via upscale retailers such as Neiman Marcus and Saks Fifth
Avenue, competitors would love to copy their look. Thus legally protecting the distinctive red sole from
imitation helps preserve Louboutin’s profits.
Fashionistas instantly recognize the trademark red sole of Christian Louboutin’s high-end shoes.
Image courtesy of
Arroser,http://wikimediafoundation.org/wiki/File:Louboutin_altadama140 .
Trademarks are important to colleges and universities. Schools earn tremendous sums of money through
royalties on T-shirts, sweatshirts, hats, backpacks, and other consumer goods sporting their names and
logos. On any given day, there are probably several students in your class wearing one or more pieces of
clothing featuring your school’s insignia; your school benefits every time items like this are sold.
Schools’ trademarks are easy to counterfeit, however, and the sales of counterfeit goods take money away
from colleges and universities. Not surprisingly, many schools fight to protect their trademarks. In
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October 2009, for example, the University of Oklahoma announced that it was teaming with law
enforcement officials to combat the sale of counterfeit goods around its campus. [1] This initiative and
similar ones at other colleges and universities are designed to ensure that schools receive their fair share
of the sales that their names and logos generate.
Figure 4.7 Trademarks
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Images courtesy of unknown author, http://en.wikipedia.org/wiki/File:Aspirine-1923 (bottom
left); Wilinckx, http://en.wikipedia.org/wiki/File:Trademark-symbool (top left); Hult Ketchen
International Group, LLC (top right); Helix84,
http://en.wikipedia.org/wiki/File:Burrbery_check.gif
Copyrights
Copyrights provide exclusive rights to the creators of original artistic works such as books, movies, songs,
and screenplays. Sometimes copyrights are sold and licensed. In the late 1960s,
Buick thought it had an agreement in place to license the number one hit “Light My Fire” for a television
advertisement from The Doors until the band’s volatile lead singer Jim Morrison loudly protested what he
saw as mistreating a work of art. Classic rock by The Beatles has been used in television ads in recent
years. After the late pop star Michael Jackson bought the rights to the band’s music catalog, he licensed
songs to Target and other companies. Some devoted music fans consider such ads to be abominations,
perhaps proving the merit of Morrison’s protest decades ago.
He looks calm here, but the licensing of a copyrighted song for a car commercial enraged rock legend Jim Morrison.
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Image courtesy of Polfoto/Jan Persson,
http://upload.wikimedia.org/wikipedia/commons/1/15/The_Doors_in_Copenhagen_1968 .
Over time, piracy has become a huge issue for the owners of copyrighted works. In China, millions of
pirated DVDs are sold each year, and music piracy is estimated to account for at least 95 percent of music
sales. This piracy deprives movie studios, record labels, and artists of millions of dollars in royalties. In
response to the damage piracy has caused, the US government has pressed its Chinese counterpart and
other national governments to better enforce copyrights.
Trade Secrets
Trade secrets refer to formulas, practices, and designs that are central to a firm’s business and that remain
unknown to competitors. Trade secrets are protected by laws on theft, but once a secret is revealed,
it cannot be a secret any longer. This leads firms to rely mainly on silence and privacy rather than the
legal system to protect trade secrets.
Some trade secrets have become legendary, perhaps because a mystique arises around the unknown. One
famous example is the blend of eleven herbs and spices used in Kentucky Fried Chicken’s original recipe
chicken. KFC protects this secret by having multiple suppliers each produce a portion of the herb and
spice blend; no one supplier knows the full recipe. The formulation of Coca-Cola is also shrouded in
mystery. In 2006, Pepsi was approached by shady individuals who were offering a chance to buy a stolen
copy of Coca-Cola’s secret recipe. Pepsi wisely refused. An FBI sting was used to bring the thieves to
justice. The soft-drink industry has other secrets too. Dr Pepper’s recipe remains unknown outside the
company. Although Coke’s formula has been the subject of greater speculation, Dr Pepper is actually the
original secret soft drink; it was created a year before Coca-Cola.
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The recipe for Dr Pepper is a secret dating back to the 1880s.
Image courtesy of anyjazz65,
K E Y T A K E A W A Y
x Intellectual property can serve as a strategic resource for organizations. While some sources of
intellectual property such as patents, trademarks, and copyrights can receive special legal protection,
trade secrets provide competitive advantages by simply staying hidden from competitors.
E X E R C I S E S
1. What designs for your college or university are protected by trademarks?
2. What type of intellectual property provides the most protection for firms?
3. Why would a firm protect a resource through trade secret rather than by a formal patent?
[1] Ward, C. 2009, October 8. OU works to prevent trademark infringement. The Oklahoma Daily. Retrieved
from http://www.oudaily.com/news/2009/oct/08/ou-works-prevent-trademark-infringement
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4.3 Value Chain
L E A R N I N G O B J E C T I V E S
1. Define the primary activities of the value chain.
2. Know the different support activities within the value chain.
3. Be able to apply the value chain to an organization of your choosing.
4. Understand the difference between a value chain and supply chain.
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Image courtesy of Carol M. Highsmith,
http://commons.wikimedia.org/wiki/File:Randy%27s_donuts1_edit1 .
Elements of the Value Chain
When executives choose strategies, an organization’s resources and capabilities should be examined
alongside consideration of its value chain. A value chain charts the path by which products and services
are created and eventually sold to customers. [1] The term value chain reflects the fact that, as each step of
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this path is completed, the product becomes more valuable than it was at the previous step.
Within the lumber business, for example, value is added when a tree is transformed into usable
wooden boards; the boards created from a tree can be sold for more money than the price of the tree.
Adapted from Porter, M. (1985). Competitive Advantage. New York: Free Press. Exhibit is
Creative Commons licensed at http://en.wikipedia.org/wiki/Image:ValueChain.PNG.”
Value chains include both primary and secondary activities. Primary activities are actions that are directly
involved in creating and distributing goods and services. Consider a simple illustrative example: doughnut
shops. Doughnut shops transform basic commodity products such as flour, sugar, butter, and grease into
delectable treats. Value is added through this process because consumers are willing to pay much more for
doughnuts than they would be willing to pay for the underlying ingredients.
There are five primary activities. Inbound logistics refers to the arrival of raw materials. Although
doughnuts are seen by most consumers as notoriously unhealthy, the Doughnut Plant in New York City
http://en.wikipedia.org/wiki/Image:ValueChain.PNG
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has carved out a unique niche for itself by obtaining organic ingredients from a local farmer’s
market.Operations refers to the actual production process, while outbound logistics tracks the movement
of a finished product to customers. One of Southwest Airlines’ unique capabilities is moving passengers
more quickly than its rivals. This advantage in operations is based in part on Southwest’s reliance on one
type of airplane (which speeds maintenance) and its avoidance of advance seat assignments (which
accelerates the passenger boarding process).
Attracting potential customers and convincing them to make purchases is the domain
of marketing and sales. For example, people cannot help but notice Randy’s Donuts in Inglewood,
California, because the building has a giant doughnut on top of it. Finally, service refers to the extent to
which a firm provides assistance to their customers. Voodoo Donuts in Portland, Oregon, has developed a
clever website (voodoodoughnut.com) that helps customers understand their uniquely named products,
such as the Voodoo Doll, the Texas Challenge, the Memphis Mafia, and the Dirty Snowball.
Secondary activities are not directly involved in the evolution of a product but instead provide important
underlying support for primary activities. Firm infrastructure refers to how the firm is organized and led
by executives. The effects of this organizing and leadership can be profound. For example, Ron Joyce’s
leadership of Canadian doughnut shop chain Tim Hortons was so successful that Canadians consume
more doughnuts per person than all other countries. In terms of resource-based theory, Joyce’s leadership
was clearly a valuable and rare resource that helped his firm prosper.
Also important is human resource management, which involves the recruitment, training, and
compensation of employees. A recent research study used data from more than twelve thousand
organizations to demonstrate that the knowledge, skills, and abilities of a firm’s employees can act as a
strategic resource and strongly influence the firm’s performance. [2] Certainly, the unique level of
dedication demonstrated by employees at Southwest Airlines has contributed to that firm’s excellent
performance over several decades.
Technology refers to the use of computerization and telecommunications to support primary activities.
Although doughnut making is not a high-tech business, technology plays a variety of roles for doughnut
shops, such as allowing customers to use credit cards. Procurement is the process of negotiating for and
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purchasing raw materials. Large doughnut chains such as Dunkin’ Donuts and Krispy Kreme can gain cost
advantages over their smaller rivals by purchasing flour, sugar, and other ingredients in bulk. Meanwhile,
Southwest Airlines has gained an advantage over its rivals by using futures contracts within its
procurement process to minimize the effects of rising fuel prices.
From the Value Chain to Best Value Supply Chains
“Time is money!” warns a famous saying. This simple yet profound statement suggests that organizations
that quickly complete their work will enjoy greater profits, while slower-moving firms will suffer. The
belief that time is money has encouraged the modern emphasis on supply chain management. A
supply chain is a system of people, activities, information, and resources involved in creating a product
and moving it to the customer. A supply chain is a broader concept than a value chain; the latter refers to
activities within one firm, while the former captures the entire process of creating and distributing a
product, often across several firms.
Competition in the twenty-first century requires an approach that considers the supply chain concept in
tandem with the value-creation process within a firm: best value supply chains. These chains do not fixate
on speed or on any other single metric. Instead, relative to their peers, best value supply chains focus on
the total value added to the customer.
Creating best value supply chains requires four components. The first is
strategic supply chain management—the use of supply chains as a means to create competitive advantages
and enhance firm performance. Such an approach contradicts the popular wisdom centered on the need
to maximize speed. Instead, there is recognition that the fastest chain may not satisfy customers’ needs.
Best value supply chains strive to excel along four measures. Speed (or “cycle time”) is the time duration
from initiation to completion of the production and distribution process. Quality refers to the relative
reliability of supply chain activities. Supply chains’ efforts at managing cost involve enhancing value by
either reducing expenses or increasing customer benefits for the same cost level. Flexibility refers to a
supply chain’s responsiveness to changes in customers’ needs. Through balancing these four metrics, best
value supply chains attempt to provide the highest level of total value added.
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The value of strategic supply chain management is reflected in how firms such as Walmart have used their
supply chains as competitive weapons to gain advantages over peers. Walmart excels in terms of speed
and cost by locating all domestic stores within one day’s drive of a warehouse while owning a trucking
fleet. This creates distribution speed and economies of scale that competitors simply cannot match. When
Kmart’s executives decided in the late 1990s to compete head-to-head with Walmart on price, Walmart’s
sophisticated logistics system enabled it to easily withstand the price war. Unable to match its rival’s
speed and costs, Kmart soon plunged into bankruptcy. Walmart’s supply chains also possess strong
quality and flexibility. When Hurricane Katrina devastated the Gulf Coast in 2005, Walmart used not only
its warehouses and trucks but also its satellite technology, radio frequency identification (RFID), and
global positioning systems to quickly divert assets to affected areas. The result was that Walmart emerged
as the first responder in many towns and provided essentials such as drinking water faster than local and
federal governments could.
Meanwhile, failing to manage a supply chain effectively causes serious harm. For example, in 2003
Motorola was unable to meet demand for its new camera phones because it did not have enough lenses
available. Also, firms whose supply chains were centered in the Port of Los Angeles collectively lost more
than $2 billion a day during a 2002 workers’ strike. In terms of stock price, firms’ market value erodes by
an average of 10 percent following the announcement of a major supply chain problem.
The second component is agility, the supply chain’s relative capacity to act rapidly in response to dramatic
changes in supply and demand. [3] Agility can be achieved using buffers. Excess capacity, inventory, and
management information systems all provide buffers that better enable a best value supply chain to
service and to be more responsive to its customers. Rapid improvements and decreased costs in deploying
information systems have enabled supply chains in recent years to reduce inventory as a buffer. Much
popular thinking depicts inventory reduction as a goal in and of itself. However, this cannot occur without
corresponding increases in buffer capacity elsewhere in the chain, or performance will suffer. A best value
supply chain seeks to optimize the total costs of all buffers used. The costs of deploying each buffer differs
across industries; therefore, no solution that works for one company can be directly applied to another in
a different industry without adaptation.
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Agility in a supply chain can also be improved and achieved by colocating with the customer. This
arrangement creates an information flow that cannot be duplicated through other methods. Daily face-to-
face contact for supply chain personnel enables quicker response times to customer demands due to the
speed at which information can travel back and forth between the parties. Again, this buffer of increased
and improved information flows comes at an expense, so executives seeking to build a best value supply
chain will investigate the opportunity and determine whether this action optimizes total costs.
Adaptability refers to a willingness and capacity to reshape supply chains when necessary. Generally,
creating one supply chain for a customer is desired because this helps minimize costs. Adaptable firms
realize that this is not always a best value solution, however. For example, in the defense industry, the US
Army requires one class of weapon simulators to be repaired within eight hours, while another class of
items can be repaired and returned within one month. To service these varying requirements efficiently
and effectively, Computer Science Corporation (the firm whose supply chains maintain the equipment)
must devise adaptable supply chains. In this case, spare parts inventory is positioned in proximity to the
class of simulators requiring quick turnaround, while the less-time-sensitive devices are sent to a
centralized repair facility. This supply chain configuration allows Computer Science Corporation to satisfy
customer demands while avoiding the excess costs that would be involved in localizing all repair activities.
In situations in which the interests of one firm in the chain and the chain as a whole conflict, most
executives will choose an option that benefits their firm. This creates a need for alignment among chain
members. Alignment refers to creating consistency in the interests of all participants in a supply chain. In
many situations, this can be accomplished through carefully writing incentives into contracts.
Collaborative forecasting with suppliers and customers can also help build alignment. Taking the time to
sit together with participants in the supply chain to agree on anticipated business levels permits shared
understanding and rapid information transfers between parties. This is particularly valuable when
customer demand is uncertain, such as in the retail industry. [4]
K E Y T A K E A W A Y
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x The value chain provides a useful tool for managers to examine systematically where value may be added
to their organizations. This tool is useful in that it examines key elements in the production of a good or
service, as well as areas in which value may be added in support of those primary activities.
E X E R C I S E S
1. If you were hired as a consultant for your university, what specific element of the value chain would you
seek to improve first?
2. What local business in your town could be improved most dramatically by applying the value chain?
Would improvements of primary or support activities help to improve this firm most? Could knowledge of
strategic supply chain management add further value to this firm?
[1] Porter, M. E. 1985. Competitive advantage: Creating and sustaining superior performance. New York, NY: Free
Press.
[2] Crook, T. R., Todd, S. Y., Combs, J. G., Woehr, D. J., & Ketchen, D. J. 2011. Does human capital matter? A meta-
analysis of the relationship between human capital and firm performance. Journal of Applied Psychology, 96(3),
443–456.
[3] Lee, H. L. 2004, October. The triple-A supply chain. Harvard Business Review, 83, 102–112.
[4] This section of the chapter is adapted from Ketchen, D. J., Rebarick, W., Hult, G. T., & Meyer, D. 2008. Best
value supply chains: A key competitive weapon for the 21st century. Business Horizons, 51, 235–243.
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4.4 Beyond Resource-Based Theory: Other Views on Firm
Performance
L E A R N I N G O B J E C T I V E S
1. Be able to discuss other theories about firm success and failure beyond resource-based theory.
2. Be able to apply different theories to help explain competition in different industries.
Although resource-based theory stands as perhaps the most popular explanation of why some
organizations prosper while others do not, several other theories are popular. Enactment treats
executives as the masters of their domains. Enactment contends that an organization can, at least in
part, create an environment for itself that is beneficial to the organization. This is accomplished by
putting strategies in place that reshape competitive conditions in a favorable way.
By the 1990s, Microsoft had been so successful at reshaping the software industry to its benefit that
the firm was the subject of a lengthy antitrust investigation by the federal government. More
recently, Apple has been able to reshape its environment by introducing products such as the iPhone
and the iPad that transcend the traditional boundaries between the cell phone, digital camera, music
player, and computer businesses. No airline has ever been able to enact the environment, however,
perhaps because the airline industry is so fragmented.
Environmental determinism offers a completely opposite view from enactment on why some firms
succeed and others fail. Environmental determinism views organizations much like biological
theories view animals—organizations (and animals) are very limited in their ability to adapt to the
conditions around them. Thus just as harsh environmental changes are believed to have made
dinosaurs extinct, changes in the business environment can destroy organizations regardless of how
clever and insightful executives are.
Until 1978, the federal government regulated the airline industry by dictating what routes each
airline would fly and what prices it would charge. Once these controls were removed, airlines were
subjected to a series of negative environmental trends, including recession, overcapacity in the
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industry, new entrants, fierce price competition, and fuel shortages. Perhaps not surprisingly, dozens
of airlines have been crushed by these conditions.
An old saying notes that “imitation is the sincerest form of flattery.” This flattery is the focus
of institutional theory. In particular, institutional theory centers on the extent to which firms copy one
another’s strategies. Consider, for example, fast-food hamburger restaurants. Innovations such as
dollar menus and drive-through windows tend to be introduced by one firm and then duplicated by
the others.
Airlines also seem to follow a “monkey see, monkey do” mentality. To build passenger loyalty,
American Airlines introduced a frequent flyer program called AAdvantage in 1981. After flying a
certain number of miles on American flights, AAdvantage members were rewarded with a free flight.
The idea was to make passengers less likely to shop around for the cheapest ticket. Ironically,
AAdvantage turned out to be not much of an advantage at all. Many of American’s rivals quickly
developed their own frequent-flyer programs, and today most airlines reward frequent passengers.
In recent years, ideas such as charging passengers to check their luggage and eliminating free food
on flights have been copied by one airline after another.
Transaction cost economics is a theory that centers on just one element of business activity: whether it
is cheaper for a firm to make or to buy the products that it needs. This is an important element,
however, because choosing the more efficient option can enhance a firm’s profits. Automakers such
as Ford and General Motors face a wide variety of make-or-buy decisions because so many different
parts are needed to build cars and trucks. Sometimes Ford and GM make these products, and other
times they purchase them from outside suppliers. These firms’ financial situations are improved
when these decisions are made wisely and harmed when they are made poorly.
In contrast, airlines always buy (or rent) their airplanes. Large planes are generally bought from
Boeing or Airbus, while modest-sized airliners are purchased from companies such as Brazil’s
Embraer. It would be simply too costly for an airline to pursue a backward integration strategy and
enter the airplane manufacturing business. Insights such as these are powerful enough that the
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creator of transaction cost economics, Professor Oliver Williamson, was awarded a Nobel Prize in
Economic Sciences in 2009.
Each of these theories—enactment, environmental determinism, institutional theory, and
transaction cost economics—is useful for understanding some situations and some important
business decisions. Thus executives should keep these perspectives in mind as they attempt to lead
their firms to greater levels of success. However, one important advantage that resource-based
theory offers over the alternatives is that only resource-based theory does a good job of explaining
firm performance across a wide variety of contexts. Thus resource-based theory offers the point of
view of business that has the strongest value for most executives.
K E Y T A K E A W A Y
x Although resource-based theory is the dominant perspective to predict performance in the strategic
management field, other theories exist to explain firm behavior. In some industries, explanations
provided by these theories can be very convincing.
E X E R C I S E S
1. What theory of the firm do you think best explains competition in the fast-food industry?
2. What is an example of an industry in which institutional theory seems to explain the behavior of firms?
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4.5 SWOT Analysis
L E A R N I N G O B J E C T I V E S
1. Understand what SWOT analysis is.
2. Learn how SWOT analysis can help organizations and individuals, and its limitations.
Five forces analysis examines the situation faced by the competitors in an industry. Strategic groups
analysis narrows the focus by centering on subsets of these competitors whose strategies are
similar. SWOT analysis takes an even narrower focus by centering on an individual firm. Specifically,
SWOT analysis is a tool that considers a firm’s strengths and weaknesses along with the
opportunities and threats that exist in the firm’s environment.
Executives using SWOT analysis compare these internal and external factors to generate ideas about
how their firm might become more successful. In general, it is wise to focus on ideas that allow a firm
to leverage its strengths, steer clear of or resolve its weaknesses, capitalize on opportunities, and
protect itself against threats. For example, untapped overseas markets have presented potentially
lucrative opportunities to Subway and other restaurant chains such as McDonald’s and Kentucky
Fried Chicken. Meanwhile, Subway’s strengths include a well-established brand name and a simple
business format that can easily be adapted to other cultures. In considering the opportunities offered
by overseas markets and Subway’s strengths, it is not surprising that entering and expanding in
different countries has been a key element of Subway’s strategy in recent years. Indeed, Subway
currently has operations in nearly 100 nations.
SWOT analysis is helpful to executives, and it is used within most organizations. Important cautions
need to be offered about SWOT analysis, however. First, in laying out each of the four elements of
SWOT, internal and external factors should not be confused with each other. It is important not to
list strengths as opportunities, for example, if executives are to succeed at matching internal and
external concerns during the idea generation process. Second, opportunities should not be confused
with strategic moves designed to capitalize on these opportunities. In the case of Subway, it would be
a mistake to list “entering new countries” as an opportunity. Instead, untapped markets are the
opportunity presented to Subway, and entering those markets is a way for Subway to exploit the
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opportunity. Finally, and perhaps most important, the results of SWOT analysis should not be
overemphasized. SWOT analysis is a relatively simple tool for understanding a firm’s situation. As a
result, SWOT is best viewed as a brainstorming technique for generating creative ideas, not as a
rigorous method for selecting strategies. Thus the ideas produced by SWOT analysis offer a starting
point for executives’ efforts to craft strategies for their organization, not an ending point.
In addition to organizations, individuals can benefit from applying SWOT analysis to their personal
situation. A college student who is approaching graduation, for example, could lay out her main
strengths and weaknesses and the opportunities and threats presented by the environment. Suppose,
for instance, that this person enjoys and is good at helping others (a strength) but also has a rather
short attention span (a weakness). Meanwhile, opportunities to work at a rehabilitation center or to
pursue an advanced degree are available. Our hypothetical student might be wise to pursue a job at
the rehabilitation center (where her strength at helping others would be a powerful asset) rather than
entering graduate school (where a lot of reading is required and her short attention span could
undermine her studies).
K E Y T A K E A W A Y
x Executives using SWOT analysis compare internal strengths and weaknesses with external opportunities
and threats to generate ideas about how their firm might become more successful. Ideas that allow a firm
to leverage its strengths, steer clear of or resolve its weaknesses, capitalize on opportunities, and protect
itself against threats are particularly helpful.
E X E R C I S E S
1. What do each of the letters in SWOT represent?
2. What are your key strengths, and how might you build your own personal strategies for success around
them?
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4.6 Conclusion
This chapter explains key issues that executives face in managing resources to keep their firms
competitive. Resource-based theory argues that firms will perform better when they assemble
resources that are valuable, rare, difficult to imitate, and nonsubstitutable. When executives can
successfully bundle organizational resources into unique capabilities, the firm is more likely to enjoy
lasting success. Different forms of intellectual property—which include patents, trademarks,
copyrights, and trade secrets—may also serve as strategic resources for firms. Examining a firm’s
resources can be aided by the value chain, a tool that systematically examines primary and secondary
activities in the creation of a good or service and by a knowledge of supply chain management that
examines the value added of multiple firms working together. While resource-based theory provides
a dominant view for examining the determinants of firm success, other perspectives provide insight
for understanding specific behaviors of firms within an industry. Finally, SWOT analysis is a simple
but powerful technique for examining the interactions between factors internal and external to the
firm.
E X E R C I S E S
1. Divide your class into four or eight groups, depending on the size of the class. Each group should search
for a patent tied to a successful product, as well as a patent associated with a product that was not a
commercial hit. Were there resources tied to the successful organization that the poor performer did not
seem to attain?
2. This chapter discussed Southwest Airlines. Based on your reading of the chapter, how well has Southwest
done in bundling together the resources recommended by resource-based theory? What theoretical
perspective best explains the competitive actions of most firms in the airline industry?
3. Conduct a SWOT analysis of your college or university. Based on your analysis, what one strategic move
should your school make first, and why?
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Chapter 4
Managing Firm Resources
L E A R N I N G O B J E C T I V E S
After reading this chapter, you should be able to understand and articulate answers to the following
questions:
1. What is resource-based theory, and why is it important to organizations?
2. In what ways can intellectual property serve as a value-added resource for organizations?
3. How should executives use the value chain to maximize the performance of their organizations?
4. What is SWOT analysis and how can it help an organization?
Southwest Airlines: Let Your LUV Flow
Southwest Airlines’ acquisition of AirTran in 2011 may lead the firm into stormy skies.
Chapter 4 from Mastering Strategic Management was adapted by The Saylor Foundation under
a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested
by the work’s original creator or licensee. © 2014, The Saylor Foundation.
http://www.saylor.org/site/textbooks/Mastering%20Strategic%20Management
http://creativecommons.org/licenses/by-nc-sa/3.0/
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Image courtesy of Stuart Seeger,http://en.wikipedia.org/wiki/File:Southwest_737_At_Burbank
In 1971, an upstart firm named Southwest Airlines opened for business by offering flights between
Houston, San Antonio, and its headquarters at Love Field in Dallas. From its initial fleet of three airplanes
and three destinations, Southwest has grown to operate hundreds of airplanes in scores of cities. Despite
competing in an industry that is infamous for bankruptcies and massive financial losses, Southwest
marked its thirty-eighth profitable year in a row in 2010.
Why has Southwest succeeded while many other airlines have failed? Historically, the firm has differed
from its competitors in a variety of important ways. Most large airlines use a “hub and spoke” system.
This type of system routes travelers through a large hub airport on their way from one city to another.
Many Delta passengers, for example, end a flight in Atlanta and then take a connecting flight to their
actual destination. The inability to travel directly between most pairs of cities adds hours to a traveler’s
itinerary and increases the chances of luggage being lost. In contrast, Southwest does not have a hub
airport; preferring instead to connect cities directly. This helps make flying on Southwest attractive to
many travelers.
Southwest has also been more efficient than its rivals. While most airlines use a variety of different
airplanes, Southwest operates only one type of jet: the Boeing 737. This means that Southwest can service
its fleet much more efficiently than can other airlines. Southwest mechanics need only the know-how to
fix one type of airplane, for example, while their counterparts with other firms need a working knowledge
of multiple planes. Southwest also gains efficiency by not offering seat assignments in advance, unlike its
competitors. This makes the boarding process move more quickly, meaning that Southwest’s jets spend
more time in the air transporting customers (and making money) and less time at the gate relative to its
rivals’ planes.
Organizational culture is the dimension along which Southwest perhaps has differed most from its rivals.
The airline industry as a whole suffers from a reputation for mediocre (or worse) service and indifferent
(sometimes even surly) employees. In contrast, Southwest enjoys strong loyalty and a sense of teamwork
among its employees.
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One tangible indicator of this culture is Southwest’s stock ticker symbol. Most companies choose stock
ticker symbols that evoke their names. Ford’s ticker symbol is F, for example, and Walmart’s symbol is
WMT. When Southwest became a publicly traded company in 1977, executives chose LUV as its ticker
symbol. LUV pays a bit of homage to the firm’s humble beginnings at Love Field. More important,
however, LUV represents the love that executives have created among employees, between employees and
the company, and between customers and the company. This “LUV affair” has long been and remains a
huge success. As recently as March 2011, for example, Southwest was ranked fourth
on Fortune magazine’s World’s Most Admired Company list.
In September 2010, Southwest surprised many observers when it announced that it was acquiring
AirTran Airways for $1.4 billion. Southwest and AirTran both emphasized low fares, but they differed in
many ways. AirTran routed most of its passengers through a hub-and-spoke system, and it relied on a
different plane than Southwest, the Boeing 717. The acquisition of AirTran thus raised important
questions about Southwest’s future. [1] How would AirTran’s hub-and-spoke system be integrated with
Southwest’s nonhub approach? Could the airlines’ respective fleets of 737s and 717s be joined without
losing efficiency? Perhaps most important, could Southwest maintain its legendary organizational culture
while taking over a sizable rival and integrating AirTran’s thousands of employees? When the acquisition
was finalized on May 2, 2011, it remained unclear whether Southwest was flying off course or whether
Southwest’s “LUV story” would continue for many years.
[1] Schlangenstein, M., & Hughes, J. 2010, September 28. Southwest risks keep-it-simple focus to spur growth.
Retrieved from http://www.washingtonpost.com/wp-dyn/content/article/2010/09/28/AR2010092801578.html
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4.1 Resource-Based Theory
L E A R N I N G O B J E C T I V E S
1. Define the four characteristics of resources that lead to sustained competitive advantage as articulated by
the resource-based theory of the firm.
2. Understand the difference between resources and capabilities.
3. Be able to explain the difference between tangible and intangible resources.
4. Know the elements of the marketing mix.
Four Characteristics of Strategic Resources
Southwest Airlines provides an illustration of resource-based theory in action. Resource-
based theory contends that the possession of strategic resources provides an organization with a golden
opportunity to develop competitive advantages over its rivals. These competitive advantages in turn
can help the organization enjoy strong profits.[1]
A strategic resource is an asset that is valuable, rare, difficult to imitate, and nonsubstitutable. [2] A
resource is valuable to the extent that it helps a firm create strategies that capitalize on opportunities and
ward off threats. Southwest Airlines’ culture fits this standard well. Most airlines struggle to be profitable,
but Southwest makes money virtually every year. One key reason is a legendary organizational culture
that inspires employees to do their very best. This culture is also rare in that strikes, layoffs, and poor
morale are common within the airline industry.
Competitors have a hard time duplicating resources that are difficult to imitate. Some difficult to imitate
resources are protected by various legal means, including trademarks, patents, and copyrights. Other
resources are hard to copy because they evolve over time and they reflect unique aspects of the firm.
Southwest’s culture arose from its very humble beginnings. The airline had so little money that at times it
had to temporarily “borrow” luggage carts from other airlines and put magnets with the Southwest logo
on top of the rivals’ logo. Southwest is a “rags to riches” story that has evolved across several decades.
Other airlines could not replicate Southwest’s culture, regardless of how hard they might try, because of
Southwest’s unusual history.
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A resource is nonsubstitutable when competitors cannot find alternative ways to gain the benefits that a
resource provides. A key benefit of Southwest’s culture is that it leads employees to treat customers well,
which in turn creates loyalty to Southwest among passengers. Executives at other airlines would love to
attract the customer loyalty that Southwest enjoys, but they have yet to find ways to inspire the kind of
customer service that the Southwest culture encourages.
Southwest Airlines’ unique culture is reflected in the customization of their aircraft over the years, such as the “Lone Star
One” design.
Image courtesy of planephotoman,http://en.wikipedia.org/wiki/File:Southwest_737_Lonestar_One .
Ideally, a firm will have a culture that embraces the four qualities. If so, these resources can provide
not only a competitive advantage but also a sustained competitive advantage—one that
will endure over time and help the firm stay successful far into the future. Resources that do not
have all four qualities can still be very useful, but they are unlikely to provide long-term advantages.
A resource that is valuable and rare but that can be imitated, for example, might provide an edge in the
short term, but competitors can overcome such an advantage eventually.
Resource-based theory also stresses the merit of an old saying: the whole is greater than the sum of its
parts. Specifically, it is also important to recognize that strategic resources can be created by taking
several strategies and resources that each could be copied and bundling them together in a way that
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cannot be copied. For example, Southwest’s culture is complemented by approaches that individually
could be copied—the airline’s emphasis on direct flights, its reliance on one type of plane, and its unique
system for passenger boarding—to create a unique business model whose performance is without peer in
the industry.
Resource-based theory can be confusing because the term resources is used in many different ways within
everyday common language. It is important to distinguish strategic resources from other resources. To
most individuals, cash is an important resource. Tangible goods such as one’s car and home are also vital
resources. When analyzing organizations, however, common resources such as cash and vehicles are not
considered to be strategic resources. Resources such as cash and vehicles are valuable, of course, but an
organization’s competitors can readily acquire them. Thus an organization cannot hope to create an
enduring competitive advantage around common resources.
On occasion, events in the environment can turn a common resource into a strategic resource. Consider,
for example, a very generic commodity: water. Humans simply cannot live without water, so water has
inherent value. Also, water cannot be imitated (at least not on a large scale), and no other substance can
substitute for the life-sustaining properties of water. Despite having three of the four properties of
strategic resources, water in the United States has remained cheap. Yet this may be changing. Major cities
in hot climates such as Las Vegas, Los Angeles, and Atlanta are confronted by dramatically shrinking
water supplies. As water becomes more and more rare, landowners in Maine stand to benefit. Maine has
been described as “the Saudi Arabia of water” because its borders contain so much drinkable water. It is
not hard to imagine a day when companies in Maine make huge profits by sending giant trucks filled with
water south and west or even by building water pipelines to service arid regions.
From Resources to Capabilities
The tangibility of a firm’s resources is an important consideration within resource-based
theory. Tangible resources are resources that can be readily seen, touched, and quantified. Physical assets
such as a firm’s property, plant, and equipment, as well as cash, are considered to be tangible resources.
In contrast, intangible resources are quite difficult to see, to touch, or to quantify. Intangible resources
include, for example, the knowledge and skills of employees, a firm’s reputation, and a firm’s culture. In
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comparing the two types of resources, intangible resources are more likely to meet the criteria for
strategic resources (i.e., valuable, rare, difficult to imitate, and nonsubstitutable) than are tangible
resources. Executives who wish to achieve long-term competitive advantages should therefore place a
premium on trying to nurture and develop their firms’ intangible resources.
Capabilities are another key concept within resource-based theory. A good and easy-to-remember way to
distinguish resources and capabilities is this: resources refer to what an organization owns, capabilities
refer to what the organization can do. Capabilities tend to arise over time as a firm takes actions that build on
its strategic resources. Southwest Airlines, for example, has developed the capability of providing excellent
customer service by building on its strong organizational culture. Capabilities are important in part because
they are how organizations capture the potential value that resources offer. Customers do not simply
send money to an organization because it owns strategic resources. Instead, capabilitiesare needed to bundle,
to manage, and otherwise to exploit resources in a manner that provides value added to customers
and creates advantages over competitors.
Some firms develop a dynamic capability. This means that a firm has a unique capability of creating new
capabilities. Said differently, a firm that enjoys a dynamic capability is skilled at continually updating its
array of capabilities to keep pace with changes in its environment. General Electric, for example, buys and
sells firms to maintain its market leadership over time, while Coca-Cola has an uncanny knack for
building new brands and products as the soft-drink market evolves. Not surprisingly, both of these firms
rank among the top thirteen among the “World’s Most Admired Companies” for 2011.
Strategy at the Movies
That Thing You Do!
How can the members of an organization reach success “doing that thing they do”? According to resource-
based theory, one possible road to riches is creating—on purpose or by accident—a unique combination of
resources. In the 1996 movie That Thing You Do!, unwittingly assembling a unique bundle of resources
leads a 1960s band called The Wonders to rise from small-town obscurity to the top of the music charts.
One resource is lead singer Jimmy Mattingly, who possesses immense musical talent. Another is guitarist
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Lenny Haise, whose fun attitude reigns in the enigmatic Mattingly. Although not a formal band member,
Mattingly’s girlfriend Faye provides emotional support to the group and even suggests the group’s name.
When the band’s usual drummer has to miss a gig due to injury, the door is opened for charismatic
drummer Guy Patterson, whose energy proves to be the final piece of the puzzle for The Wonders.
Despite Mattingly’s objections, Guy spontaneously adds an up-tempo beat to a sleepy ballad called “That
Thing You Do!” during a local talent contest. When the talent show audience goes crazy in response, it
marks the beginning of a meteoric rise for both the song and the band. Before long, The Wonders perform
on television and “That Thing You Do!” is a top-ten hit record. The band’s magic vanishes as quickly as it
appeared, however. After their bass player joins the Marines, Lenny elopes on a whim, and Jimmy’s diva
attitude runs amok, the band is finished and Guy is left to “wonder” what might have been. That Thing
You Do! illustrates that while bundling resources in a unique way can create immense success, preserving
and managing these resources over time can be very difficult.
Liv Tyler plays Faye Dolan, the love interest of drummer Guy Patterson, in That Thing You Do!
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Image courtesy of Daniel Dormann,http://en.wikipedia.org/wiki/File:LivTylerJune08 .
Is Resource-Based Theory Old News?
Resource-based theory has evolved in recent years to provide a way to understand how strategic resources
and capabilities allow firms to enjoy excellent performance. But more than one wry observer has
wondered aloud, “Is resource-based theory just old wine in a new bottle?” This is a question worth
considering because the role of resources in shaping success and failure has been discussed for many
centuries.
Aesop was a Greek storyteller who lived approximately 2,500 years ago. Aesop is known in particular for
having created a series of fables—stories that appear on the surface to be simply children’s tales but that
offer deep lessons for everyone. One of Aesop’s fables focuses on an ass (donkey) and some grasshoppers.
When the ass tries to duplicate the sweet singing of the grasshoppers by copying their diet, he soon dies of
starvation. Attempting to replicate the grasshoppers’ unique singing capability proved to be a fatal
mistake. The fable illustrates a central point of resource-based theory: it is an array of resources and
capabilities that fuels enduring success, not any one resource alone.
In a far more recent example, sociologist Philip Selznick developed the concept
of distinctive competence through a series of books in the 1940s and 1950s.[3] A distinctive competence is
a set of activities that an organization performs especially well. Southwest Airlines, for example, appears
to have a distinctive competency in operations, as evidenced by how quickly it moves its flights in and out
of airports. Further, Selznick suggested that possessing a distinctive competency creates a competitive
advantage for a firm. Certainly, there is plenty of overlap between the concept of distinctive competency,
on the one hand, and capabilities, on the other.
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So is resource-based theory in fact old wine in a new bottle? Not really. Resource-based theory builds on
past ideas about resources, but it represents a big improvement on past ideas in at least two ways. First,
resource-based theory offers a complete framework for analyzing organizations, not just snippets of
valuable wisdom like Aesop and Selznick provided. Second, the ideas offered by resource-based theory
have been developed and refined through scores of research studies involving thousands of organizations.
In other words, there is solid evidence backing it up.
The Marketing Mix
Leveraging resources and capabilities to create desirable products and services is important, but
customers must still be convinced to purchase these goods and services. The marketing mix—also known
as the four Ps of marketing—provides important insights into how to make this happen. A master of the
marketing mix was circus impresario P. T. Barnum, who is famous in part for his claim that “there’s a
sucker born every minute.” The real purpose of the marketing mix is not to trick customers but rather to
provide a strong alignment among the four Ps (product, price, place, and promotion) to offer customers a
coherent and persuasive message.
A firm’s product is what it sells to customers. Southwest Airlines sells, of course, airplane flights. The
airline tries to set its flights apart from those of airlines by making flying fun. This can include, for
example, flight attendants offering preflight instructions as a rap. The price of a good or service should
provide a good match with the value offered. Throughout its history, Southwest has usually charged lower
airfares than its rivals. Place can refer to a physical purchase point as well as a distribution channel.
Southwest has generally operated in cities that are not served by many airlines and in secondary airports
in major cities. This has allowed the firm to get favorable lease rates at airports and has helped it create
customer loyalty among passengers who are thankful to have access to good air travel.
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Finally, promotion consists of the communications used to market a product, including advertising, public
relations, and other forms of direct and indirect selling. Southwest is known for its clever advertising. In a
recent television advertising campaign, for example, Southwest lampooned the baggage fees charged by
most other airlines while highlighting its more customer-friendly approach to checked luggage. Given the
consistent theme of providing a good value plus an element of fun to passengers that is developed across
the elements of the marketing mix, it is no surprise that Southwest has been so successful within a very
challenging industry.
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Few executives in history have had the marketing savvy of P. T. Barnum.
Image courtesy of The Strobridge Litho. Co., Cincinnati & New York,
http://en.wikipedia.org/wiki/File:Barnum_%26_Bailey_clowns_and_geese2 .
K E Y T A K E A W A Y
x Resource-based theory suggests that resources that are valuable, rare, difficult to imitate, and
nonsubstitutable best position a firm for long-term success. These strategic resources can provide the
foundation to develop firm capabilities that can lead to superior performance over time. Capabilities are
needed to bundle, to manage, and otherwise to exploit resources in a manner that provides value added
to customers and creates advantages over competitors.
E X E R C I S E S
1. Does your favorite restaurant have the four qualities of resources that lead to success as articulated by
resource-based theory?
2. If you were hired by your college or university to market your athletic department, what element of the
marketing mix would you focus on first and why?
3. What other classic stories or fables could be applied to discuss the importance of firm resources and
superior performance?
[1] Barney, J. B. 1991. Firm resources and sustained competitive advantage. Journal of Management, 17, 99–120;
Wernerfelt, B. 1984. A resource-based view of the firm. Strategic Management Journal, 5, 171–180.
[2] Barney, J. B. 1991. Firm resources and sustained competitive advantage. Journal of Management, 17, 99–120;
Chi, T. 1994. Trading in strategic resources: Necessary conditions, transaction cost problems, and choice of
exchange structure. Strategic Management Journal, 15(4), 271–290.
[3] Selznick, P. 1957. Leadership in administration. New York: Harper; Selznick, P. 1952. The organizational weapon.
New York, NY: McGraw-Hill; Selznick, P. 1949. TVA and the grass roots. Berkeley, CA: University of California Press.
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4.2 Intellectual Property
L E A R N I N G O B J E C T I V E S
1. Define the four major types of intellectual property.
2. Be able to provide examples of each intellectual property type.
3. Understand how intellectual property can be a valuable resource for firms.
Defining Intellectual Property
The inability of competitors to imitate a strategic resource is a key to leveraging the resource to achieve
long–term competitive advantages. Companies are clever, and effective imitation is often very possible.
But resources that involve intellectual property reduce or even eliminate this risk. As a result, developing
intellectual property is important to many organizations.
Intellectual property refers to creations of the mind, such as inventions, artistic products, and symbols.
The four main types of intellectual property are patents, trademarks, copyrights, and trade secrets.
If a piece of intellectual property is also valuable, rare, and nonsubstitutable, it constitutes
a strategic resource. Even if a piece of intellectual property does not meet all four criteria for serving as a
strategic resource, it can be bundled with other resources and activities to create a resource.
A variety of formal and informal methods are available to protect a firm’s intellectual property from
imitation by rivals. Some forms of intellectual property are best protected by legal means, while defending
others depends on surrounding them in secrecy. This can be contrasted with Southwest Airlines’ well-
known culture, which rivals are free to attempt to copy if they wish. Southwest’s culture thus is not
intellectual property, although some of its complements such as Southwest’s logo and unique color
schemes are.
Patents
Patents are legal decrees that protect inventions from direct imitation for a limited period of time.
Obtaining a patent involves navigating a challenging process. To earn a patent from the US
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Patent and Trademark Office, an inventor must demonstrate than an invention is new, nonobvious, and
useful. If the owner of a patent believes that a company or person has infringed on the patent, the owner
can sue for damages. In 2011, for example, a private company named EBSCO alleged that retailer Bass Pro
Shops sold a product that violated EBSCO’s patent on a deer-hunting stand that helps prevent hunters
from falling out of trees. Rather than endure a costly legal fight, the two sides agreed to settle EBSCO’s
complaint out of court.
Patenting an invention is important because patents can fuel enormous profits. Imagine, for example, the
potential for lost profits if the Slinky had not been patented. Shipyard engineer Richard James came up
with the idea for the Slinky by accident in 1943 while he was trying to create springs for use in ship
instruments. When James accidentally tipped over one of his springs, he noticed that it moved downhill in
a captivating way. James spent his free time perfecting the Slinky and then applied for a patent in 1946.
To date, more than three hundred million Slinkys have been sold by the company that Richard James and
his wife Betty created.
Patenting inventions such as the Slinky helps ensure that the invention is protected from imitation.
Image courtesy of Roger McLassus,http://upload.wikimedia.org/wikipedia/commons/f/f3/2006-
02-04_Metal_spiral .
Trademarks
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Trademarks are phrases, pictures, names, or symbols used to identify a particular organization.
Trademarks are important because they help an organization stand out and build an identity in the
marketplace. Some trademarks are so iconic that almost all consumers recognize them, including
McDonald’s golden arches, the Nike swoosh, and Apple’s outline of an apple.
Other trademarks help rising companies carve out a unique niche for themselves. For example, French
shoe designer Christian Louboutin has trademarked the signature red sole of his designer shoes. Because
these shoes sell for many hundreds of dollars via upscale retailers such as Neiman Marcus and Saks Fifth
Avenue, competitors would love to copy their look. Thus legally protecting the distinctive red sole from
imitation helps preserve Louboutin’s profits.
Fashionistas instantly recognize the trademark red sole of Christian Louboutin’s high-end shoes.
Image courtesy of
Arroser,http://wikimediafoundation.org/wiki/File:Louboutin_altadama140 .
Trademarks are important to colleges and universities. Schools earn tremendous sums of money through
royalties on T-shirts, sweatshirts, hats, backpacks, and other consumer goods sporting their names and
logos. On any given day, there are probably several students in your class wearing one or more pieces of
clothing featuring your school’s insignia; your school benefits every time items like this are sold.
Schools’ trademarks are easy to counterfeit, however, and the sales of counterfeit goods take money away
from colleges and universities. Not surprisingly, many schools fight to protect their trademarks. In
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October 2009, for example, the University of Oklahoma announced that it was teaming with law
enforcement officials to combat the sale of counterfeit goods around its campus. [1] This initiative and
similar ones at other colleges and universities are designed to ensure that schools receive their fair share
of the sales that their names and logos generate.
Figure 4.7 Trademarks
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Images courtesy of unknown author, http://en.wikipedia.org/wiki/File:Aspirine-1923 (bottom
left); Wilinckx, http://en.wikipedia.org/wiki/File:Trademark-symbool (top left); Hult Ketchen
International Group, LLC (top right); Helix84,
http://en.wikipedia.org/wiki/File:Burrbery_check.gif
Copyrights
Copyrights provide exclusive rights to the creators of original artistic works such as books, movies, songs,
and screenplays. Sometimes copyrights are sold and licensed. In the late 1960s,
Buick thought it had an agreement in place to license the number one hit “Light My Fire” for a television
advertisement from The Doors until the band’s volatile lead singer Jim Morrison loudly protested what he
saw as mistreating a work of art. Classic rock by The Beatles has been used in television ads in recent
years. After the late pop star Michael Jackson bought the rights to the band’s music catalog, he licensed
songs to Target and other companies. Some devoted music fans consider such ads to be abominations,
perhaps proving the merit of Morrison’s protest decades ago.
He looks calm here, but the licensing of a copyrighted song for a car commercial enraged rock legend Jim Morrison.
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Image courtesy of Polfoto/Jan Persson,
http://upload.wikimedia.org/wikipedia/commons/1/15/The_Doors_in_Copenhagen_1968 .
Over time, piracy has become a huge issue for the owners of copyrighted works. In China, millions of
pirated DVDs are sold each year, and music piracy is estimated to account for at least 95 percent of music
sales. This piracy deprives movie studios, record labels, and artists of millions of dollars in royalties. In
response to the damage piracy has caused, the US government has pressed its Chinese counterpart and
other national governments to better enforce copyrights.
Trade Secrets
Trade secrets refer to formulas, practices, and designs that are central to a firm’s business and that remain
unknown to competitors. Trade secrets are protected by laws on theft, but once a secret is revealed,
it cannot be a secret any longer. This leads firms to rely mainly on silence and privacy rather than the
legal system to protect trade secrets.
Some trade secrets have become legendary, perhaps because a mystique arises around the unknown. One
famous example is the blend of eleven herbs and spices used in Kentucky Fried Chicken’s original recipe
chicken. KFC protects this secret by having multiple suppliers each produce a portion of the herb and
spice blend; no one supplier knows the full recipe. The formulation of Coca-Cola is also shrouded in
mystery. In 2006, Pepsi was approached by shady individuals who were offering a chance to buy a stolen
copy of Coca-Cola’s secret recipe. Pepsi wisely refused. An FBI sting was used to bring the thieves to
justice. The soft-drink industry has other secrets too. Dr Pepper’s recipe remains unknown outside the
company. Although Coke’s formula has been the subject of greater speculation, Dr Pepper is actually the
original secret soft drink; it was created a year before Coca-Cola.
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The recipe for Dr Pepper is a secret dating back to the 1880s.
Image courtesy of anyjazz65,
K E Y T A K E A W A Y
x Intellectual property can serve as a strategic resource for organizations. While some sources of
intellectual property such as patents, trademarks, and copyrights can receive special legal protection,
trade secrets provide competitive advantages by simply staying hidden from competitors.
E X E R C I S E S
1. What designs for your college or university are protected by trademarks?
2. What type of intellectual property provides the most protection for firms?
3. Why would a firm protect a resource through trade secret rather than by a formal patent?
[1] Ward, C. 2009, October 8. OU works to prevent trademark infringement. The Oklahoma Daily. Retrieved
from http://www.oudaily.com/news/2009/oct/08/ou-works-prevent-trademark-infringement
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4.3 Value Chain
L E A R N I N G O B J E C T I V E S
1. Define the primary activities of the value chain.
2. Know the different support activities within the value chain.
3. Be able to apply the value chain to an organization of your choosing.
4. Understand the difference between a value chain and supply chain.
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Image courtesy of Carol M. Highsmith,
http://commons.wikimedia.org/wiki/File:Randy%27s_donuts1_edit1 .
Elements of the Value Chain
When executives choose strategies, an organization’s resources and capabilities should be examined
alongside consideration of its value chain. A value chain charts the path by which products and services
are created and eventually sold to customers. [1] The term value chain reflects the fact that, as each step of
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this path is completed, the product becomes more valuable than it was at the previous step.
Within the lumber business, for example, value is added when a tree is transformed into usable
wooden boards; the boards created from a tree can be sold for more money than the price of the tree.
Adapted from Porter, M. (1985). Competitive Advantage. New York: Free Press. Exhibit is
Creative Commons licensed at http://en.wikipedia.org/wiki/Image:ValueChain.PNG.”
Value chains include both primary and secondary activities. Primary activities are actions that are directly
involved in creating and distributing goods and services. Consider a simple illustrative example: doughnut
shops. Doughnut shops transform basic commodity products such as flour, sugar, butter, and grease into
delectable treats. Value is added through this process because consumers are willing to pay much more for
doughnuts than they would be willing to pay for the underlying ingredients.
There are five primary activities. Inbound logistics refers to the arrival of raw materials. Although
doughnuts are seen by most consumers as notoriously unhealthy, the Doughnut Plant in New York City
http://en.wikipedia.org/wiki/Image:ValueChain.PNG
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has carved out a unique niche for itself by obtaining organic ingredients from a local farmer’s
market.Operations refers to the actual production process, while outbound logistics tracks the movement
of a finished product to customers. One of Southwest Airlines’ unique capabilities is moving passengers
more quickly than its rivals. This advantage in operations is based in part on Southwest’s reliance on one
type of airplane (which speeds maintenance) and its avoidance of advance seat assignments (which
accelerates the passenger boarding process).
Attracting potential customers and convincing them to make purchases is the domain
of marketing and sales. For example, people cannot help but notice Randy’s Donuts in Inglewood,
California, because the building has a giant doughnut on top of it. Finally, service refers to the extent to
which a firm provides assistance to their customers. Voodoo Donuts in Portland, Oregon, has developed a
clever website (voodoodoughnut.com) that helps customers understand their uniquely named products,
such as the Voodoo Doll, the Texas Challenge, the Memphis Mafia, and the Dirty Snowball.
Secondary activities are not directly involved in the evolution of a product but instead provide important
underlying support for primary activities. Firm infrastructure refers to how the firm is organized and led
by executives. The effects of this organizing and leadership can be profound. For example, Ron Joyce’s
leadership of Canadian doughnut shop chain Tim Hortons was so successful that Canadians consume
more doughnuts per person than all other countries. In terms of resource-based theory, Joyce’s leadership
was clearly a valuable and rare resource that helped his firm prosper.
Also important is human resource management, which involves the recruitment, training, and
compensation of employees. A recent research study used data from more than twelve thousand
organizations to demonstrate that the knowledge, skills, and abilities of a firm’s employees can act as a
strategic resource and strongly influence the firm’s performance. [2] Certainly, the unique level of
dedication demonstrated by employees at Southwest Airlines has contributed to that firm’s excellent
performance over several decades.
Technology refers to the use of computerization and telecommunications to support primary activities.
Although doughnut making is not a high-tech business, technology plays a variety of roles for doughnut
shops, such as allowing customers to use credit cards. Procurement is the process of negotiating for and
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purchasing raw materials. Large doughnut chains such as Dunkin’ Donuts and Krispy Kreme can gain cost
advantages over their smaller rivals by purchasing flour, sugar, and other ingredients in bulk. Meanwhile,
Southwest Airlines has gained an advantage over its rivals by using futures contracts within its
procurement process to minimize the effects of rising fuel prices.
From the Value Chain to Best Value Supply Chains
“Time is money!” warns a famous saying. This simple yet profound statement suggests that organizations
that quickly complete their work will enjoy greater profits, while slower-moving firms will suffer. The
belief that time is money has encouraged the modern emphasis on supply chain management. A
supply chain is a system of people, activities, information, and resources involved in creating a product
and moving it to the customer. A supply chain is a broader concept than a value chain; the latter refers to
activities within one firm, while the former captures the entire process of creating and distributing a
product, often across several firms.
Competition in the twenty-first century requires an approach that considers the supply chain concept in
tandem with the value-creation process within a firm: best value supply chains. These chains do not fixate
on speed or on any other single metric. Instead, relative to their peers, best value supply chains focus on
the total value added to the customer.
Creating best value supply chains requires four components. The first is
strategic supply chain management—the use of supply chains as a means to create competitive advantages
and enhance firm performance. Such an approach contradicts the popular wisdom centered on the need
to maximize speed. Instead, there is recognition that the fastest chain may not satisfy customers’ needs.
Best value supply chains strive to excel along four measures. Speed (or “cycle time”) is the time duration
from initiation to completion of the production and distribution process. Quality refers to the relative
reliability of supply chain activities. Supply chains’ efforts at managing cost involve enhancing value by
either reducing expenses or increasing customer benefits for the same cost level. Flexibility refers to a
supply chain’s responsiveness to changes in customers’ needs. Through balancing these four metrics, best
value supply chains attempt to provide the highest level of total value added.
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The value of strategic supply chain management is reflected in how firms such as Walmart have used their
supply chains as competitive weapons to gain advantages over peers. Walmart excels in terms of speed
and cost by locating all domestic stores within one day’s drive of a warehouse while owning a trucking
fleet. This creates distribution speed and economies of scale that competitors simply cannot match. When
Kmart’s executives decided in the late 1990s to compete head-to-head with Walmart on price, Walmart’s
sophisticated logistics system enabled it to easily withstand the price war. Unable to match its rival’s
speed and costs, Kmart soon plunged into bankruptcy. Walmart’s supply chains also possess strong
quality and flexibility. When Hurricane Katrina devastated the Gulf Coast in 2005, Walmart used not only
its warehouses and trucks but also its satellite technology, radio frequency identification (RFID), and
global positioning systems to quickly divert assets to affected areas. The result was that Walmart emerged
as the first responder in many towns and provided essentials such as drinking water faster than local and
federal governments could.
Meanwhile, failing to manage a supply chain effectively causes serious harm. For example, in 2003
Motorola was unable to meet demand for its new camera phones because it did not have enough lenses
available. Also, firms whose supply chains were centered in the Port of Los Angeles collectively lost more
than $2 billion a day during a 2002 workers’ strike. In terms of stock price, firms’ market value erodes by
an average of 10 percent following the announcement of a major supply chain problem.
The second component is agility, the supply chain’s relative capacity to act rapidly in response to dramatic
changes in supply and demand. [3] Agility can be achieved using buffers. Excess capacity, inventory, and
management information systems all provide buffers that better enable a best value supply chain to
service and to be more responsive to its customers. Rapid improvements and decreased costs in deploying
information systems have enabled supply chains in recent years to reduce inventory as a buffer. Much
popular thinking depicts inventory reduction as a goal in and of itself. However, this cannot occur without
corresponding increases in buffer capacity elsewhere in the chain, or performance will suffer. A best value
supply chain seeks to optimize the total costs of all buffers used. The costs of deploying each buffer differs
across industries; therefore, no solution that works for one company can be directly applied to another in
a different industry without adaptation.
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Agility in a supply chain can also be improved and achieved by colocating with the customer. This
arrangement creates an information flow that cannot be duplicated through other methods. Daily face-to-
face contact for supply chain personnel enables quicker response times to customer demands due to the
speed at which information can travel back and forth between the parties. Again, this buffer of increased
and improved information flows comes at an expense, so executives seeking to build a best value supply
chain will investigate the opportunity and determine whether this action optimizes total costs.
Adaptability refers to a willingness and capacity to reshape supply chains when necessary. Generally,
creating one supply chain for a customer is desired because this helps minimize costs. Adaptable firms
realize that this is not always a best value solution, however. For example, in the defense industry, the US
Army requires one class of weapon simulators to be repaired within eight hours, while another class of
items can be repaired and returned within one month. To service these varying requirements efficiently
and effectively, Computer Science Corporation (the firm whose supply chains maintain the equipment)
must devise adaptable supply chains. In this case, spare parts inventory is positioned in proximity to the
class of simulators requiring quick turnaround, while the less-time-sensitive devices are sent to a
centralized repair facility. This supply chain configuration allows Computer Science Corporation to satisfy
customer demands while avoiding the excess costs that would be involved in localizing all repair activities.
In situations in which the interests of one firm in the chain and the chain as a whole conflict, most
executives will choose an option that benefits their firm. This creates a need for alignment among chain
members. Alignment refers to creating consistency in the interests of all participants in a supply chain. In
many situations, this can be accomplished through carefully writing incentives into contracts.
Collaborative forecasting with suppliers and customers can also help build alignment. Taking the time to
sit together with participants in the supply chain to agree on anticipated business levels permits shared
understanding and rapid information transfers between parties. This is particularly valuable when
customer demand is uncertain, such as in the retail industry. [4]
K E Y T A K E A W A Y
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x The value chain provides a useful tool for managers to examine systematically where value may be added
to their organizations. This tool is useful in that it examines key elements in the production of a good or
service, as well as areas in which value may be added in support of those primary activities.
E X E R C I S E S
1. If you were hired as a consultant for your university, what specific element of the value chain would you
seek to improve first?
2. What local business in your town could be improved most dramatically by applying the value chain?
Would improvements of primary or support activities help to improve this firm most? Could knowledge of
strategic supply chain management add further value to this firm?
[1] Porter, M. E. 1985. Competitive advantage: Creating and sustaining superior performance. New York, NY: Free
Press.
[2] Crook, T. R., Todd, S. Y., Combs, J. G., Woehr, D. J., & Ketchen, D. J. 2011. Does human capital matter? A meta-
analysis of the relationship between human capital and firm performance. Journal of Applied Psychology, 96(3),
443–456.
[3] Lee, H. L. 2004, October. The triple-A supply chain. Harvard Business Review, 83, 102–112.
[4] This section of the chapter is adapted from Ketchen, D. J., Rebarick, W., Hult, G. T., & Meyer, D. 2008. Best
value supply chains: A key competitive weapon for the 21st century. Business Horizons, 51, 235–243.
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4.4 Beyond Resource-Based Theory: Other Views on Firm
Performance
L E A R N I N G O B J E C T I V E S
1. Be able to discuss other theories about firm success and failure beyond resource-based theory.
2. Be able to apply different theories to help explain competition in different industries.
Although resource-based theory stands as perhaps the most popular explanation of why some
organizations prosper while others do not, several other theories are popular. Enactment treats
executives as the masters of their domains. Enactment contends that an organization can, at least in
part, create an environment for itself that is beneficial to the organization. This is accomplished by
putting strategies in place that reshape competitive conditions in a favorable way.
By the 1990s, Microsoft had been so successful at reshaping the software industry to its benefit that
the firm was the subject of a lengthy antitrust investigation by the federal government. More
recently, Apple has been able to reshape its environment by introducing products such as the iPhone
and the iPad that transcend the traditional boundaries between the cell phone, digital camera, music
player, and computer businesses. No airline has ever been able to enact the environment, however,
perhaps because the airline industry is so fragmented.
Environmental determinism offers a completely opposite view from enactment on why some firms
succeed and others fail. Environmental determinism views organizations much like biological
theories view animals—organizations (and animals) are very limited in their ability to adapt to the
conditions around them. Thus just as harsh environmental changes are believed to have made
dinosaurs extinct, changes in the business environment can destroy organizations regardless of how
clever and insightful executives are.
Until 1978, the federal government regulated the airline industry by dictating what routes each
airline would fly and what prices it would charge. Once these controls were removed, airlines were
subjected to a series of negative environmental trends, including recession, overcapacity in the
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industry, new entrants, fierce price competition, and fuel shortages. Perhaps not surprisingly, dozens
of airlines have been crushed by these conditions.
An old saying notes that “imitation is the sincerest form of flattery.” This flattery is the focus
of institutional theory. In particular, institutional theory centers on the extent to which firms copy one
another’s strategies. Consider, for example, fast-food hamburger restaurants. Innovations such as
dollar menus and drive-through windows tend to be introduced by one firm and then duplicated by
the others.
Airlines also seem to follow a “monkey see, monkey do” mentality. To build passenger loyalty,
American Airlines introduced a frequent flyer program called AAdvantage in 1981. After flying a
certain number of miles on American flights, AAdvantage members were rewarded with a free flight.
The idea was to make passengers less likely to shop around for the cheapest ticket. Ironically,
AAdvantage turned out to be not much of an advantage at all. Many of American’s rivals quickly
developed their own frequent-flyer programs, and today most airlines reward frequent passengers.
In recent years, ideas such as charging passengers to check their luggage and eliminating free food
on flights have been copied by one airline after another.
Transaction cost economics is a theory that centers on just one element of business activity: whether it
is cheaper for a firm to make or to buy the products that it needs. This is an important element,
however, because choosing the more efficient option can enhance a firm’s profits. Automakers such
as Ford and General Motors face a wide variety of make-or-buy decisions because so many different
parts are needed to build cars and trucks. Sometimes Ford and GM make these products, and other
times they purchase them from outside suppliers. These firms’ financial situations are improved
when these decisions are made wisely and harmed when they are made poorly.
In contrast, airlines always buy (or rent) their airplanes. Large planes are generally bought from
Boeing or Airbus, while modest-sized airliners are purchased from companies such as Brazil’s
Embraer. It would be simply too costly for an airline to pursue a backward integration strategy and
enter the airplane manufacturing business. Insights such as these are powerful enough that the
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creator of transaction cost economics, Professor Oliver Williamson, was awarded a Nobel Prize in
Economic Sciences in 2009.
Each of these theories—enactment, environmental determinism, institutional theory, and
transaction cost economics—is useful for understanding some situations and some important
business decisions. Thus executives should keep these perspectives in mind as they attempt to lead
their firms to greater levels of success. However, one important advantage that resource-based
theory offers over the alternatives is that only resource-based theory does a good job of explaining
firm performance across a wide variety of contexts. Thus resource-based theory offers the point of
view of business that has the strongest value for most executives.
K E Y T A K E A W A Y
x Although resource-based theory is the dominant perspective to predict performance in the strategic
management field, other theories exist to explain firm behavior. In some industries, explanations
provided by these theories can be very convincing.
E X E R C I S E S
1. What theory of the firm do you think best explains competition in the fast-food industry?
2. What is an example of an industry in which institutional theory seems to explain the behavior of firms?
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4.5 SWOT Analysis
L E A R N I N G O B J E C T I V E S
1. Understand what SWOT analysis is.
2. Learn how SWOT analysis can help organizations and individuals, and its limitations.
Five forces analysis examines the situation faced by the competitors in an industry. Strategic groups
analysis narrows the focus by centering on subsets of these competitors whose strategies are
similar. SWOT analysis takes an even narrower focus by centering on an individual firm. Specifically,
SWOT analysis is a tool that considers a firm’s strengths and weaknesses along with the
opportunities and threats that exist in the firm’s environment.
Executives using SWOT analysis compare these internal and external factors to generate ideas about
how their firm might become more successful. In general, it is wise to focus on ideas that allow a firm
to leverage its strengths, steer clear of or resolve its weaknesses, capitalize on opportunities, and
protect itself against threats. For example, untapped overseas markets have presented potentially
lucrative opportunities to Subway and other restaurant chains such as McDonald’s and Kentucky
Fried Chicken. Meanwhile, Subway’s strengths include a well-established brand name and a simple
business format that can easily be adapted to other cultures. In considering the opportunities offered
by overseas markets and Subway’s strengths, it is not surprising that entering and expanding in
different countries has been a key element of Subway’s strategy in recent years. Indeed, Subway
currently has operations in nearly 100 nations.
SWOT analysis is helpful to executives, and it is used within most organizations. Important cautions
need to be offered about SWOT analysis, however. First, in laying out each of the four elements of
SWOT, internal and external factors should not be confused with each other. It is important not to
list strengths as opportunities, for example, if executives are to succeed at matching internal and
external concerns during the idea generation process. Second, opportunities should not be confused
with strategic moves designed to capitalize on these opportunities. In the case of Subway, it would be
a mistake to list “entering new countries” as an opportunity. Instead, untapped markets are the
opportunity presented to Subway, and entering those markets is a way for Subway to exploit the
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opportunity. Finally, and perhaps most important, the results of SWOT analysis should not be
overemphasized. SWOT analysis is a relatively simple tool for understanding a firm’s situation. As a
result, SWOT is best viewed as a brainstorming technique for generating creative ideas, not as a
rigorous method for selecting strategies. Thus the ideas produced by SWOT analysis offer a starting
point for executives’ efforts to craft strategies for their organization, not an ending point.
In addition to organizations, individuals can benefit from applying SWOT analysis to their personal
situation. A college student who is approaching graduation, for example, could lay out her main
strengths and weaknesses and the opportunities and threats presented by the environment. Suppose,
for instance, that this person enjoys and is good at helping others (a strength) but also has a rather
short attention span (a weakness). Meanwhile, opportunities to work at a rehabilitation center or to
pursue an advanced degree are available. Our hypothetical student might be wise to pursue a job at
the rehabilitation center (where her strength at helping others would be a powerful asset) rather than
entering graduate school (where a lot of reading is required and her short attention span could
undermine her studies).
K E Y T A K E A W A Y
x Executives using SWOT analysis compare internal strengths and weaknesses with external opportunities
and threats to generate ideas about how their firm might become more successful. Ideas that allow a firm
to leverage its strengths, steer clear of or resolve its weaknesses, capitalize on opportunities, and protect
itself against threats are particularly helpful.
E X E R C I S E S
1. What do each of the letters in SWOT represent?
2. What are your key strengths, and how might you build your own personal strategies for success around
them?
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4.6 Conclusion
This chapter explains key issues that executives face in managing resources to keep their firms
competitive. Resource-based theory argues that firms will perform better when they assemble
resources that are valuable, rare, difficult to imitate, and nonsubstitutable. When executives can
successfully bundle organizational resources into unique capabilities, the firm is more likely to enjoy
lasting success. Different forms of intellectual property—which include patents, trademarks,
copyrights, and trade secrets—may also serve as strategic resources for firms. Examining a firm’s
resources can be aided by the value chain, a tool that systematically examines primary and secondary
activities in the creation of a good or service and by a knowledge of supply chain management that
examines the value added of multiple firms working together. While resource-based theory provides
a dominant view for examining the determinants of firm success, other perspectives provide insight
for understanding specific behaviors of firms within an industry. Finally, SWOT analysis is a simple
but powerful technique for examining the interactions between factors internal and external to the
firm.
E X E R C I S E S
1. Divide your class into four or eight groups, depending on the size of the class. Each group should search
for a patent tied to a successful product, as well as a patent associated with a product that was not a
commercial hit. Were there resources tied to the successful organization that the poor performer did not
seem to attain?
2. This chapter discussed Southwest Airlines. Based on your reading of the chapter, how well has Southwest
done in bundling together the resources recommended by resource-based theory? What theoretical
perspective best explains the competitive actions of most firms in the airline industry?
3. Conduct a SWOT analysis of your college or university. Based on your analysis, what one strategic move
should your school make first, and why?
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more than 3,200 Kentucky Fried Chicken stores. Overall, Subway was on a roll, and this success seemed
likely to continue.
How had Subway surpassed a global icon like McDonald’s? One key factor was Subway’s efforts to provide
and promote healthy eating options. This emphasis took hold in the late 1990s when the American public
became captivated by college student Jared Fogle. As a freshman at Indiana University in 1998, the 425
pound Fogle decided to try to lose weight by walking regularly and eating a diet consisting of Subway
subs. Amazingly, Fogle dropped 245 pounds by February of 1999.
Subway executives knew that a great story had fallen into their laps. They decided to feature Fogle in
Subway’s advertising and soon he was a well-known celebrity. In 2007, Fogle met with President Bush
about nutrition and testified before the US Congress about the need for healthier snack options in schools.
Today, Fogle is the face of Subway and one of the few celebrities that are instantly recognizable based on
his first name alone. Much like Beyoncé and Oprah, you can mention “Jared” to almost anyone in America
and that person will know exactly of whom you are speaking. Subway’s line of Fresh Fit sandwiches is
targeted at prospective Jareds who want to improve their diets.
Because American diets contain too much salt, which can cause high blood pressure, salt levels in
restaurant food are attracting increased scrutiny. Subway responded to this issue in April 2011 when its
outlets in the United States reduced the amount of salt in all its sandwiches by at least 15 percent without
any alteration in taste. The Fresh Fit line of sandwiches received a more dramatic 28 percent reduction in
salt. These changes were enacted after customers of Subway’s outlets in New Zealand and Australia
embraced similar adjustments. Although the new sandwich recipes cost slightly more than the old ones,
Subway plans to absorb these costs rather than raising their prices. [2] This may be a wise strategy for
retaining customers, who have become very price sensitive because of the ongoing uncertainty
surrounding the American economy and the high unemployment.
[1] Kingsley, P. 2011, March 9. How a sandwich franchise ousted McDonald’s. The Guardian. Retrieved
from http://www.guardian.co.uk/lifeandstyle/2011/mar/09/subway-biggest -fast-food-chain
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[2] Riley, C. 2011, April. Subway lowers salt in its sandwiches. CNNMoney. Retrieved from
http://money.cnn.com/2011/04/18/news/companies/subway_salt/index.htm
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3.1 The Relationship between an Organization and Its
Environment
L E A R N I N G O B J E C T I V E S
1. Define the environment in the context of business.
2. Understand how an organization and its environment affect each other.
3. Learn the difference between the general environment and the industry.
What Is the Environment?
For any organization, the environment consists of the set of external conditions and forces that have the
potential to influence the organization. In the case of Subway, for example, the environment contains its
customers, its rivals such as McDonald’s and Kentucky Fried Chicken, social trends such as the shift in
society toward healthier eating, political entities such as the US Congress, and many additional conditions
and forces.
It is useful to break the concept of the environment down into two components.
The general environment (or macroenvironment) includes overall trends and events in society such as
social trends, technological trends, demographics, and economic conditions. The
industry (or competitive environment) consists of multiple organizations that collectively compete with
one another by providing similar goods, services, or both.
Every action that an organization takes, such as raising its prices or launching an advertising campaign,
creates some degree of changes in the world around it. Most organizations are limited to influencing their
industry. Subway’s move to cut salt in its sandwiches, for example, may lead other fast-food firms to
revisit the amount of salt contained in their products. A few organizations wield such power and influence
that they can shape some elements of the general environment. While most organizations simply react to
major technological trends, for example, the actions of firms such as Intel, Microsoft, and Apple help
create these trends. Some aspects of the general environment, such as demographics, simply must be
taken as a given by all organizations. Overall, the environment has a far greater influence on most
organizations than most organizations have on the environment.
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Why Does the Environment Matter?
Understanding the environment that surrounds an organization is important to the executives in charge
of the organizations. There are several reasons for this. First, the environment provides resources that an
organization needs in order to create goods and services. In the seventeenth century, British poet John
Donne famously noted that “no man is an island.” Similarly, it is accurate to say that no organization is
self-sufficient. As the human body must consume oxygen, food, and water, an organization needs to take
in resources such as labor, money, and raw materials from outside its boundaries. Subway, for example,
simply would cease to exist without the contributions of the franchisees that operate its stores, the
suppliers that provide food and other necessary inputs, and the customers who provide Subway with
money through purchasing its products. An organization cannot survive without the support of its
environment.
Second, the environment is a source of opportunities and threats for an organization. Opportunities are
events and trends that create chances to improve an organization’s performance level. In the late 1990s,
for example, Jared Fogle’s growing fame created an opportunity for Subway to position itself as a healthy
alternative to traditional fast-food restaurants. Threats are events and trends that may undermine an
organization’s performance. Subway faces a threat from some upstart restaurant chains. Saladworks, for
example, offers a variety of salads that contain fewer than five hundred calories. Noodles and Company
offers a variety of sandwiches, pasta dishes, and salads that contain fewer than four hundred calories.
These two firms are much smaller than Subway, but they could grow to become substantial threats to
Subway’s positioning as a healthy eatery.
Executives must also realize that virtually any environmental trend or event is likely to create
opportunities for some organizations and threats for others. This is true even in extreme cases. In
addition to horrible human death and suffering, the March 2011 earthquake and tsunami in Japan
devastated many organizations, ranging from small businesses that were simply wiped out to corporate
giants such as Toyota whose manufacturing capabilities were undermined. As odd as it may seem,
however, these tragic events also opened up significant opportunities for other organizations. The
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rebuilding of infrastructure and dwellings requires concrete, steel, and other materials. Japanese concrete
manufacturers, steelmakers, and construction companies are likely to be very busy in the years ahead.
Third, the environment shapes the various strategic decisions that executives make as they attempt to lead
their organizations to success. The environment often places important constraints on an organization’s
goals, for example. A firm that sets a goal of increasing annual sales by 50 percent might struggle to
achieve this goal during an economic recession or if several new competitors enter its business.
Environmental conditions also need to be taken into account when examining whether to start doing
business in a new country, whether to acquire another company, and whether to launch an innovative
product, to name just a few.
K E Y T A K E A W A Y
x An organization’s environment is a major consideration. The environment is the source of resources that
the organizations needs. It provides opportunities and threats, and it influences the various strategic
decisions that executives must make.
E X E R C I S E S
1. What are the three reasons that the environment matters?
2. Which of these three reasons is most important? Why?
3. Can you identify an environmental trend that no organizations can influence?
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3.2 Evaluating the General Environment
L E A R N I N G O B J E C T I V E S
1. Explain how PESTEL analysis is useful to organizations.
2. Be able to offer an example of each of the elements of the general environment.
The Elements of the General Environment: PESTEL Analysis
An organization’s environment includes factors that it can readily affect as well as factors that largely lay
beyond its influence. The latter set of factors are said to exist within the general environment. Because the
general environment often has a substantial influence on an organization’s level of success, executives
must track trends and events as they evolve and try to anticipate the implications of these trends and
events.
PESTEL analysis is one important tool that executives can rely on to organize factors within the general
environment and to identify how these factors influence industries and the firms within them. PESTEL is
an anagram, meaning it is a word that created by using parts of other words. In particular, PESTEL
reflects the names of the six segments of the general environment: (1) political, (2) economic, (3) social,
(4) technological, (5) environmental, and (6) legal. Wise executives carefully examine each of these six
segments to identify major opportunities and threats and then adjust their firms’ strategies accordingly.
P Is for “Political”
The political segment centers on the role of governments in shaping business. This segment includes
elements such as tax policies, changes in trade restrictions and tariffs, and the stability of governments.
Immigration policy is an aspect of the political segment of the general environment that offers important
implications for many different organizations. What approach to take to illegal immigration into the United
States from Mexico has been a hotly debated dilemma. Some hospital executives have noted that illegal
immigrants put a strain on the health care system because immigrants seldom can pay for medical
services and hospitals cannot by law turn them away from emergency rooms.
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Meanwhile, farmers argue that a tightening of immigration policy would be harmful because farmers rely
heavily on cheap labor provided by illegal immigrants. In particular, if farmers were forced to employ only
legal workers, this would substantially increase the cost of vegetables. Restaurant chains such as Subway
would then pay higher prices for lettuce, tomatoes, and other perishables. Subway would then have to
decide whether to absorb these costs or pass them along to customers by charging more for subs. Overall,
any changes in immigration policy will have implications for hospitals, farmers, restaurants, and many
other organizations.
E Is for “Economic”
The economic segment centers on the economic conditions within which organizations operate. It
includes elements such as interest rates, inflation rates, gross domestic product, unemployment rates,
levels of disposable income, and the general growth or decline of the economy.
The economic crisis of the late 2000s has had a tremendous negative effect on a vast array of
organizations. Rising unemployment discouraged consumers from purchasing expensive, nonessential
goods such as automobiles and television sets. Bank failures during the economic crisis led to a dramatic
tightening of credit markets. This dealt a huge blow to home builders, for example, who saw demand for
new houses plummet because mortgages were extremely difficult to obtain.
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Some businesses, however, actually prospered during the crisis. Retailers that offer deep discounts, such
as Dollar General and Walmart, enjoyed an increase in their customer base as consumers sought to find
ways to economize. Similarly, restaurants such as Subway that charge relatively low prices gained
customers, while high-end restaurants such as Ruth’s Chris Steak House worked hard to retain their
clientele.
S Is for “Social”
A generation ago, ketchup was an essential element of every American pantry and salsa was a relatively
unknown product. Today, however, food manufacturers sell more salsa than ketchup in the United States.
This change reflects the social segment of the general environment. Social factors include trends in
demographics such as population size, age, and ethnic mix, as well as cultural trends such as attitudes
toward obesity and consumer activism. The exploding popularity of salsa reflects the increasing number
of Latinos in the United States over time, as well as the growing acceptance of Latino food by other
ethnic groups.
Sometimes changes in the social segment arise from unexpected sources. Before World War II, the
American workforce was overwhelmingly male. When millions of men were sent to Europe and Asia to
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fight in the war, however, organizations had no choice but to rely heavily on female employees. At the
time, the attitudes of many executives toward women were appalling. Consider, for example, some of the
advice provided to male supervisors of female workers in the July 1943 issue of Transportation
Magazine: [1]
x Older women who have never contacted the public have a hard time adapting themselves and are
inclined to be cantankerous and fussy. It’s always well to impress upon older women the importance
of friendliness and courtesy.
x General experience indicates that “husky” girls—those who are just a little on the heavy side—are
more even tempered and efficient than their underweight sisters.
x Give every girl an adequate number of rest periods during the day. You have to make some allowances
for feminine psychology. A girl has more confidence and is more efficient if she can keep her hair
tidied, apply fresh lipstick and wash her hands several times a day.
The tremendous contributions of female workers during the war contradicted these awful stereotypes. The
main role of women who assembled airplanes, ships, and other war materials was to support the military,
of course, but their efforts also changed a lot of male executives’ minds about what females could
accomplish within organizations if provided with opportunities. Inequities in the workplace still exist
today, but modern attitudes among men toward women in the workplace are much more enlightened than
they were in 1943.
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Women’s immense contributions to the war effort during World War II helped create positive
social changes in the ensuing decades.
Image courtesy of J. Howard Miller, http://en.wikipedia.org/wiki/File:We_Can_Do_It! .
Beyond being a positive social change, the widespread acceptance of women into the workforce has
created important opportunities for certain organizations. Retailers such as Talbot’s and Dillard’s sell
business attire to women. Subway and other restaurants benefit when the scarceness of time lead dual
income families to purchase take-out meals rather than cook at home.
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T Is for “Technological”
The technological segment centers on improvements in products and services that are provided by
science. Relevant factors include, for example, changes in the rate of new product development, increases
in automation, and advancements in service industry delivery. One key feature of the modern era
is the ever-increasing pace of technological innovation. In 1965, Intel cofounder Gordon E. Moore
offered an idea that has come to be known as Moore’s law. Moore’s law suggests that the performance
of microcircuit technology roughly doubles every two years. This law has been very accurate in the
decades since it was offered.
One implication of Moore’s law is that over time electronic devices can become smaller but also more
powerful. This creates important opportunities and threats in a variety of settings. Consider, for example,
photography. Just a decade ago, digital cameras were relatively large and they produced mediocre images.
With each passing year, however, digital cameras have become smaller, lighter, and better. Today, digital
cameras are, in essence, minicomputers, and electronics firms such as Panasonic have been able to
establish strong positions in the market. Meanwhile, film photography icon Kodak has been forced to
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abandon products that had been successful for decades. In 2005, the firm announced that it would stop
producing black-and-white photographic paper. Four years later, Kodachrome color film was phased out.
Successful technologies are also being embraced at a much faster rate than in earlier generations. The
Internet reached fifty million users in only four years. In contrast, television reached the same number of
users in thirteen years while it took radio thirty-eight years. This trend creates great opportunities for
organizations that depend on emerging technologies. Writers of applications for Apple’s iPad and other
tablet devices, for example, are able to target a fast-growing population of users. At the same time,
organizations that depend on technologies that are being displaced must be aware that consumers could
abandon them at a very rapid pace. As more and more Internet users rely on Wi-Fi service, for example,
demand for cable modems may plummet.
Although the influence of the technological segment on technology-based companies such as Panasonic
and Apple is readily apparent, technological trends and events help to shape low-tech businesses too. In
2009, Subway started a service called Subway Now. This service allows customers to place their orders in
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advance using text messages and avoid standing in line at the store. By offering customers this service,
Subway is also responding to a trend in the general environment’s social segment: the need to save time in
today’s fast-paced society.
E Is for “Environmental”
The environmental segment involves the physical conditions within which organizations operate. It
includes factors such as natural disasters, pollution levels, and weather patterns. The threat of
pollution, for example, has forced municipalities to treat water supplies with chemicals. These chemicals
increase the safety of the water but detract from its taste. This has created opportunities for businesses that
provide better-tasting water. Rather than consume cheap but bad-tasting tap water, many consumers
purchase bottled water. Indeed, according to the Beverage Marketing Corporation, the amount of bottled water
consumed by the average American increased from 1.6 gallons in 1976 to 28.3 gallons in 2006.[2]
At present, roughly one-third of Americans drink bottled water regularly.
As is the case for many companies, bottled water producers not only have benefited from the general
environment but also have been threatened by it. Some estimates are that 80 percent of plastic bottles end
up in landfills. This has led some socially conscious consumers to become hostile to bottled water.
Meanwhile, water filtration systems offered by Brita and other companies are a cheaper way to obtain
clean and tasty water. Such systems also hold considerable appeal for individuals who feel the need to cut
personal expenses due to economic conditions. In sum, bottled water producers have been provided
opportunities by the environmental segment of the general environment (specifically, the spread of poor-
tasting water to combat pollution) but are faced with threats from the social segment (the social
conscience of some consumers) and the economic segment (the financial concerns of other consumers).
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L Is for “Legal”
The legal segment centers on how the courts influence business activity. Examples of important legal
factors include employment laws, health and safety regulations, discrimination laws, and antitrust laws.
Intellectual property rights are a particularly daunting aspect of the legal segment for many organizations.
When a studio such as Pixar produces a movie, a software firm such as Adobe revises a program, or a
video game company such as Activision devises a new game, these firms are creating intellectual property.
Such firms attempt to make profits by selling copies of their movies, programs, and games to individuals.
Piracy of intellectual property—a process wherein illegal copies are made and sold by others—poses a
serious threat to such profits. Law enforcement agencies and courts in many countries, including the
United States, provide organizations with the necessary legal mechanisms to protect their intellectual
property from piracy.
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In other countries, such as China, piracy of intellectual property is quite common. Three other general
environment segments play a role in making piracy a major concern. First, in terms of the social segment,
China is the most populous country in the world. Second, in terms of the economic segment, China’s
affluence is growing rapidly. Third, in terms of the technological segment, rapid advances in computers
and communication have made piracy easier over time. Taken together, these various general
environment trends lead piracy to be a major source of angst for firms that rely on intellectual property to
deliver profits.
K E Y T A K E A W A Y
x To transform an avocado into guacamole, a chef may choose to use a mortar and pestle. A mortar is a
mashing device that is shaped liked a baseball bat, while a pestle is a sturdy bowl within which the
mashing takes place. Similarly, PESTEL reflects the general environment factors—political, economic,
social, technological, environmental, and legal—that can crush an organization. In many cases, executives
can prevent such outcomes by performing a PESTEL analysis to diagnose where in the general
environment important opportunities and threats arise.
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E X E R C I S E S
1. What does each letter of PESTEL mean?
2. Using a recent news article, identify a trend that has a positive and negative implication for a particular
industry.
3. Can you identify a general environment trend that has positive implications for nursing homes but
negative implications for diaper makers?
4. Are all six elements of PESTEL important to every organization? Why or why not?
5. What is a key trend for each letter of PESTEL and one industry or firm that would be affected by that
trend?
[1] 1943 guide to hiring women. 2007, September–October. Savvy & Sage, p. 16.
[2] Plastic recycling facts. earth911.com. Retrieved from http://earth911.com/recycling/plastic/plastic-bottle-
recycling-facts
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3.3 Evaluating the Industry
L E A R N I N G O B J E C T I V E S
1. Explain how five forces analysis is useful to organizations.
2. Be able to offer an example of each of the five forces.
The Purpose of Five Forces Analysis
Visit the executive suite of any company and the chances are very high that the chief executive officer and
her vice presidents are relying on five forces analysis to understand their industry. Introduced more than
thirty years ago by Professor Michael Porter of the Harvard Business School, five forces analysis has long
been and remains perhaps the most popular analytical tool in the business world.
Adapted from Porter, M. (1980). Competitive strategy. New York: Free Press.
The purpose of five forces analysis is to identify how much profit potential exists in an industry. To do so,
five forces analysis considers the interactions among the competitors in an industry, potential new
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entrants to the industry, substitutes for the industry’s offerings, suppliers to the industry, and the
industry’s buyers. [1] If none of these five forces works to undermine profits in the industry, then the profit
potential is very strong. If all the forces work to undermine profits, then the profit potential is very weak.
Most industries lie somewhere in between these extremes. This could involve, for example, all five forces
providing firms with modest help or two forces encouraging profits while the other three undermine
profits. Once executives determine how much profit potential exists in an industry, they can then decide
what strategic moves to make to be successful. If the situation looks bleak, for example, one possible move
is to exit the industry.
The Rivalry among Competitors in an Industry
The competitors in an industry are firms that produce similar products or services. Competitors use a
variety of moves such as advertising, new offerings, and price cuts to try to outmaneuver one another to
retain existing buyers and to attract new ones. Because competitors seek to serve the same general set of
buyers, rivalry can become intense. Subway faces fierce competition within the restaurant business,
for example. This is illustrated by a quote from the man who built McDonald’s into a worldwide icon.
Former CEO Ray Kroc allegedly once claimed that “if any of my competitors were
drowning, I’d stick a hose in their mouth.” While this sentiment was (hopefully) just a figure of speech,
the announcement in March 2011 that Subway had surpassed McDonald’s in terms of numbers of stores
might lead the hostility of McDonald’s toward its rival to rise.
Understanding the intensity of rivalry among an industry’s competitors is important because the degree of
intensity helps shape the industry’s profit potential. Of particular concern is whether firms in an industry
compete based on price. When competition is bitter and cutthroat, the prices competitors charge—and
their profit margins—tend to go down. If, on the other hand, competitors avoid bitter rivalry, then price
wars can be avoided and profit potential increases.
Every industry is unique to some degree, but there are some general characteristics that help to predict
the likelihood that fierce rivalry will erupt. Rivalry tends to be fierce, for example, to the extent that the
growth rate of demand for the industry’s offerings is low (because a lack of new customers forces firms to
compete more for existing customers), fixed costs in the industry are high (because firms will fight to have
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enough customers to cover these costs), competitors are not differentiated from one another (because this
forces firms to compete based on price rather than based on the uniqueness of their offerings),
and exit barriers in the industry are high (because firms do not have the option of leaving the industry
gracefully). Exit barriers can include emotional barriers, such as the bad publicity associated with massive
layoffs, or more objective reasons to stay in an industry, such as a desire to recoup considerable costs that
might have been previously spent to enter and compete.
Industry concentration is an important aspect of competition in many industries. Industry concentration
is the extent to which a small number of firms dominate an industry. Among circuses, for example,
the four largest companies collectively own 89 percent of the market. Meanwhile, these companies tend
to keep their competition rather polite. Their advertising does not lampoon one another, and they do not
put on shows in the same city at the same time. This does not guarantee that the circus industry will be
profitable; there are four other forces to consider as well as the quality of each firm’s strategy.
But low levels of rivalry certainly help build the profit potential of the industry.
In contrast, the restaurant industry is fragmented, meaning that the largest rivals control just a small
fraction of the business and that a large number of firms are important participants. Rivalry in
fragmented industries tends to become bitter and fierce. Quiznos, a chain of sub shops that is roughly 15
percent the size of Subway, has directed some of its advertising campaigns directly at Subway, including
one depicting a fictional sub shop called “Wrong Way” that bore a strong resemblance to Subway.
Within fragmented industries, it is almost inevitable that over time some firms will try to steal customers
from other firms, such as by lowering prices, and that any competitive move by one firm will be matched
by others. In the wake of Subway’s success in offering foot-long subs for $5, for example, Quiznos has
matched Subway’s price. Such price jockeying is delightful to customers, of course, but it tends to reduce
prices (and profit margins) within an industry. Indeed, Quiznos later escalated its attempt to attract
budget-minded consumers by introducing a flatbread sandwich that cost only $2. Overall, when choosing
strategic moves, Subway’s presence in a fragmented industry forces the firm to try to anticipate not only
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how fellow restaurant giants such as McDonald’s and Burger King will react but also how smaller sub
shop chains like Quiznos and various regional and local players will respond.
The Threat of Potential New Entrants to an Industry
Competing within a highly profitable industry is desirable, but it can also attract unwanted attention from
outside the industry. Potential new entrants to an industry are firms that do not currently compete in the
industry but may in the future. New entrants tend to reduce the profit potential of an industry by increasing
its competitiveness. If, for example, an industry consisting of five firms is entered by two new firms, this means
that seven rather than five firms are now trying to attract the same general pool of customers. Thus executives
need to analyze how likely it is that one or more new entrants will enter their industry as part of their effort
to understand the profit potential that their industry offers.
New entrants can join the fray within an industry in several different ways. New entrants can be start-up
companies created by entrepreneurs, foreign firms that decide to enter a new geographic area, supplier
firms that choose to enter their customers’ business, or buyer firms that choose to enter their suppliers’
business. The likelihood of these four paths being taken varies across industries. Restaurant firms such as
Subway, for example, do not need to worry about their buyers entering the industry because they sell
directly to individuals, not to firms. It is also unlikely that Subway’s suppliers, such as farmers, will make
a big splash in the restaurant industry.
On the other hand, entrepreneurs launch new restaurant concepts every year, and one or more of these
concepts may evolve into a fearsome competitor. Also, competitors based overseas sometimes enter
Subway’s core US market. In February 2011, Australia-based Oporto opened its first US store in
California. [2] Oporto operates more than 130 chicken burger restaurants in its home country. Time will
tell whether this new entrant has a significant effect on Subway and other restaurant firms. Because a
chicken burger closely resembles a hamburger, McDonald’s and Burger King may have more to fear from
Oporto than does Subway.
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Every industry is unique to some degree, but some general characteristics help to predict the likelihood
that new entrants will join an industry. New entry is less likely, for example, to the extent that existing
competitors enjoy economies of scale (because new entrants struggle to match incumbents’ prices),
capital requirements to enter the industry are high (because new entrants struggle to gather enough cash
to get started), access to distribution channels is limited (because new entrants struggle to get their
offerings to customers), governmental policy discourages new entry, differentiation among existing
competitors is high (because each incumbent has a group of loyal customers that enjoy its unique
features), switching costs are high (because this discourages customers from buying a new entrant’s
offerings), expected retaliation from existing competitors is high, and cost advantages independent of size
exist.
The Threat of Substitutes for an Industry’s Offerings
Executives need to take stock not only of their direct competition but also of players in other industries
that can steal their customers. Substitutes are offerings that differ from the goods and services provided
by the competitors in an industry but that fill similar needs to what the industry offers.How strong of a
threat substitutes are depends on how effective substitutes are in serving an industry’s customers.
At first glance, it could appear that the satellite television business is a tranquil one because there are only
two significant competitors—DIRECTV and DISH Network. These two industry giants, however, face a
daunting challenge from substitutes. The closest substitute for satellite television is provided by cable
television firms, such as Comcast and Charter Communications. DIRECTV and DISH Network also need
to be wary of streaming video services, such as Netflix, and video rental services, such as Redbox. The
availability of viable substitutes places stringent limits on what DIRECTV and DISH Network can charge
for their services. If the satellite television firms raise their prices, customers will be tempted to obtain
video programs from alternative sources. This limits the profit potential of the satellite television
business.
In other settings, viable substitutes are not available, and this helps an industry’s competitors enjoy
profits. Like lightbulbs, candles can provide lighting within a home. Few consumers, however, would be
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willing to use candles instead of lightbulbs. Candles simply do not provide as much light as lightbulbs.
Also, the risk of starting a fire when using candles is far greater than the fire risk of using lightbulbs.
Because candles are a poor substitute, lightbulb makers such as General Electric and Siemens do not need
to fear candle makers stealing their customers and undermining their profits.
The dividing line between which firms are competitors and which firms offer substitutes is a challenging
issue for executives. Most observers would agree that, from Subway’s perspective, sandwich maker
Quiznos should be considered a competitor and that grocery stores such as Kroger offer a substitute for
Subway’s offerings. But what about full-service restaurants, such as Ruth’s Chris Steak House, and “fast
causal” outlets, such as Panera Bread? Whether firms such as these are considered competitors or
substitutes depends on how the industry is defined. Under a broad definition—Subway competes in the
restaurant business—Ruth’s Chris and Panera should be considered competitors. Under a narrower
definition—Subway competes in the sandwich business—Panera is a competitor and Ruth’s Chris is a
substitute. Under a very narrow definition—Subway competes in the sub sandwich business—both Ruth’s
Chris and Panera provide substitute offerings. Thus clearly defining a firm’s industry is an important step
for executives who are performing a five forces analysis.
The Power of Suppliers to an Industry
Suppliers provide inputs that the firms in an industry need to create the goods and services that they in
turn sell to their buyers. A variety of supplies are important to companies, including raw materials,
financial resources, and labor. For restaurant firms such as Subway, key suppliers include such firms as Sysco
that bring various foods to their doors, restaurant supply stores that sell kitchen equipment, and
employees that provide labor.
The relative bargaining power between an industry’s competitors and its suppliers helps shape the profit
potential of the industry. If suppliers have greater leverage over the competitors than the competitors
have over the suppliers, then suppliers can increase their prices over time. This cuts into competitors’
profit margins and makes them less likely to be prosperous. On the other hand, if suppliers have less
leverage over the competitors than the competitors have over the suppliers, then suppliers may be forced
to lower their prices over time. This strengthens competitors’ profit margins and makes them more likely
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to be prosperous. Thus when analyzing the profit potential of their industry, executives must carefully
consider whether suppliers have the ability to demand higher prices.
Every industry is unique to some degree, but some general characteristics help to predict the likelihood
that suppliers will be powerful relative to the firms to which they sell their goods and services. Suppliers
tend to be powerful, for example, to the extent that the suppliers’ industry is dominated by a few
companies, if it is more concentrated than the industry that it supplies and/or if there is no effective
substitute for what the supplier group provides. These circumstances restrict industry competitors’ ability
to shop around for better prices and put suppliers in a position of strength.
Supplier power is also stronger to the extent that industry members rely heavily on suppliers to be
profitable, industry members face high costs when changing suppliers, and suppliers’ products are
differentiated. Finally, suppliers possess power to the extent that they have the ability to become a new
entrant to the industry if they wish. This is a strategy calledforward vertical integration. Ford, for
example, used a forward vertical integration strategy when it purchased rental car company (and Ford
customer) Hertz. A difficult financial situation forced Ford to sell Hertz for $5.6 billion in 2005. But
before rental car companies such as Avis and Thrifty drive too hard of a bargain when buying cars from an
automaker, their executives should remember that automakers are much bigger firms than are rental car
companies. The executives running the automaker might simply decide that they want to enjoy the rental
car company’s profits themselves and acquire the firm.
Strategy at the Movies
Flash of Genius
When dealing with a large company, a small supplier can get squashed like a bug on a windshield. That is
what college professor and inventor Dr. Robert Kearns found out when he invented intermittent
windshield wipers in the 1960s and attempted to supply them to Ford Motor Company. As depicted in the
2008 movie Flash of Genius, Kearns dreamed of manufacturing the wipers and selling them to Detroit
automakers. Rather than buy the wipers from Kearns, Ford replicated the design. An angry Kearns then
spent many years trying to hold the firm accountable for infringing on his patent. Kearns eventually won
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in court, but he paid a terrible personal price along the way, including a nervous breakdown and
estrangement from his family. Kearns’s lengthy battle with Ford illustrates the concept of bargaining
power that is central to Porter’s five forces model. Even though Kearns created an exceptional new
product, he had little leverage when dealing with a massive, well-financed automobile manufacturer.
The Power of an Industry’s Buyers
Buyers purchase the goods and services that the firms in an industry produce. For Subway and other
restaurants, buyers are individual people. In contrast, the buyers for some firms are other firms rather than
end users. For Procter & Gamble, for example, buyers are retailers such as Walmart and Target who
stock Procter & Gamble’s pharmaceuticals, hair care products, pet supplies, cleaning products, and other
household goods on their shelves.
The relative bargaining power between an industry’s competitors and its buyers helps shape the profit
potential of the industry. If buyers have greater leverage over the competitors than the competitors have
over the buyers, then the competitors may be forced to lower their prices over time. This weakens
competitors’ profit margins and makes them less likely to be prosperous. Walmart furnishes a good
example. The mammoth retailer is notorious among manufacturers of goods for demanding lower and
lower prices over time. [3] In 2008, for example, the firm threatened to stop selling compact discs if record
companies did not lower their prices. Walmart has the power to insist on price concessions because its
sales volume is huge. Compact discs make up a small portion of Walmart’s overall sales, so exiting the
market would not hurt Walmart. From the perspective of record companies, however, Walmart is their
biggest buyer. If the record companies were to refuse to do business with Walmart, they would miss out
on access to a large portion of consumers.
On the other hand, if buyers have less leverage over the competitors than the competitors have over the
buyers, then competitors can raise their prices and enjoy greater profits. This description fits the textbook
industry quite well. College students are often dismayed to learn that an assigned textbook costs $150 or
more. Historically, textbook publishers have been able to charge high prices because buyers had no
leverage. A student enrolled in a class must purchase the specific book that the professor has selected.
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Used copies are sometimes a lower-cost option, but textbook publishers have cleverly worked to
undermine the used textbook market by releasing new editions after very short periods of time.
Of course, the presence of a very high profit industry is attractive to potential new entrants. Firms such as
the publisher of this book, have entered the textbook market with lower-priced offerings. Time will tell
whether such offerings bring down textbook prices. Like any new entrant, upstarts in the textbook
business must prove that they can execute their strategies before they can gain widespread acceptance.
Overall, when analyzing the profit potential of their industry, executives must carefully consider whether
buyers have the ability to demand lower prices. In the textbook market, buyers do not.
Every industry is unique to some degree, but some general characteristics help to predict the likelihood
that buyers will be powerful relative to the firms from which they purchases goods and services. Buyers
tend to be powerful, for example, to the extent that there are relatively few buyers compared with the
number of firms that supply the industry, the industry’s goods or services are standardized or
undifferentiated, buyers face little or no switching costs in changing vendors, the good or service
purchased by the buyers represents a high percentage of the buyer’s costs, and the good or service is of
limited importance to the quality or price of the buyer’s offerings.
Finally, buyers possess power to the extent that they have the ability to become a new entrant to the
industry if they wish. This strategy is called backward vertical integration. DIRECTV used to be an
important customer of TiVo, the pioneer of digital video recorders. This situation changed, however, when
executives at DIRECTV grew weary of their relationship with TiVo. DIRECTV then used a backward
vertical integration strategy and started offering DIRECTV-branded digital video recorders. Profits that
used to be enjoyed by TiVo were transferred at that point to DIRECTV.
The Limitations of Five Forces Analysis
Five forces analysis is useful, but it has some limitations too. The description of five forces analysis
provided by its creator, Michael Porter, seems to assume that competition is a zero-sum game, meaning
that the amount of profit potential in an industry is fixed. One implication is that, if a firm is to make
more profit, it must take that profit from a rival, a supplier, or a buyer. In some settings, however,
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collaboration can create a larger pool of profit that benefits everyone involved in the collaboration. In
general, collaboration is a possibility that five forces analysis tends to downplay. The relationships among
the rivals in an industry, for example, are depicted as adversarial. In reality, these relationships are
sometimes adversarial and sometimes collaborative. General Motors and Toyota compete fiercely all
around the world, for example, but they also have worked together in joint ventures. Similarly, five forces
analysis tends to portray a firm’s relationships with its suppliers and buyers as adversarial, but many
firms find ways to collaborate with these parties for mutual benefit. Indeed, concepts such as just-in-time
inventory systems depend heavily on a firm working as a partner with its suppliers and buyers.
K E Y T A K E A W A Y
x “How much profit potential exists in our industry?” is a key question for executives. Five forces analysis
provides an answer to this question. It does this by considering the interactions among the competitors in
an industry, potential new entrants to the industry, substitutes for the industry’s offerings, suppliers to
the industry, and the industry’s buyers.
E X E R C I S E S
1. What are the five forces?
2. Is there an aspect of industry activity that the five forces seems to leave out?
3. Imagine you are the president of your college or university. Which of the five forces would be most
important to you? Why?
[1] Porter, M. E. 1979, March–April. How competitive forces shape strategy. Harvard Business Review, 137–156.
[2] Odell, K. 2011, February 22. Portuguese-influenced Australian chicken burger chain, Oporto, comes to
SoCal. Eater LA. Retrieved from
http://la.eater.com/archives/2011/02/22/portugueseinfluenced_australian_chicken_burger_chain_oporto_comes
_to_socal.php
[3] Bianco, B., & Zellner, W. 2003, October 6. Is Wal-Mart too powerful? Bloomberg Businessweek. Retrieved
fromhttp://www.businessweek.com/magazine/content/03_40/b3852001_mz001.htm
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3.4 Mapping Strategic Groups
L E A R N I N G O B J E C T I V E S
1. Understand what strategic groups are.
2. Learn three ways that analyzing strategic groups is useful to organizations.
The analysis of the strategic groups in an industry can offer important insights to executives. Strategic
groups are sets of firms that follow similar strategies to one another. [1] More specifically, a strategic
group consists of a set of industry competitors that have similar characteristics to one another but
differ in important ways from the members of other groups.
Understanding the nature of strategic groups within an industry is important for at least three
reasons. First, emphasizing the members of a firm’s group is helpful because these firms are usually
its closest rivals. When assessing their firm’s performance and considering strategic moves, the other
members of a group are often the best referents for executives to consider. In some cases, one or
more strategic groups in the industry are irrelevant. Subway, for example, does not need to worry
about competing for customers with the likes of Ruth’s Chris Steak House and P. F. Chang’s. This is
partly because firms confront mobility barriers that make it difficult or illogical for a particular firm to
change groups over time. Because Subway is unlikely to offer a gourmet steak as well as the
experience offered by fine-dining outlets, they can largely ignore the actions taken by firms in that
restaurant industry strategic group.
Second, the strategies pursued by firms within other strategic groups highlight alternative paths to
success. A firm may be able to borrow an idea from another strategic group and use this idea to
improve its situation. During the recession of the late 2000s, midquality restaurant chains such as
Applebee’s and Chili’s used a variety of promotions such as coupons and meal combinations to try to
attract budget-conscious consumers. Firms such as Subway and Quiznos that already offered low-
priced meals still had an inherent price advantage over Applebee’s and Chili’s, however: There is no
tipping expected at the former restaurants, but there is at the latter. It must have been tempting to
executives at Applebee’s and Chili’s to try to expand their appeal to budget-conscious consumers by
experimenting with operating formats that do not involve tipping.
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Third, the analysis of strategic groups can reveal gaps in the industry that represent untapped
opportunities. Within the restaurant business, for example, it appears that no national chain offers
both very high-quality meals and a very diverse menu. Perhaps the firm that comes the closest to
filling this niche is the Cheesecake Factory, a chain of approximately 150 outlets whose menu
includes more than 200 lunch, dinner, and dessert items. Ruth’s Chris Steak House already offers
very high quality food; its executives could consider moving the firm toward offering a very diverse
menu as well. This would involve considerable risk, however. Perhaps no national chain offers both
very high quality meals and a very diverse menu because doing so is extremely difficult.
Nevertheless, examining the strategic groups in an industry with an eye toward untapped
opportunities offers executives a chance to consider novel ideas.
K E Y T A K E A W A Y
x Examination of the strategic groups in an industry provides a firm’s executives with a better
understanding of their closest rivals, reveals alternative paths to success, and highlights untapped
opportunities.
E X E R C I S E S
1. What other colleges and universities are probably in your school’s strategic group?
2. From what other groups of colleges and universities could your school learn? What specific ideas could be
borrowed from these groups?
[1] Hunt, M. S. 1972. Competition in the major home appliance industry 1960–1970. (Unpublished doctoral
dissertation). Harvard University, Cambridge, MA; Short, J. C., Ketchen, D. J., Palmer, T., & Hult, G. T. 2007. Firm,
strategic group, and industry influences on performance. Strategic Management Journal, 28, 147–167.
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3.5 Conclusion
This chapter explains several considerations for examining the external environment that executives
must monitor to lead their organizations strategically. Executives must be aware of trends and
changes in the general environment, as well as the condition of their specific industry, as elements of
both have the potential to change considerably over time. While PESTEL analysis provides a useful
framework to understand the general environment, Porter’s five forces is helpful to make sense of an
industry’s profit potential. Strategic groups are valuable for understanding close competitors that
affect a firm more than other industry members. When executives carefully monitor their
organization’s environment using these tools, they greatly increase the chances of their organization
being successful.
E X E R C I S E S
1. In groups of four or five, use the PESTEL framework to identify elements from each factor of the general
environment that could have a large effect on your future career.
2. Use Porter’s five forces analysis to analyze an industry in which you might like to work in the future.
Discuss the implications your results may have on the salary potential of jobs in that industry and how
that could impact your career plans.
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Chapter 4
Managing Firm Resources
L E A R N I N G O B J E C T I V E S
After reading this chapter, you should be able to understand and articulate answers to the following
questions:
1. What is resource-based theory, and why is it important to organizations?
2. In what ways can intellectual property serve as a value-added resource for organizations?
3. How should executives use the value chain to maximize the performance of their organizations?
4. What is SWOT analysis and how can it help an organization?
Southwest Airlines: Let Your LUV Flow
Southwest Airlines’ acquisition of AirTran in 2011 may lead the firm into stormy skies.
Chapter 4 from Mastering Strategic Management was adapted by The Saylor Foundation under
a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested
by the work’s original creator or licensee. © 2014, The Saylor Foundation.
http://www.saylor.org/site/textbooks/Mastering%20Strategic%20Management
http://creativecommons.org/licenses/by-nc-sa/3.0/
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Image courtesy of Stuart Seeger,http://en.wikipedia.org/wiki/File:Southwest_737_At_Burbank
In 1971, an upstart firm named Southwest Airlines opened for business by offering flights between
Houston, San Antonio, and its headquarters at Love Field in Dallas. From its initial fleet of three airplanes
and three destinations, Southwest has grown to operate hundreds of airplanes in scores of cities. Despite
competing in an industry that is infamous for bankruptcies and massive financial losses, Southwest
marked its thirty-eighth profitable year in a row in 2010.
Why has Southwest succeeded while many other airlines have failed? Historically, the firm has differed
from its competitors in a variety of important ways. Most large airlines use a “hub and spoke” system.
This type of system routes travelers through a large hub airport on their way from one city to another.
Many Delta passengers, for example, end a flight in Atlanta and then take a connecting flight to their
actual destination. The inability to travel directly between most pairs of cities adds hours to a traveler’s
itinerary and increases the chances of luggage being lost. In contrast, Southwest does not have a hub
airport; preferring instead to connect cities directly. This helps make flying on Southwest attractive to
many travelers.
Southwest has also been more efficient than its rivals. While most airlines use a variety of different
airplanes, Southwest operates only one type of jet: the Boeing 737. This means that Southwest can service
its fleet much more efficiently than can other airlines. Southwest mechanics need only the know-how to
fix one type of airplane, for example, while their counterparts with other firms need a working knowledge
of multiple planes. Southwest also gains efficiency by not offering seat assignments in advance, unlike its
competitors. This makes the boarding process move more quickly, meaning that Southwest’s jets spend
more time in the air transporting customers (and making money) and less time at the gate relative to its
rivals’ planes.
Organizational culture is the dimension along which Southwest perhaps has differed most from its rivals.
The airline industry as a whole suffers from a reputation for mediocre (or worse) service and indifferent
(sometimes even surly) employees. In contrast, Southwest enjoys strong loyalty and a sense of teamwork
among its employees.
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One tangible indicator of this culture is Southwest’s stock ticker symbol. Most companies choose stock
ticker symbols that evoke their names. Ford’s ticker symbol is F, for example, and Walmart’s symbol is
WMT. When Southwest became a publicly traded company in 1977, executives chose LUV as its ticker
symbol. LUV pays a bit of homage to the firm’s humble beginnings at Love Field. More important,
however, LUV represents the love that executives have created among employees, between employees and
the company, and between customers and the company. This “LUV affair” has long been and remains a
huge success. As recently as March 2011, for example, Southwest was ranked fourth
on Fortune magazine’s World’s Most Admired Company list.
In September 2010, Southwest surprised many observers when it announced that it was acquiring
AirTran Airways for $1.4 billion. Southwest and AirTran both emphasized low fares, but they differed in
many ways. AirTran routed most of its passengers through a hub-and-spoke system, and it relied on a
different plane than Southwest, the Boeing 717. The acquisition of AirTran thus raised important
questions about Southwest’s future. [1] How would AirTran’s hub-and-spoke system be integrated with
Southwest’s nonhub approach? Could the airlines’ respective fleets of 737s and 717s be joined without
losing efficiency? Perhaps most important, could Southwest maintain its legendary organizational culture
while taking over a sizable rival and integrating AirTran’s thousands of employees? When the acquisition
was finalized on May 2, 2011, it remained unclear whether Southwest was flying off course or whether
Southwest’s “LUV story” would continue for many years.
[1] Schlangenstein, M., & Hughes, J. 2010, September 28. Southwest risks keep-it-simple focus to spur growth.
Retrieved from http://www.washingtonpost.com/wp-dyn/content/article/2010/09/28/AR2010092801578.html
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4.1 Resource-Based Theory
L E A R N I N G O B J E C T I V E S
1. Define the four characteristics of resources that lead to sustained competitive advantage as articulated by
the resource-based theory of the firm.
2. Understand the difference between resources and capabilities.
3. Be able to explain the difference between tangible and intangible resources.
4. Know the elements of the marketing mix.
Four Characteristics of Strategic Resources
Southwest Airlines provides an illustration of resource-based theory in action. Resource-
based theory contends that the possession of strategic resources provides an organization with a golden
opportunity to develop competitive advantages over its rivals. These competitive advantages in turn
can help the organization enjoy strong profits.[1]
A strategic resource is an asset that is valuable, rare, difficult to imitate, and nonsubstitutable. [2] A
resource is valuable to the extent that it helps a firm create strategies that capitalize on opportunities and
ward off threats. Southwest Airlines’ culture fits this standard well. Most airlines struggle to be profitable,
but Southwest makes money virtually every year. One key reason is a legendary organizational culture
that inspires employees to do their very best. This culture is also rare in that strikes, layoffs, and poor
morale are common within the airline industry.
Competitors have a hard time duplicating resources that are difficult to imitate. Some difficult to imitate
resources are protected by various legal means, including trademarks, patents, and copyrights. Other
resources are hard to copy because they evolve over time and they reflect unique aspects of the firm.
Southwest’s culture arose from its very humble beginnings. The airline had so little money that at times it
had to temporarily “borrow” luggage carts from other airlines and put magnets with the Southwest logo
on top of the rivals’ logo. Southwest is a “rags to riches” story that has evolved across several decades.
Other airlines could not replicate Southwest’s culture, regardless of how hard they might try, because of
Southwest’s unusual history.
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A resource is nonsubstitutable when competitors cannot find alternative ways to gain the benefits that a
resource provides. A key benefit of Southwest’s culture is that it leads employees to treat customers well,
which in turn creates loyalty to Southwest among passengers. Executives at other airlines would love to
attract the customer loyalty that Southwest enjoys, but they have yet to find ways to inspire the kind of
customer service that the Southwest culture encourages.
Southwest Airlines’ unique culture is reflected in the customization of their aircraft over the years, such as the “Lone Star
One” design.
Image courtesy of planephotoman,http://en.wikipedia.org/wiki/File:Southwest_737_Lonestar_One .
Ideally, a firm will have a culture that embraces the four qualities. If so, these resources can provide
not only a competitive advantage but also a sustained competitive advantage—one that
will endure over time and help the firm stay successful far into the future. Resources that do not
have all four qualities can still be very useful, but they are unlikely to provide long-term advantages.
A resource that is valuable and rare but that can be imitated, for example, might provide an edge in the
short term, but competitors can overcome such an advantage eventually.
Resource-based theory also stresses the merit of an old saying: the whole is greater than the sum of its
parts. Specifically, it is also important to recognize that strategic resources can be created by taking
several strategies and resources that each could be copied and bundling them together in a way that
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cannot be copied. For example, Southwest’s culture is complemented by approaches that individually
could be copied—the airline’s emphasis on direct flights, its reliance on one type of plane, and its unique
system for passenger boarding—to create a unique business model whose performance is without peer in
the industry.
Resource-based theory can be confusing because the term resources is used in many different ways within
everyday common language. It is important to distinguish strategic resources from other resources. To
most individuals, cash is an important resource. Tangible goods such as one’s car and home are also vital
resources. When analyzing organizations, however, common resources such as cash and vehicles are not
considered to be strategic resources. Resources such as cash and vehicles are valuable, of course, but an
organization’s competitors can readily acquire them. Thus an organization cannot hope to create an
enduring competitive advantage around common resources.
On occasion, events in the environment can turn a common resource into a strategic resource. Consider,
for example, a very generic commodity: water. Humans simply cannot live without water, so water has
inherent value. Also, water cannot be imitated (at least not on a large scale), and no other substance can
substitute for the life-sustaining properties of water. Despite having three of the four properties of
strategic resources, water in the United States has remained cheap. Yet this may be changing. Major cities
in hot climates such as Las Vegas, Los Angeles, and Atlanta are confronted by dramatically shrinking
water supplies. As water becomes more and more rare, landowners in Maine stand to benefit. Maine has
been described as “the Saudi Arabia of water” because its borders contain so much drinkable water. It is
not hard to imagine a day when companies in Maine make huge profits by sending giant trucks filled with
water south and west or even by building water pipelines to service arid regions.
From Resources to Capabilities
The tangibility of a firm’s resources is an important consideration within resource-based
theory. Tangible resources are resources that can be readily seen, touched, and quantified. Physical assets
such as a firm’s property, plant, and equipment, as well as cash, are considered to be tangible resources.
In contrast, intangible resources are quite difficult to see, to touch, or to quantify. Intangible resources
include, for example, the knowledge and skills of employees, a firm’s reputation, and a firm’s culture. In
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comparing the two types of resources, intangible resources are more likely to meet the criteria for
strategic resources (i.e., valuable, rare, difficult to imitate, and nonsubstitutable) than are tangible
resources. Executives who wish to achieve long-term competitive advantages should therefore place a
premium on trying to nurture and develop their firms’ intangible resources.
Capabilities are another key concept within resource-based theory. A good and easy-to-remember way to
distinguish resources and capabilities is this: resources refer to what an organization owns, capabilities
refer to what the organization can do. Capabilities tend to arise over time as a firm takes actions that build on
its strategic resources. Southwest Airlines, for example, has developed the capability of providing excellent
customer service by building on its strong organizational culture. Capabilities are important in part because
they are how organizations capture the potential value that resources offer. Customers do not simply
send money to an organization because it owns strategic resources. Instead, capabilitiesare needed to bundle,
to manage, and otherwise to exploit resources in a manner that provides value added to customers
and creates advantages over competitors.
Some firms develop a dynamic capability. This means that a firm has a unique capability of creating new
capabilities. Said differently, a firm that enjoys a dynamic capability is skilled at continually updating its
array of capabilities to keep pace with changes in its environment. General Electric, for example, buys and
sells firms to maintain its market leadership over time, while Coca-Cola has an uncanny knack for
building new brands and products as the soft-drink market evolves. Not surprisingly, both of these firms
rank among the top thirteen among the “World’s Most Admired Companies” for 2011.
Strategy at the Movies
That Thing You Do!
How can the members of an organization reach success “doing that thing they do”? According to resource-
based theory, one possible road to riches is creating—on purpose or by accident—a unique combination of
resources. In the 1996 movie That Thing You Do!, unwittingly assembling a unique bundle of resources
leads a 1960s band called The Wonders to rise from small-town obscurity to the top of the music charts.
One resource is lead singer Jimmy Mattingly, who possesses immense musical talent. Another is guitarist
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Lenny Haise, whose fun attitude reigns in the enigmatic Mattingly. Although not a formal band member,
Mattingly’s girlfriend Faye provides emotional support to the group and even suggests the group’s name.
When the band’s usual drummer has to miss a gig due to injury, the door is opened for charismatic
drummer Guy Patterson, whose energy proves to be the final piece of the puzzle for The Wonders.
Despite Mattingly’s objections, Guy spontaneously adds an up-tempo beat to a sleepy ballad called “That
Thing You Do!” during a local talent contest. When the talent show audience goes crazy in response, it
marks the beginning of a meteoric rise for both the song and the band. Before long, The Wonders perform
on television and “That Thing You Do!” is a top-ten hit record. The band’s magic vanishes as quickly as it
appeared, however. After their bass player joins the Marines, Lenny elopes on a whim, and Jimmy’s diva
attitude runs amok, the band is finished and Guy is left to “wonder” what might have been. That Thing
You Do! illustrates that while bundling resources in a unique way can create immense success, preserving
and managing these resources over time can be very difficult.
Liv Tyler plays Faye Dolan, the love interest of drummer Guy Patterson, in That Thing You Do!
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Image courtesy of Daniel Dormann,http://en.wikipedia.org/wiki/File:LivTylerJune08 .
Is Resource-Based Theory Old News?
Resource-based theory has evolved in recent years to provide a way to understand how strategic resources
and capabilities allow firms to enjoy excellent performance. But more than one wry observer has
wondered aloud, “Is resource-based theory just old wine in a new bottle?” This is a question worth
considering because the role of resources in shaping success and failure has been discussed for many
centuries.
Aesop was a Greek storyteller who lived approximately 2,500 years ago. Aesop is known in particular for
having created a series of fables—stories that appear on the surface to be simply children’s tales but that
offer deep lessons for everyone. One of Aesop’s fables focuses on an ass (donkey) and some grasshoppers.
When the ass tries to duplicate the sweet singing of the grasshoppers by copying their diet, he soon dies of
starvation. Attempting to replicate the grasshoppers’ unique singing capability proved to be a fatal
mistake. The fable illustrates a central point of resource-based theory: it is an array of resources and
capabilities that fuels enduring success, not any one resource alone.
In a far more recent example, sociologist Philip Selznick developed the concept
of distinctive competence through a series of books in the 1940s and 1950s.[3] A distinctive competence is
a set of activities that an organization performs especially well. Southwest Airlines, for example, appears
to have a distinctive competency in operations, as evidenced by how quickly it moves its flights in and out
of airports. Further, Selznick suggested that possessing a distinctive competency creates a competitive
advantage for a firm. Certainly, there is plenty of overlap between the concept of distinctive competency,
on the one hand, and capabilities, on the other.
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So is resource-based theory in fact old wine in a new bottle? Not really. Resource-based theory builds on
past ideas about resources, but it represents a big improvement on past ideas in at least two ways. First,
resource-based theory offers a complete framework for analyzing organizations, not just snippets of
valuable wisdom like Aesop and Selznick provided. Second, the ideas offered by resource-based theory
have been developed and refined through scores of research studies involving thousands of organizations.
In other words, there is solid evidence backing it up.
The Marketing Mix
Leveraging resources and capabilities to create desirable products and services is important, but
customers must still be convinced to purchase these goods and services. The marketing mix—also known
as the four Ps of marketing—provides important insights into how to make this happen. A master of the
marketing mix was circus impresario P. T. Barnum, who is famous in part for his claim that “there’s a
sucker born every minute.” The real purpose of the marketing mix is not to trick customers but rather to
provide a strong alignment among the four Ps (product, price, place, and promotion) to offer customers a
coherent and persuasive message.
A firm’s product is what it sells to customers. Southwest Airlines sells, of course, airplane flights. The
airline tries to set its flights apart from those of airlines by making flying fun. This can include, for
example, flight attendants offering preflight instructions as a rap. The price of a good or service should
provide a good match with the value offered. Throughout its history, Southwest has usually charged lower
airfares than its rivals. Place can refer to a physical purchase point as well as a distribution channel.
Southwest has generally operated in cities that are not served by many airlines and in secondary airports
in major cities. This has allowed the firm to get favorable lease rates at airports and has helped it create
customer loyalty among passengers who are thankful to have access to good air travel.
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Finally, promotion consists of the communications used to market a product, including advertising, public
relations, and other forms of direct and indirect selling. Southwest is known for its clever advertising. In a
recent television advertising campaign, for example, Southwest lampooned the baggage fees charged by
most other airlines while highlighting its more customer-friendly approach to checked luggage. Given the
consistent theme of providing a good value plus an element of fun to passengers that is developed across
the elements of the marketing mix, it is no surprise that Southwest has been so successful within a very
challenging industry.
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Few executives in history have had the marketing savvy of P. T. Barnum.
Image courtesy of The Strobridge Litho. Co., Cincinnati & New York,
http://en.wikipedia.org/wiki/File:Barnum_%26_Bailey_clowns_and_geese2 .
K E Y T A K E A W A Y
Resource-based theory suggests that resources that are valuable, rare, difficult to imitate, and
nonsubstitutable best position a firm for long-term success. These strategic resources can provide the
foundation to develop firm capabilities that can lead to superior performance over time. Capabilities are
needed to bundle, to manage, and otherwise to exploit resources in a manner that provides value added
to customers and creates advantages over competitors.
E X E R C I S E S
1. Does your favorite restaurant have the four qualities of resources that lead to success as articulated by
resource-based theory?
2. If you were hired by your college or university to market your athletic department, what element of the
marketing mix would you focus on first and why?
3. What other classic stories or fables could be applied to discuss the importance of firm resources and
superior performance?
[1] Barney, J. B. 1991. Firm resources and sustained competitive advantage. Journal of Management, 17, 99–120;
Wernerfelt, B. 1984. A resource-based view of the firm. Strategic Management Journal, 5, 171–180.
[2] Barney, J. B. 1991. Firm resources and sustained competitive advantage. Journal of Management, 17, 99–120;
Chi, T. 1994. Trading in strategic resources: Necessary conditions, transaction cost problems, and choice of
exchange structure. Strategic Management Journal, 15(4), 271–290.
[3] Selznick, P. 1957. Leadership in administration. New York: Harper; Selznick, P. 1952. The organizational weapon.
New York, NY: McGraw-Hill; Selznick, P. 1949. TVA and the grass roots. Berkeley, CA: University of California Press.
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4.2 Intellectual Property
L E A R N I N G O B J E C T I V E S
1. Define the four major types of intellectual property.
2. Be able to provide examples of each intellectual property type.
3. Understand how intellectual property can be a valuable resource for firms.
Defining Intellectual Property
The inability of competitors to imitate a strategic resource is a key to leveraging the resource to achieve
long–term competitive advantages. Companies are clever, and effective imitation is often very possible.
But resources that involve intellectual property reduce or even eliminate this risk. As a result, developing
intellectual property is important to many organizations.
Intellectual property refers to creations of the mind, such as inventions, artistic products, and symbols.
The four main types of intellectual property are patents, trademarks, copyrights, and trade secrets.
If a piece of intellectual property is also valuable, rare, and nonsubstitutable, it constitutes
a strategic resource. Even if a piece of intellectual property does not meet all four criteria for serving as a
strategic resource, it can be bundled with other resources and activities to create a resource.
A variety of formal and informal methods are available to protect a firm’s intellectual property from
imitation by rivals. Some forms of intellectual property are best protected by legal means, while defending
others depends on surrounding them in secrecy. This can be contrasted with Southwest Airlines’ well-
known culture, which rivals are free to attempt to copy if they wish. Southwest’s culture thus is not
intellectual property, although some of its complements such as Southwest’s logo and unique color
schemes are.
Patents
Patents are legal decrees that protect inventions from direct imitation for a limited period of time.
Obtaining a patent involves navigating a challenging process. To earn a patent from the US
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Patent and Trademark Office, an inventor must demonstrate than an invention is new, nonobvious, and
useful. If the owner of a patent believes that a company or person has infringed on the patent, the owner
can sue for damages. In 2011, for example, a private company named EBSCO alleged that retailer Bass Pro
Shops sold a product that violated EBSCO’s patent on a deer-hunting stand that helps prevent hunters
from falling out of trees. Rather than endure a costly legal fight, the two sides agreed to settle EBSCO’s
complaint out of court.
Patenting an invention is important because patents can fuel enormous profits. Imagine, for example, the
potential for lost profits if the Slinky had not been patented. Shipyard engineer Richard James came up
with the idea for the Slinky by accident in 1943 while he was trying to create springs for use in ship
instruments. When James accidentally tipped over one of his springs, he noticed that it moved downhill in
a captivating way. James spent his free time perfecting the Slinky and then applied for a patent in 1946.
To date, more than three hundred million Slinkys have been sold by the company that Richard James and
his wife Betty created.
Patenting inventions such as the Slinky helps ensure that the invention is protected from imitation.
Image courtesy of Roger McLassus,http://upload.wikimedia.org/wikipedia/commons/f/f3/2006-
02-04_Metal_spiral .
Trademarks
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Trademarks are phrases, pictures, names, or symbols used to identify a particular organization.
Trademarks are important because they help an organization stand out and build an identity in the
marketplace. Some trademarks are so iconic that almost all consumers recognize them, including
McDonald’s golden arches, the Nike swoosh, and Apple’s outline of an apple.
Other trademarks help rising companies carve out a unique niche for themselves. For example, French
shoe designer Christian Louboutin has trademarked the signature red sole of his designer shoes. Because
these shoes sell for many hundreds of dollars via upscale retailers such as Neiman Marcus and Saks Fifth
Avenue, competitors would love to copy their look. Thus legally protecting the distinctive red sole from
imitation helps preserve Louboutin’s profits.
Fashionistas instantly recognize the trademark red sole of Christian Louboutin’s high-end shoes.
Image courtesy of
Arroser,http://wikimediafoundation.org/wiki/File:Louboutin_altadama140 .
Trademarks are important to colleges and universities. Schools earn tremendous sums of money through
royalties on T-shirts, sweatshirts, hats, backpacks, and other consumer goods sporting their names and
logos. On any given day, there are probably several students in your class wearing one or more pieces of
clothing featuring your school’s insignia; your school benefits every time items like this are sold.
Schools’ trademarks are easy to counterfeit, however, and the sales of counterfeit goods take money away
from colleges and universities. Not surprisingly, many schools fight to protect their trademarks. In
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October 2009, for example, the University of Oklahoma announced that it was teaming with law
enforcement officials to combat the sale of counterfeit goods around its campus. [1] This initiative and
similar ones at other colleges and universities are designed to ensure that schools receive their fair share
of the sales that their names and logos generate.
Figure 4.7 Trademarks
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Images courtesy of unknown author, http://en.wikipedia.org/wiki/File:Aspirine-1923 (bottom
left); Wilinckx, http://en.wikipedia.org/wiki/File:Trademark-symbool (top left); Hult Ketchen
International Group, LLC (top right); Helix84,
http://en.wikipedia.org/wiki/File:Burrbery_check.gif
Copyrights
Copyrights provide exclusive rights to the creators of original artistic works such as books, movies, songs,
and screenplays. Sometimes copyrights are sold and licensed. In the late 1960s,
Buick thought it had an agreement in place to license the number one hit “Light My Fire” for a television
advertisement from The Doors until the band’s volatile lead singer Jim Morrison loudly protested what he
saw as mistreating a work of art. Classic rock by The Beatles has been used in television ads in recent
years. After the late pop star Michael Jackson bought the rights to the band’s music catalog, he licensed
songs to Target and other companies. Some devoted music fans consider such ads to be abominations,
perhaps proving the merit of Morrison’s protest decades ago.
He looks calm here, but the licensing of a copyrighted song for a car commercial enraged rock legend Jim Morrison.
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Image courtesy of Polfoto/Jan Persson,
http://upload.wikimedia.org/wikipedia/commons/1/15/The_Doors_in_Copenhagen_1968 .
Over time, piracy has become a huge issue for the owners of copyrighted works. In China, millions of
pirated DVDs are sold each year, and music piracy is estimated to account for at least 95 percent of music
sales. This piracy deprives movie studios, record labels, and artists of millions of dollars in royalties. In
response to the damage piracy has caused, the US government has pressed its Chinese counterpart and
other national governments to better enforce copyrights.
Trade Secrets
Trade secrets refer to formulas, practices, and designs that are central to a firm’s business and that remain
unknown to competitors. Trade secrets are protected by laws on theft, but once a secret is revealed,
it cannot be a secret any longer. This leads firms to rely mainly on silence and privacy rather than the
legal system to protect trade secrets.
Some trade secrets have become legendary, perhaps because a mystique arises around the unknown. One
famous example is the blend of eleven herbs and spices used in Kentucky Fried Chicken’s original recipe
chicken. KFC protects this secret by having multiple suppliers each produce a portion of the herb and
spice blend; no one supplier knows the full recipe. The formulation of Coca-Cola is also shrouded in
mystery. In 2006, Pepsi was approached by shady individuals who were offering a chance to buy a stolen
copy of Coca-Cola’s secret recipe. Pepsi wisely refused. An FBI sting was used to bring the thieves to
justice. The soft-drink industry has other secrets too. Dr Pepper’s recipe remains unknown outside the
company. Although Coke’s formula has been the subject of greater speculation, Dr Pepper is actually the
original secret soft drink; it was created a year before Coca-Cola.
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The recipe for Dr Pepper is a secret dating back to the 1880s.
Image courtesy of anyjazz65,
K E Y T A K E A W A Y
Intellectual property can serve as a strategic resource for organizations. While some sources of
intellectual property such as patents, trademarks, and copyrights can receive special legal protection,
trade secrets provide competitive advantages by simply staying hidden from competitors.
E X E R C I S E S
1. What designs for your college or university are protected by trademarks?
2. What type of intellectual property provides the most protection for firms?
3. Why would a firm protect a resource through trade secret rather than by a formal patent?
[1] Ward, C. 2009, October 8. OU works to prevent trademark infringement. The Oklahoma Daily. Retrieved
from http://www.oudaily.com/news/2009/oct/08/ou-works-prevent-trademark-infringement
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4.3 Value Chain
L E A R N I N G O B J E C T I V E S
1. Define the primary activities of the value chain.
2. Know the different support activities within the value chain.
3. Be able to apply the value chain to an organization of your choosing.
4. Understand the difference between a value chain and supply chain.
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Image courtesy of Carol M. Highsmith,
http://commons.wikimedia.org/wiki/File:Randy%27s_donuts1_edit1 .
Elements of the Value Chain
When executives choose strategies, an organization’s resources and capabilities should be examined
alongside consideration of its value chain. A value chain charts the path by which products and services
are created and eventually sold to customers. [1] The term value chain reflects the fact that, as each step of
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this path is completed, the product becomes more valuable than it was at the previous step.
Within the lumber business, for example, value is added when a tree is transformed into usable
wooden boards; the boards created from a tree can be sold for more money than the price of the tree.
Adapted from Porter, M. (1985). Competitive Advantage. New York: Free Press. Exhibit is
Creative Commons licensed at http://en.wikipedia.org/wiki/Image:ValueChain.PNG.”
Value chains include both primary and secondary activities. Primary activities are actions that are directly
involved in creating and distributing goods and services. Consider a simple illustrative example: doughnut
shops. Doughnut shops transform basic commodity products such as flour, sugar, butter, and grease into
delectable treats. Value is added through this process because consumers are willing to pay much more for
doughnuts than they would be willing to pay for the underlying ingredients.
There are five primary activities. Inbound logistics refers to the arrival of raw materials. Although
doughnuts are seen by most consumers as notoriously unhealthy, the Doughnut Plant in New York City
http://en.wikipedia.org/wiki/Image:ValueChain.PNG
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has carved out a unique niche for itself by obtaining organic ingredients from a local farmer’s
market.Operations refers to the actual production process, while outbound logistics tracks the movement
of a finished product to customers. One of Southwest Airlines’ unique capabilities is moving passengers
more quickly than its rivals. This advantage in operations is based in part on Southwest’s reliance on one
type of airplane (which speeds maintenance) and its avoidance of advance seat assignments (which
accelerates the passenger boarding process).
Attracting potential customers and convincing them to make purchases is the domain
of marketing and sales. For example, people cannot help but notice Randy’s Donuts in Inglewood,
California, because the building has a giant doughnut on top of it. Finally, service refers to the extent to
which a firm provides assistance to their customers. Voodoo Donuts in Portland, Oregon, has developed a
clever website (voodoodoughnut.com) that helps customers understand their uniquely named products,
such as the Voodoo Doll, the Texas Challenge, the Memphis Mafia, and the Dirty Snowball.
Secondary activities are not directly involved in the evolution of a product but instead provide important
underlying support for primary activities. Firm infrastructure refers to how the firm is organized and led
by executives. The effects of this organizing and leadership can be profound. For example, Ron Joyce’s
leadership of Canadian doughnut shop chain Tim Hortons was so successful that Canadians consume
more doughnuts per person than all other countries. In terms of resource-based theory, Joyce’s leadership
was clearly a valuable and rare resource that helped his firm prosper.
Also important is human resource management, which involves the recruitment, training, and
compensation of employees. A recent research study used data from more than twelve thousand
organizations to demonstrate that the knowledge, skills, and abilities of a firm’s employees can act as a
strategic resource and strongly influence the firm’s performance. [2] Certainly, the unique level of
dedication demonstrated by employees at Southwest Airlines has contributed to that firm’s excellent
performance over several decades.
Technology refers to the use of computerization and telecommunications to support primary activities.
Although doughnut making is not a high-tech business, technology plays a variety of roles for doughnut
shops, such as allowing customers to use credit cards. Procurement is the process of negotiating for and
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purchasing raw materials. Large doughnut chains such as Dunkin’ Donuts and Krispy Kreme can gain cost
advantages over their smaller rivals by purchasing flour, sugar, and other ingredients in bulk. Meanwhile,
Southwest Airlines has gained an advantage over its rivals by using futures contracts within its
procurement process to minimize the effects of rising fuel prices.
From the Value Chain to Best Value Supply Chains
“Time is money!” warns a famous saying. This simple yet profound statement suggests that organizations
that quickly complete their work will enjoy greater profits, while slower-moving firms will suffer. The
belief that time is money has encouraged the modern emphasis on supply chain management. A
supply chain is a system of people, activities, information, and resources involved in creating a product
and moving it to the customer. A supply chain is a broader concept than a value chain; the latter refers to
activities within one firm, while the former captures the entire process of creating and distributing a
product, often across several firms.
Competition in the twenty-first century requires an approach that considers the supply chain concept in
tandem with the value-creation process within a firm: best value supply chains. These chains do not fixate
on speed or on any other single metric. Instead, relative to their peers, best value supply chains focus on
the total value added to the customer.
Creating best value supply chains requires four components. The first is
strategic supply chain management—the use of supply chains as a means to create competitive advantages
and enhance firm performance. Such an approach contradicts the popular wisdom centered on the need
to maximize speed. Instead, there is recognition that the fastest chain may not satisfy customers’ needs.
Best value supply chains strive to excel along four measures. Speed (or “cycle time”) is the time duration
from initiation to completion of the production and distribution process. Quality refers to the relative
reliability of supply chain activities. Supply chains’ efforts at managing cost involve enhancing value by
either reducing expenses or increasing customer benefits for the same cost level. Flexibility refers to a
supply chain’s responsiveness to changes in customers’ needs. Through balancing these four metrics, best
value supply chains attempt to provide the highest level of total value added.
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The value of strategic supply chain management is reflected in how firms such as Walmart have used their
supply chains as competitive weapons to gain advantages over peers. Walmart excels in terms of speed
and cost by locating all domestic stores within one day’s drive of a warehouse while owning a trucking
fleet. This creates distribution speed and economies of scale that competitors simply cannot match. When
Kmart’s executives decided in the late 1990s to compete head-to-head with Walmart on price, Walmart’s
sophisticated logistics system enabled it to easily withstand the price war. Unable to match its rival’s
speed and costs, Kmart soon plunged into bankruptcy. Walmart’s supply chains also possess strong
quality and flexibility. When Hurricane Katrina devastated the Gulf Coast in 2005, Walmart used not only
its warehouses and trucks but also its satellite technology, radio frequency identification (RFID), and
global positioning systems to quickly divert assets to affected areas. The result was that Walmart emerged
as the first responder in many towns and provided essentials such as drinking water faster than local and
federal governments could.
Meanwhile, failing to manage a supply chain effectively causes serious harm. For example, in 2003
Motorola was unable to meet demand for its new camera phones because it did not have enough lenses
available. Also, firms whose supply chains were centered in the Port of Los Angeles collectively lost more
than $2 billion a day during a 2002 workers’ strike. In terms of stock price, firms’ market value erodes by
an average of 10 percent following the announcement of a major supply chain problem.
The second component is agility, the supply chain’s relative capacity to act rapidly in response to dramatic
changes in supply and demand. [3] Agility can be achieved using buffers. Excess capacity, inventory, and
management information systems all provide buffers that better enable a best value supply chain to
service and to be more responsive to its customers. Rapid improvements and decreased costs in deploying
information systems have enabled supply chains in recent years to reduce inventory as a buffer. Much
popular thinking depicts inventory reduction as a goal in and of itself. However, this cannot occur without
corresponding increases in buffer capacity elsewhere in the chain, or performance will suffer. A best value
supply chain seeks to optimize the total costs of all buffers used. The costs of deploying each buffer differs
across industries; therefore, no solution that works for one company can be directly applied to another in
a different industry without adaptation.
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Agility in a supply chain can also be improved and achieved by colocating with the customer. This
arrangement creates an information flow that cannot be duplicated through other methods. Daily face-to-
face contact for supply chain personnel enables quicker response times to customer demands due to the
speed at which information can travel back and forth between the parties. Again, this buffer of increased
and improved information flows comes at an expense, so executives seeking to build a best value supply
chain will investigate the opportunity and determine whether this action optimizes total costs.
Adaptability refers to a willingness and capacity to reshape supply chains when necessary. Generally,
creating one supply chain for a customer is desired because this helps minimize costs. Adaptable firms
realize that this is not always a best value solution, however. For example, in the defense industry, the US
Army requires one class of weapon simulators to be repaired within eight hours, while another class of
items can be repaired and returned within one month. To service these varying requirements efficiently
and effectively, Computer Science Corporation (the firm whose supply chains maintain the equipment)
must devise adaptable supply chains. In this case, spare parts inventory is positioned in proximity to the
class of simulators requiring quick turnaround, while the less-time-sensitive devices are sent to a
centralized repair facility. This supply chain configuration allows Computer Science Corporation to satisfy
customer demands while avoiding the excess costs that would be involved in localizing all repair activities.
In situations in which the interests of one firm in the chain and the chain as a whole conflict, most
executives will choose an option that benefits their firm. This creates a need for alignment among chain
members. Alignment refers to creating consistency in the interests of all participants in a supply chain. In
many situations, this can be accomplished through carefully writing incentives into contracts.
Collaborative forecasting with suppliers and customers can also help build alignment. Taking the time to
sit together with participants in the supply chain to agree on anticipated business levels permits shared
understanding and rapid information transfers between parties. This is particularly valuable when
customer demand is uncertain, such as in the retail industry. [4]
K E Y T A K E A W A Y
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The value chain provides a useful tool for managers to examine systematically where value may be added
to their organizations. This tool is useful in that it examines key elements in the production of a good or
service, as well as areas in which value may be added in support of those primary activities.
E X E R C I S E S
1. If you were hired as a consultant for your university, what specific element of the value chain would you
seek to improve first?
2. What local business in your town could be improved most dramatically by applying the value chain?
Would improvements of primary or support activities help to improve this firm most? Could knowledge of
strategic supply chain management add further value to this firm?
[1] Porter, M. E. 1985. Competitive advantage: Creating and sustaining superior performance. New York, NY: Free
Press.
[2] Crook, T. R., Todd, S. Y., Combs, J. G., Woehr, D. J., & Ketchen, D. J. 2011. Does human capital matter? A meta-
analysis of the relationship between human capital and firm performance. Journal of Applied Psychology, 96(3),
443–456.
[3] Lee, H. L. 2004, October. The triple-A supply chain. Harvard Business Review, 83, 102–112.
[4] This section of the chapter is adapted from Ketchen, D. J., Rebarick, W., Hult, G. T., & Meyer, D. 2008. Best
value supply chains: A key competitive weapon for the 21st century. Business Horizons, 51, 235–243.
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4.4 Beyond Resource-Based Theory: Other Views on Firm
Performance
L E A R N I N G O B J E C T I V E S
1. Be able to discuss other theories about firm success and failure beyond resource-based theory.
2. Be able to apply different theories to help explain competition in different industries.
Although resource-based theory stands as perhaps the most popular explanation of why some
organizations prosper while others do not, several other theories are popular. Enactment treats
executives as the masters of their domains. Enactment contends that an organization can, at least in
part, create an environment for itself that is beneficial to the organization. This is accomplished by
putting strategies in place that reshape competitive conditions in a favorable way.
By the 1990s, Microsoft had been so successful at reshaping the software industry to its benefit that
the firm was the subject of a lengthy antitrust investigation by the federal government. More
recently, Apple has been able to reshape its environment by introducing products such as the iPhone
and the iPad that transcend the traditional boundaries between the cell phone, digital camera, music
player, and computer businesses. No airline has ever been able to enact the environment, however,
perhaps because the airline industry is so fragmented.
Environmental determinism offers a completely opposite view from enactment on why some firms
succeed and others fail. Environmental determinism views organizations much like biological
theories view animals—organizations (and animals) are very limited in their ability to adapt to the
conditions around them. Thus just as harsh environmental changes are believed to have made
dinosaurs extinct, changes in the business environment can destroy organizations regardless of how
clever and insightful executives are.
Until 1978, the federal government regulated the airline industry by dictating what routes each
airline would fly and what prices it would charge. Once these controls were removed, airlines were
subjected to a series of negative environmental trends, including recession, overcapacity in the
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industry, new entrants, fierce price competition, and fuel shortages. Perhaps not surprisingly, dozens
of airlines have been crushed by these conditions.
An old saying notes that “imitation is the sincerest form of flattery.” This flattery is the focus
of institutional theory. In particular, institutional theory centers on the extent to which firms copy one
another’s strategies. Consider, for example, fast-food hamburger restaurants. Innovations such as
dollar menus and drive-through windows tend to be introduced by one firm and then duplicated by
the others.
Airlines also seem to follow a “monkey see, monkey do” mentality. To build passenger loyalty,
American Airlines introduced a frequent flyer program called AAdvantage in 1981. After flying a
certain number of miles on American flights, AAdvantage members were rewarded with a free flight.
The idea was to make passengers less likely to shop around for the cheapest ticket. Ironically,
AAdvantage turned out to be not much of an advantage at all. Many of American’s rivals quickly
developed their own frequent-flyer programs, and today most airlines reward frequent passengers.
In recent years, ideas such as charging passengers to check their luggage and eliminating free food
on flights have been copied by one airline after another.
Transaction cost economics is a theory that centers on just one element of business activity: whether it
is cheaper for a firm to make or to buy the products that it needs. This is an important element,
however, because choosing the more efficient option can enhance a firm’s profits. Automakers such
as Ford and General Motors face a wide variety of make-or-buy decisions because so many different
parts are needed to build cars and trucks. Sometimes Ford and GM make these products, and other
times they purchase them from outside suppliers. These firms’ financial situations are improved
when these decisions are made wisely and harmed when they are made poorly.
In contrast, airlines always buy (or rent) their airplanes. Large planes are generally bought from
Boeing or Airbus, while modest-sized airliners are purchased from companies such as Brazil’s
Embraer. It would be simply too costly for an airline to pursue a backward integration strategy and
enter the airplane manufacturing business. Insights such as these are powerful enough that the
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creator of transaction cost economics, Professor Oliver Williamson, was awarded a Nobel Prize in
Economic Sciences in 2009.
Each of these theories—enactment, environmental determinism, institutional theory, and
transaction cost economics—is useful for understanding some situations and some important
business decisions. Thus executives should keep these perspectives in mind as they attempt to lead
their firms to greater levels of success. However, one important advantage that resource-based
theory offers over the alternatives is that only resource-based theory does a good job of explaining
firm performance across a wide variety of contexts. Thus resource-based theory offers the point of
view of business that has the strongest value for most executives.
K E Y T A K E A W A Y
Although resource-based theory is the dominant perspective to predict performance in the strategic
management field, other theories exist to explain firm behavior. In some industries, explanations
provided by these theories can be very convincing.
E X E R C I S E S
1. What theory of the firm do you think best explains competition in the fast-food industry?
2. What is an example of an industry in which institutional theory seems to explain the behavior of firms?
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4.5 SWOT Analysis
L E A R N I N G O B J E C T I V E S
1. Understand what SWOT analysis is.
2. Learn how SWOT analysis can help organizations and individuals, and its limitations.
Five forces analysis examines the situation faced by the competitors in an industry. Strategic groups
analysis narrows the focus by centering on subsets of these competitors whose strategies are
similar. SWOT analysis takes an even narrower focus by centering on an individual firm. Specifically,
SWOT analysis is a tool that considers a firm’s strengths and weaknesses along with the
opportunities and threats that exist in the firm’s environment.
Executives using SWOT analysis compare these internal and external factors to generate ideas about
how their firm might become more successful. In general, it is wise to focus on ideas that allow a firm
to leverage its strengths, steer clear of or resolve its weaknesses, capitalize on opportunities, and
protect itself against threats. For example, untapped overseas markets have presented potentially
lucrative opportunities to Subway and other restaurant chains such as McDonald’s and Kentucky
Fried Chicken. Meanwhile, Subway’s strengths include a well-established brand name and a simple
business format that can easily be adapted to other cultures. In considering the opportunities offered
by overseas markets and Subway’s strengths, it is not surprising that entering and expanding in
different countries has been a key element of Subway’s strategy in recent years. Indeed, Subway
currently has operations in nearly 100 nations.
SWOT analysis is helpful to executives, and it is used within most organizations. Important cautions
need to be offered about SWOT analysis, however. First, in laying out each of the four elements of
SWOT, internal and external factors should not be confused with each other. It is important not to
list strengths as opportunities, for example, if executives are to succeed at matching internal and
external concerns during the idea generation process. Second, opportunities should not be confused
with strategic moves designed to capitalize on these opportunities. In the case of Subway, it would be
a mistake to list “entering new countries” as an opportunity. Instead, untapped markets are the
opportunity presented to Subway, and entering those markets is a way for Subway to exploit the
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opportunity. Finally, and perhaps most important, the results of SWOT analysis should not be
overemphasized. SWOT analysis is a relatively simple tool for understanding a firm’s situation. As a
result, SWOT is best viewed as a brainstorming technique for generating creative ideas, not as a
rigorous method for selecting strategies. Thus the ideas produced by SWOT analysis offer a starting
point for executives’ efforts to craft strategies for their organization, not an ending point.
In addition to organizations, individuals can benefit from applying SWOT analysis to their personal
situation. A college student who is approaching graduation, for example, could lay out her main
strengths and weaknesses and the opportunities and threats presented by the environment. Suppose,
for instance, that this person enjoys and is good at helping others (a strength) but also has a rather
short attention span (a weakness). Meanwhile, opportunities to work at a rehabilitation center or to
pursue an advanced degree are available. Our hypothetical student might be wise to pursue a job at
the rehabilitation center (where her strength at helping others would be a powerful asset) rather than
entering graduate school (where a lot of reading is required and her short attention span could
undermine her studies).
K E Y T A K E A W A Y
Executives using SWOT analysis compare internal strengths and weaknesses with external opportunities
and threats to generate ideas about how their firm might become more successful. Ideas that allow a firm
to leverage its strengths, steer clear of or resolve its weaknesses, capitalize on opportunities, and protect
itself against threats are particularly helpful.
E X E R C I S E S
1. What do each of the letters in SWOT represent?
2. What are your key strengths, and how might you build your own personal strategies for success around
them?
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4.6 Conclusion
This chapter explains key issues that executives face in managing resources to keep their firms
competitive. Resource-based theory argues that firms will perform better when they assemble
resources that are valuable, rare, difficult to imitate, and nonsubstitutable. When executives can
successfully bundle organizational resources into unique capabilities, the firm is more likely to enjoy
lasting success. Different forms of intellectual property—which include patents, trademarks,
copyrights, and trade secrets—may also serve as strategic resources for firms. Examining a firm’s
resources can be aided by the value chain, a tool that systematically examines primary and secondary
activities in the creation of a good or service and by a knowledge of supply chain management that
examines the value added of multiple firms working together. While resource-based theory provides
a dominant view for examining the determinants of firm success, other perspectives provide insight
for understanding specific behaviors of firms within an industry. Finally, SWOT analysis is a simple
but powerful technique for examining the interactions between factors internal and external to the
firm.
E X E R C I S E S
1. Divide your class into four or eight groups, depending on the size of the class. Each group should search
for a patent tied to a successful product, as well as a patent associated with a product that was not a
commercial hit. Were there resources tied to the successful organization that the poor performer did not
seem to attain?
2. This chapter discussed Southwest Airlines. Based on your reading of the chapter, how well has Southwest
done in bundling together the resources recommended by resource-based theory? What theoretical
perspective best explains the competitive actions of most firms in the airline industry?
3. Conduct a SWOT analysis of your college or university. Based on your analysis, what one strategic move
should your school make first, and why?
