The Foundations of Strategic Management

Chapter 1: The Foundations of Strategic Management

Chapter 1 The Foundations of Strategic Management

KNOWLEDGE OBJECTIVES

1. Define strategic management. 2. Discuss why firms use the industrial organization model to analyze their external environment. 3. Discuss why firms use the resource-based view of the firm model to analyze their internal environment. 4. Define stakeholders and understand their importance. 5. Explain the work of strategic leaders.

CHAPTER OUTLINE

Focusing on Strategy: Integrating Solutions to Handle Cash: The Foundation for Loomis’s Continuing Success? WHAT IS STRATEGIC MANAGEMENT? The Three Parts of the Strategic Management Process

Understanding Strategy, Learning from Success: Wal-Mart’s Grocery Business: Can the Momentum and Success Be Maintained? Understanding Strategy, Learning from Failure: ”:”CompUSA Is Closing All of its Stores,” the Headlines Read. What Happened? THE INDUSTRIAL ORGANIZATION MODEL THE RESOURCE-BASED VIEW OF THE FIRM MODEL STAKEHOLDERS STRATEGIC LEADERS HOW THE BOOK IS ORGANIZED SUMMARY KEY TERMS DISCUSSION QUESTIONS

STRATEGY TOOLBOX

Mini-Case: Are Still Better Days Ahead for Hewlett-Packard? EXPERIENTIAL EXERCISES BIZ FLIX ENDNOTES

Lecture notes: Chapter Introduction: This chapter lays the groundwork with concepts and terminology that will be used throughout the book. The instructor may wish to emphasize to the students that a firm grasp of these concepts will

1 Chapter 1: The Foundations of Strategic Management give them a good foundation for understanding and using the material in the rest of the text.

The purpose of the text is to explain the three parts of strategic management: vision, analysis, and strategy. Stress that it is crucial for the success of the organization for all members to understand and implement the vision and strategy of the firm. Ideally, strategy is not isolated at the CEO level, but extends to all levels of employees. Nor is strategy confined to Fortune 500 firms. All firms need effective business strategy.

Focusing on Strategy

Integrating Solutions to Handle Cash: The Foundation for Loomis’s Continuing Success

This feature applies to Knowledge Objectives 1 and 2. In a world where cash and coins are used less frequently and some speak of the possibilities of a cash-free world, Loomis, Fargo & Co.exhibitsCo. exhibits integrated solutions for handling cash as the foundation of its success. Historically, Loomis, having later merged with Wells Fargo to form Loomis, Fargo & Co., had focused upon “having the right amount of cash, in the right place, and at the right time.” After the merger, Loomis attributes having a vision of “managing the public flow of cash.” Loomis has faced external environmental change that continually forces them to recast themselves and to alter their strategy. By examining environmental changes, Loomis opted to use technology as a means to differentiate themselves from competitors by providing broader based cash logistics services. To increase its scale of operations, Loomis acquired Guardian Armored Security making it the largest cash-handling services provider in the state of Michigan. The success of Loomis, Fargo, & Co. is attributed to their use of the strategic management process of maintaining a vision, analyzing the environment, and making appropriate adjustments or adaptation in strategy.

WHAT IS STRATEGIC MANAGEMENT?

This section applies to Knowledge Objective 1.

 The ongoing process of strategic management forms a vision, analyzes the external and internal environments, and selects one or more strategies to create value for stakeholders whichwho includes customers and shareholders.  Strategic management is an action plan designed to move an organization toward achievement of its goals.  The firm’s vision consists of o its mission, the firm’s DNA, its core information, characteristics and o the “picture” of the firm’s future

2 Chapter 1: The Foundations of Strategic Management

 The vision inspires employees.  The mission defines the firm’s core intent and the business(es) in which it intends to operate.  The external environment is conditions outside the firm that affect firm performance.  The internal environment is conditions inside the firm that affect the choice of and use of strategies.  Strengths are resources and capabilities allowing the firm to complete important tasks.  Resources are tangible and intangible assets of the firm.  Capabilities result from the integration of different resources to complete a task or a series of related tasks.  Core competencies are capabilities the firm performs especially well. o Distinctive competencies are core competencies that differ from those held by competitors.  Competitive advantage exists when o the firm creates value for customers by performing a key activity better than its competitors or o the firm’s distinctive competence allows it to create values for customers that competitors cannot.

FIGURE 1.1 The Strategic Management Process

This figure applies to Knowledge Objective 1.

This figure shows the major components, linkages and flows of the strategic management process. It indicates where each component is covered in the text.

Vision influences and is influenced by analysis of environments. Vision and analysis in turn influence and are influenced by strategy.

Strategy takes two forms: competing through rivalry and competing through market entry. TABLE 1.1 Key Characteristics of Strategic Management

This table applies to Knowledge Objective 1.

This table indicates that strategic management is  performance oriented  ongoing  dynamic rather than static  present- and future-oriented

 concerned with conditions inside and outside the firm  concerned with performing well and satisfying stakeholders

The Three Parts of the Strategic Management Process

This section applies to Knowledge Objective 1

 Firms must analyze their external and internal environments before strategies can be chosen and implemented.  A firm’s strategy should deliver a unique mix of value to customers.  Strategies include o business-level strategies o multiproduct strategies o acquiring and integrating businesses  Strategies allow a firm to enter new markets through o international strategies o alliances o new ventures  Strategy implementation is the set of actions the firm takes to use a strategy.  Organizational success can be transitory. What works for a company in the present, may not work in the future.

TABLE 1.2 Vision and Mission Statements

This table applies to Knowledge Objective 1.

This table gives examples of mission and vision statements of well-known companies. These statements may provide a basis for discussion as to whether they are effective in terms of providing direction (mission) for the firm and providing an inspiration to act ethically (vision).

Understanding Strategy, Learning from Success

Wal-Mart’s Grocery Business: Can the Momentum and Success Be Maintained?

This case applies to Knowledge Objective 1, 2, 3, and 5.

The case describes the current state of Wal-Mart’s grocery business. By taking advantage of their inventory management and distribution core competences/competitive advantages, Wal-Mart implements a cost leadership strategy in its grocery stores that coincides with its

4 Chapter 1: The Foundations of Strategic Management other larger units such as Wal-Mart Supercenters. Use of the strategic management process has recently proven successful for Wal-Mart. With success, Wal-Mart is now facing strong competition by Tesco PLC in American markets. Recognizing Tesco’s competitive ability, Wal-Mart is adapting its strategy by testing small format grocery stores, with fresher foods, and customer convenience. With a desire to build upon its competitive advantages to create more types of value for its consumers, Wal-Mart intends to establish walk-in medical facilities within their stores along with possibilities for private-label fresh food offerings. Wal-Mart’s strategic management must continue to analyze internal and external environments to ensure future success.

This case illustrates that strategic success is not permanent and must continually evolve to meet changing environmental conditions.

Critical thinking questions:

1. From the case materials, how has Wal-Mart utilized the strategic management process? (Knowledge Objective 1)

Answer: Wal-Mart’s vision to be the “cost leader” influences and is influenced by an analysis of its environments. Wal-Mart, being aware of its core competencies and utilizing these resources to remain competitively advantaged, and recognizing the strength of its competitors shows proven analysis of the environment. Their intentions for walk-in medical care and private-label food offerings indicate adaptation and changes in strategy.

2. What future do you envision for Wal-Mart as a grocer? (Knowledge Objectives 2 and 3.

Answer: Students can brainstorm on what Wal-Mart can do to remain true to its vision (which is very general) by developing new value types for its customers. Do you anticipate Wal-Mart taking its grocery store concepts to other countries and what environmental conditions should they consider? Will Wal-Mart compete with Tesco in its home turf of Britian and what environmental conditions may prompt such a move?

Understanding Strategy, Learning from Failure

“CompUSA Is Closing All of its Stores,” the Headlines Read. What Happened? This case applies to Knowledge Objectives 1, 2, 4, and 5.

This case illustrates the failure of CompUSA to execute a strategic management process. While the firm has been sold and the name replaced with TigerDirect, CompUSA never

5 Chapter 1: The Foundations of Strategic Management had its own identity or vision—a seller of software apparently evolved to offering more products without any primary initiative. CompUSA, even in turbulence, failed to examine its environment. An analysis of competitors, mission, strengths, weaknesses, opportunities, threats, resources, capabilities, and core competencies would have proven beneficial for CompUSA.

Even if a business exists and sells products, failure is inevitable without a vision, analysis of the environment, and a resulting strategy to be implemented—the strategic management process.

Critical thinking questions:

1. The instructor might point out that CompUSA expanded without direction. As Soft Warehouse, they were a seller of software that expanded product lines for sale without a reason and found themselves questioning what kind of a seller they were. (Knowledge Objectives 1, 2, 3, and 5)

a. Can you develop a vision for CompUSA that would have given them a “picture of their future?” b. What external and internal environmental conditions should CompUSA have considered? c. Based upon the answers to a and b, how would CompUSA’s strategy have changed? d. Will CompUSA assets be a successful integration for TigerDirect? This might be the place for the instructor to discuss whether most start-up firms really have a well-thought out business strategy. Note that most start-up firms fail. Could this be due to a failure of strategy?

Answer:

These questions are designed to stimulate thought and discussion among the students. The outcomes of this discussion should be that with sound strategic management processes, organizations have better opportunities for success. THE INDUSTRIAL ORGANIZATION MODEL

 External environmental conditions can be o opportunities which may help the firm reach its vision or o threats which may prevent the firm from reaching its vision  Lack of control over conditions in the external environment reduces a firm’s strategic options.  A lack of options results in an industry wherein firms use similar strategies.

THE RESOURCE-BASED VIEW OF THE FIRM MODEL

This case applies to Knowledge Objective 3

 The resource-based view (RBV) model describes how firms analyze their internal environment.  This identifies the firm’s o strengths o resources o capabilities o core competencies o distinctive competencies o competitive advantages  The RBV model (internally focused) complements the I/O model (externally focused).  The RBV model suggests that the firm needs resources and capabilities that are unique in order to create competitive advantage through creating value for customers.  The firm has direct control over the internal environment (but not the external environment).  The choices that the firm makes about its resources and capabilities and how they will be nurtured and used affects whether the firm can develop them differently than other firms and thus increase the firm’s strategic options.  Unique resources and capabilities increase strategic options.

FIGURE 1.2 Using the Industrial Organization (I/O) Model to Analyze the External Environment

Firms analyze the external environment by  studying conditions  identifying an attractive industry or industry segment  selecting the strategy appropriate for the external environment  implementing the strategy with the firm’s resources

FIGURE 1.3 Using the RBV Model to Analyze the Internal Environment

Firms analyze the internal environment by

 studying the firm’s strengths and weaknesses  identifying what the firm’s resources allow it to do better than its competitors  selecting the strategy suggested by the competitive advantages and an appropriate industry  implementing the strategy with the firm’s resources

Lecture note: The instructor may point out that in both the I/O and RBV models the first step is studying and the last step is implementation. The implication here is that many ideas for organizations, products or services never make it to implementation stage (or, that they shouldn’t make it to the implementation stage, which may account for the high failure rate of new firms!) If you view the models as a “weeding out” process, you may say that only the strongest ideas with the best chances for success should make it to the implementation stage. Also note that in a new venture, the idea must pass the test in both models, so that the firm has the internal strengths to compete in the external environment.

STAKEHOLDERS

Teaching note: Students may be confused by the concept that persons, organizations, and institutions outside of the firm are stakeholders, especially when they are not customers of the firm. It may be useful to select a company with which most students are familiar, for example, McDonald’s. Explore the non- customer stakeholders of McDonald’s. Since the premiere of the film “Upsize Me” these stakeholders have gotten much more involved in McDonald’s products and operations. These include government health agencies, health related groups that deal with specific problems such as obesity, diabetes, childhood health problems, parents, etc. The students may raise the U.S. society as a whole, when one considers the cost to taxpayers of healthcare for obese and ill citizens, and the lower productivity of obese and ill citizens. This might be an interesting class discussion since some students will argue that the need of the customers to eat high calorie foods outweighs the cost to society.

 Stakeholders are individuals and groups who have an interest in the firm’s performance and the ability to influence its actions.  Stakeholders support or withdraw support from firms depending on how well the firm meets their needs.  Firms have relationships with stakeholders that must be managed.  Better management of stakeholders can be a competitive advantage.  Communication is key to management of stakeholders.  Satisfying one stakeholder’s needs may disadvantage another stakeholder.

 All stakeholders must be at least minimally satisfied.

FIGURE 1.4 Stakeholder Groups

The major stakeholder groups can be divided into three main categories:  Owners  External stakeholders  Internal stakeholders

STRATEGIC LEADERS

 Strategic leaders are the individuals practicing strategic leadership. Their tasks include o developing the firm’s vision, and using the vision statement to stimulate employees’ creativity. o deciding the firm’s strategies to achieve the vision o deciding what resources to acquire at what prices o deciding how to manage the firm’s resources o shaping and nurturing organizational culture  Organizational culture is the set of values and beliefs shared throughout the firm. o Values reflect what is important. o Beliefs refer to how things should be done.  The most effective organizational culture lets people know they are appreciated. This can motivate excellent performance.  Strategic management is increasingly decentralized, moving decisions down to people who are closest to the action.  The final responsibility for effective strategic management rests with the firm’s strategic leaders.  Strategic leaders must act ethically.  Ethics are concerned with standards for deciding what is good or bad, right or wrong, as defined by most members of a society.  Ethics can be documented in codes of conduct.  Ethics can be inferred by the behavior of stakeholders, especially employees.

Teaching note: Ethics is a hot topic in the corporate world today. Some firms and leaders have been brought down for relatively minor lapses, whereas some firms suspected of major ethical lapses are apparently continuing unscathed by

9 Chapter 1: The Foundations of Strategic Management public opinion or governmental action. A class debate could be developed by asking students if they think the issue of ethics is a currently politically correct concept that is only given lip service, or if concern about organizational ethics is a deeply felt and growing issue among the general public. You may also ask which is more indicative of the true ethical standards of the organization: the formal code of conduct or the actual day-to-day behavior of employees and board members.

HOW THE BOOK IS ORGANIZED

SUMMARY

KEY TERMS

ANSWERS TO DISCUSSION QUESTIONS

1. What is strategic management? Describe strategic management’s importance in today’s organizations. (Knowledge Objective 1)

Answer:

The process of strategic management forms a vision, analyzes the external and internal environments, and selects one or more strategies to create value for stakeholders. Strategic management is an action plan designed to move an organization toward achievement of its goals. Strategic management is important in today’s organizations because it determines the success of the organization. As the environment changes, the necessary strategies must also change, otherwise the organization will fail.

2. What is the industrial organization (I/O) model? Why do firms use it to analyze their external environment? (Knowledge Objective 2)

Answer:

The I/O model describes how firms analyze the external environment by studying conditions, identifying an attractive industry or industry segment, selecting the strategy appropriate for the external environment, and implementing the strategy with the firm’s resources. Firms use this model to identify threats to the firm’s success and opportunities for the firm to achieve its vision.

3. What is the resource-based view of the firm model? Why do firms use this model to examine their internal environment? (Knowledge Objective 3)

Answer:

Firms analyze the internal environment by: studying the firm’s strengths and weaknesses, identifying what the firm’s resources allow it to do better than its competitors, selecting the strategy suggested by the competitive advantages and an appropriate industry, and implementing the strategy using the firm’s resources. The goal is to develop competitive advantage.

4. Who are stakeholders? Why are stakeholders important to firms? What does it mean to say that the firm has relationships with its stakeholders? (Knowledge Objective 4)

Answer:

Stakeholders are individuals and groups who have an interest in the firm’s performance and the ability to influence its actions. Stakeholders support or withdraw support from firms depending on how well the firm meets their needs. The success of the firm requires that all stakeholders be at least minimally satisfied. The firm and its stakeholders have relationships because each stakeholder needs something the firm provides and the firm needs something the stakeholders provide.

5. What is the nature of the strategic leader’s work? (Knowledge Objective 5)

Answer:

The nature of the strategic leader’s work includes developing the firm’s vision, and using the vision statement to stimulate employees’ creativity. Strategic leaders must shape and nurture the organizational culture. Decision-making is a large part of the strategic leader’s work, including: selecting the firm’s strategies to achieve the vision, deciding what resources to acquire at what prices, and deciding how to manage the firm’s resources.

INSTRUCTORS’ NOTES FOR STRATEGY TOOLBOX

This feature applies to Knowledge Objectives 1 and 5.

Present this process map to students as a guide to doing strategy. It can be applied to the largest fortune 500 companies, the US Military as well as student organizations in

11 Chapter 1: The Foundations of Strategic Management universities. The process doesn’t change – only the scope and contents of the results. Make it clear that the entire textbook is dedicated to sharing key tools, frameworks and methodologies that support the strategic management process.

Have the students fill this process map in using a student organization in which they belong (especially if they are a leader). Remind them to continually prioritize the contents (no more than 3 in each category) to make it clear enough for all students in the organization to understand and successfully implement. Mention that even the Fortune 100 companies struggle to do this consistently as it is dynamic and requires constant attention of the strategic leaders.

INSTRUCTORS’ NOTE FOR MINI-CASE

Are Still Better Days Ahead for Hewlett-Packard?

This case applies to Knowledge Objective 5.

This case exhibits Hewlett Packard’s leadership practices with Mark Hurd, CEO, at the helm. Hurd is credited with the positive turnaround at HP through increased stock prices, cost cutting and improvements in operational techniques. While Hurd’s present skills and practices have shown promise, the issue now becomes “Does he have the vision needed for HP?” This case focuses on Hurd’s attention to R & D allocation and acquisition as a means of innovation and is it the right direction for HP.

Questions:

1. Using materials available to you, including the Internet, learn as much as you can about Mark Hurd as a strategic leader. See if you can determine the type of organizational culture Hurd is developing at HP. Given what you learn and in light of comments included in the case, would you want to work for Hurd? Why or why not? (Knowledge Objective 5)

Answer:

Student answers will most likely vary depending upon the materials and websites reviewed.

A review of http://www.hp.com/hpinfo/execteam/bios/hurd.html does reveal that Mark Hurd came to HP after his ability to reignite NCR Corporation. By all accounts, Hurd is customer focused and communicates this throughout the company and in his own external communications. Mr. Hurd has established the following goal for HP:

With the goal of establishing HP as the world's leading technology company, Hurd has sharpened HP's strategic focus and concentrated its investments on three long-term growth opportunities: next-generation enterprise data center architecture and services; technologies for always connected, always personal mobile experiences; and a broad transition from analog to digital imaging and printing across the consumer, commercial and industrial markets.

Another article at http://www.bloggingstocks.com/2007/12/16/money-winners- of-2007-hps-mark-hurd-firing-on-all-cylinders/ indicates that Mark Hurd is firing on all cylinders and not a single CEO articulates company vision, strategy, sales prowess, and operational efficiency better than Hurd.

According to http://blogs.zdnet.com/BTL/index.php?p=1217, the HP organizational culture under Mark Hurd is focused upon shaping its present foundations with the future of technology built around operational efficiency.

Based on the fact that Mark Hurd does exhibit the practices of strategic leadership by: 1) developing the firm’s vision, and uses the vision statement to stimulate employees’ creativity 2) deciding the firm’s strategies to achieve the vision 3) deciding what resources to acquire at what prices 4) deciding how to manage the firm’s resources 5) shaping an nurturing organizational culture

provides an incentive to work for him.

The instructor may wish to use the Internet sites chosen by the students as a discussion piece for examining the tasks of strategic leadership in greater detail.

2. Go to Hewlett-Packard’s Web site (www.hp.com) to discover the firm’s current actions regarding “printing from the Web.” Has HP acquired more companies to support the effort to leverage the Internet? If so, what are those actions and how successful are they? ? (Knowledge Objective 4)

Answer:

A review of the Web site reveals no current actions regarding “printing from the Web.” The Web site does reveal that:

Phase One of HP's strategy has been about building the world's best hardware business. Phase Two has focused on developing a layer of leading software applications, with a particular emphasis on management automation, to optimize the performance of HP's hardware and differentiate it in the marketplace. Phase Three has addressed the services side with a goal of bringing the business into the forefront of global providers.

Along the way, HP has successfully acquired 26 companies over the past three and a half years, developing substantial experience in integrating new businesses. Following news on May 13 of HP's intention to acquire EDS, more than three months of intensive integration planning has taken place, putting the company in a strong position to better serve our clients quickly.

Due to the currency of acquisitions and economic conditions, the success of these endeavors are yet to be measured.

The instructor may opt to examine and discuss with students why the “Printing from the Web” is no longer an initiative and what strategic leadership characteristics may have prompted the project to be abandoned.

3. The industrial organization (I/O) model and the resource-based view of the firm model are introduced in this chapter. Find evidence in the case showing that HP was being influenced by its external environment and that the firm has unique capabilities it intends to use to be successful.? (Knowledge Objectives 2 and 3)

Answer:

Evidence of External Environment Influence

Predictions of reductions in the amounts companies around the globe would invest in technology in the next several years.

Hurd’s interest in driving technological innovations for its customers.

Multiple other issues may be raised by students.

Evidence of Unique Capabilities to be used for Success

HP recognized as a technology giant.

Printers are HP’s most famous and durable products.

The HP Deskjet printer is “the world’s top-selling brand.” Innovation as a foundation for the future and Hurd promises to keep the pipeline stocked with promising new products and services.

The instructor may want to discuss with student the implications of this knowledge such how does it impact chosen strategies.

INSTRUCTORS’ NOTES FOR EXPERIENTIAL EXERCISES

Exercise One: The Culture, Vision, and Strategy Linkage

This exercise applies to Knowledge Objective 5.

This question encourages students to think carefully about the link between the culture of well known companies and the missions and strategies they follow. Students likely have tacit understandings of each firm’s culture but may never have explicitly expressed them or thought about how tight links between a firm’s strategy and its culture. The second part of the exercise helps students see how cultures are complementary to the firm’s mission and vision. An alternative to the use of the web is for the instructor to bring the mission or vision statement of each firm to class and present it after a consensus about the culture strategy link is made. Instructors should conclude the exercise by linking the connections made on the firm level for each company with the general model presented in Figure 1-1.

Exercise Two: Gathering and Assessing External and Internal Information

The exercise applies to Knowledge Objectives 2 and 3.

The purpose of the exercise is to teach students how to apply two fundamental models (the I/O and model and resource-based view) to the analysis of a firm’s external and internal environment. The exercise seeks to use the external and internal analysis as the basis for understanding current situations facing firms, so the instructor can change the list of firms to meet that goal. For example, at the time of writing the exercise, high fuel prices and aircraft order cancellations were two threats facing U.S. Airways and Boeing respectively. The instructor should emphasize that the external and internal analysis are basic parts of the strategic management process and are central to firms in creating their strategies.

INSTRUCTORS’ NOTES FOR BIZ FLIX

This exercise applies to Knowledge Objectives 2 and 5.

U-571: Setting Strategy

The scene from U-571 shows several aspects of strategic management and strategic planning described in this chapter. Show the scene after introducing strategic management and strategic planning. You can guide a discussion focused on the questions in the student workbook.

This action-packed World War II thriller shows a U.S. submarine crew’s efforts to retrieve an Enigma encryption device from a disabled German submarine. After the crew gets the device, a German vessel torpedoes and sinks their submarine. The survivors must now use the disabled German submarine to escape from the enemy with their prize. The film’s almost nonstop action and extraordinary special effects look and sound best with a home theater system.

The scene comes from the “160 meters” segment toward the film’s end. Lt. Andrew Tyler (Matthew McConaughey) is now the submarine’s commander following the drowning death of Lt. Commander Mike Dahlgren (Bill Paxton), the original commander. Lt. Tyler says, “Chief.” Chief Petty Officer (CPO) Henry Klough (Harvey Keitel) approaches the map table. The film continues to its dramatic end with the execution of the strategy Tyler described.

What to Watch for and Ask Yourself

1. Does Lt. Tyler analyze the submarine’s external environment?

Answer:

Lt. Tyler carefully assesses the submarine’s external environment. The external environment includes his submarine’s submerged level, its change in that level, and the enemy destroyer’s position and speed. The creation of the debris field noted in the next question becomes part of the external environment involved in his strategic plan.

ENDNOTES