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THIRTEENTH EDITION Strategic Management CONCEPTS AND CASES Fred R. David Francis Marion University Florence, South Carolina Prentice Hall Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo Preface Why the Need for This New Edition? The global economic recession has created a business world today that is quite different and more complex than it was just two years ago when the previous edition of this text was published. Thousands of businesses have vanished, and consumers have become extremely price sensitive and oftentimes reluctant purchasers of products and services. Very tight credit markets, high unemployment, and millions of new entrepreneurs have also changed the business landscape. Business firms that have survived the last three years of global economic turmoil are today leaner and meaner than ever before. Gaining and sustaining competitive advantage is harder than ever. Social networking and e-commerce have altered marketing to its core since the prior edition. This new edi- tion reveals how to conduct effective strategic planning in this new world order. Since the prior edition, thousands of liquidations, bankruptcies, divestitures, merg- ers, alliances, and partnerships captured the news. Corporate scandals highlighted the need for improved business ethics and corporate disclosure of financial transactions. Downsizing, rightsizing, and reengineering contributed to a permanently altered corpo- rate landscape. Thousands of firms began doing business globally, and thousands more closed their global operations. Thousands prospered, and yet thousands failed in the last two years as the global recession spared few. Long-held competitive advantages have eroded as new ones formed. This new edition captures the complexity of this world busi- ness environment. Both the challenges and opportunities facing organizations of all sizes today are greater than ever. There is less room than ever for error in the formulation and imple- mentation of a strategic plan. This new edition provides a systematic effective approach for developing a clear strategic plan, even in the worst of times. Changes made in this edition are aimed squarely at illustrating the effect of new business concepts and tech- niques on strategic-management theory and practice. Due to the magnitude of recent changes affecting companies, cultures, and countries, every page of this edition has been updated. The first edition of this text was published in 1986. Since then, this textbook has grown to be one of the most widely read strategic- management books, perhaps the most widely read, in the world. This text is now published in nine languages. What Is New in This Edition? This edition includes exciting new features, changes, and content designed to position this text as the clear leader and best choice for teaching strategic management. Here is a sum- mary of what is new in this edition: • A new Chapter 10, “Business Ethics/Social Responsibility/Environmental Sustainability”; there is extensive new coverage of ethics and sustainability because this text emphasizes that “good ethics is good business.” Unique to strategic-management texts, the natural environment discussion is strengthened in this edition to promote and encourage firms to conduct operations in an environmentally sound manner. Respect for the natural environment has become an important concern for consumers, companies, society, and AACSB-International. • A new Chapter 11, “Global/International Issues”; there is extensive new coverage of cultural and conceptual strategic-management differences across countries. Doing business globally has become a necessity, rather than a luxury in most industries because nearly all strategic decisions today are affected by globalxviii PREFACE issues and concerns. Every case company in this edition does business globally, providing students ample opportunity to evaluate and consider international aspects of doing business. • A new boxed insert at the beginning of each chapter showcases a company that has done exceptionally well in the 2008–2010 global economic recession and reveals their strategy. • Hundreds of new examples abound in every chapter. • A new cohesion case on McDonald’s Corporation (2010); this is one of the most successful, well-known, and best managed global companies in the world; students apply strategy concepts to McDonald’s at the end of each chapter through new Assurance of Learning Exercises. • Thirty-two new tables in the chapters to better capture key strategic-management concepts. • A revised comprehensive strategic management model to reflect the new chapters. • Extensive new narrative on strategic management theory and concepts in every chapter to illustrate the new business world order. • On average, 15 new review questions at the end of each chapter. • Forty-eight new Assurance of Learning Exercises at the end of chapters that apply chapter concepts; the exercises prepare students for strategic-management case analysis. • Twenty-four new color photographs bring the edition to life and illustrate companies/concepts. • All new current readings at the end of each chapter; new research and theories of seminal thinkers in strategy development, such as Ansoff, Chandler, Porter, Hamel, Prahalad, Mintzberg, and Barney are provided in the chapters; practical aspects of strategic management, however, are still center stage and the trademark of this text below. • Twenty-nine new cases—grouped by industry; great mix of profit/nonprofit, large/small, and manufacturing/service organizations; all the cases have a 2009–2010 time setting; all the cases are “comprehensive” in the sense that each focuses on multiple business functions, rather than addressing one particular busi- ness problem or issue; all the cases are undisguised and feature real organizations in real industries using real names and real places (nothing is fictitious in any case); all the cases feature an organization “undergoing strategic change,” thus offering students up-to-date issues to evaluate and consider; all the cases are written in a lively, concise writing style that captures the reader’s interest and establishes a time setting, usually in the opening paragraph; all the cases provide excellent quantitative information such as numbers, ratios, percentages, dollar val- ues, graphs, statistics, and maps so students can prepare a more specific, rational, and defensible strategic plan for the organization; all the cases provide excellent information about the industry and competitors. This edition continues to offer many special time-tested features and content that have made this text so successful for over 20 years. Historical trademarks of this text that are strengthened in this edition are described below. Chapters: Time-Tested Features • This text meets AACSB-International guidelines that support a practitioner orien- tation rather than a theory/research approach. It offers a skills-oriented approach to developing a vision and mission statement; performing an external audit; con- ducting an internal assessment; and formulating, implementing, and evaluating strategies. • The author’s writing style is concise, conversational, interesting, logical, lively, and supported by numerous current examples throughout.PREFACE xix • A simple, integrative strategic-management model appears in all chapters and on the inside front cover of the text. This model is widely used for strategic planning among consultants and companies worldwide. One reviewer said, “One thing I have admired about David’s text is that he follows the fundamental sequence of strategy formulation, implementation, and evaluation. There is a basic flow from mission/purposes to internal/external environmental scanning to strategy develop- ment, selection, implementation, and evaluation. This has been, and continues to be, a hallmark of the David text. Many other strategy texts are more disjointed in their presentation, and thus confusing to the student, especially at the undergraduate level.” • A Cohesion Case follows Chapter 1 and is revisited at the end of each chapter. This Cohesion Case allows students to apply strategic-management concepts and tech- niques to a real organization as chapter material is covered, which readies students for case analysis in the course. • End-of-chapter Assurance of Learning Exercises effectively apply concepts and techniques in a challenging, meaningful, and enjoyable manner. Eighteen exercises apply text material to the Cohesion Case; 10 apply textual material to a college or university; another 10 exercises send students into the business world to explore important strategy topics. The exercises are relevant, interesting, and contemporary. • There is excellent pedagogy in this text, including notable quotes and objectives to open each chapter, and key terms, current readings, discussion questions, and experi- ential exercises to close each chapter. • There is excellent coverage of strategy formulation issues, such as business ethics, global versus domestic operations, vision/mission, matrix analysis, partnering, joint venturing, competitive analysis, governance, and guidelines for conducting an internal/external strategy assessment. • There is excellent coverage of strategy implementation issues such as corporate culture, organizational structure, outsourcing, marketing concepts, financial analysis, and business ethics. • A systematic, analytical approach is presented in Chapter 6, including matrices such as the SWOT, BCG, IE, GRAND, SPACE, and QSPM. • The chapter material is again published in a four-color format. • A chapters-only paperback version of the text is available. • Custom-case publishing is available whereby an instructor can combine chapters from this text with cases from a variety of sources or select any number of cases desired from the 29 cases in the full text. • For the chapter material, the outstanding ancillary package includes a comprehensive Instructor’s Manual, computerized test bank, and PowerPoints. The comprehensive strategic-management model is displayed on the inside front cover of the text. At the start of each chapter, the section of the comprehensive strategy model covered in that chapter is highlighted and enlarged so students can see the focus of each chapter in the basic unifying comprehensive model. The Case Information Matrix and Case Description Matrix provided in the preface reveal (1) topical areas emphasized in each case and (2) contact and location information for each case company. These matrices provide suggestions on how the cases deal with concepts in the 11 chapters. Cases: Time-Tested Features • This edition contains the most current set of cases in any strategic-management text on the market. All cases include year-end 2009 financial data and information. • The cases focus on well-known firms in the news making strategic changes. All cases are undisguised, and most are exclusively written for this text to reflectxx PREFACE current strategic-management problems and practices. These are all “student- friendly” cases. • Organized conveniently by industry (usually two competing firms per industry), the cases feature a great mix of small business, international, and not-for-profit firms. • All cases have been class tested to ensure that they are interesting, challenging, and effective for illustrating strategic-management concepts. • All the cases provide complete financial information about the firm, as well as an organizational chart and a vision and mission statement for the organization if those were available. • Customized inclusion of cases to comprise a tailored text is available to meet the spe- cial needs of some professors. • For the cases, the outstanding ancillary package includes an elaborate Case Solutions Manual and support from the www.strategyclub.com Web site. • All of the cases are comprehensive in the sense that each provides a full description of the firm and its operations rather than focusing on one issue or problem such as a plant closing. Each case thus lends itself to students preparing a three-year strategic plan for the firm. Special Note to Students Welcome to strategic management. This is a challenging and exciting capstone course that will allow you to function as the owner or chief executive officer of different organizations. Your major task in this course will be to make strategic decisions and to justify those deci- sions through oral and written communication. Strategic decisions determine the future direction and competitive position of an enterprise for a long time. Decisions to expand geographically or to diversify are examples of strategic decisions. Strategic decision-making occurs in all types and sizes of organizations, from Exxon and IBM to a small hardware store or small college. Many people’s lives and jobs are affected by strategic decisions, so the stakes are very high. An organization’s very survival is often at stake. The overall importance of strategic decisions makes this course especially exciting and challenging. You will be called upon in this course to demonstrate how your strategic decisions could be successfully implemented. In this course, you can look forward to making strategic decisions both as an individ- ual and as a member of a team. No matter how hard employees work, an organization is in real trouble if strategic decisions are not made effectively. Doing the right things (effec- tiveness) is more important than doing things right (efficiency). For example, many American newspapers are faltering as consumers increasingly switch to interactive media for news. You will have the opportunity in this course to make actual strategic decisions, perhaps for the first time in your academic career. Do not hesitate to take a stand and defend specific strategies that you determine to be the best, based on tools and concepts in this textbook. The rationale for your strategic decisions will be more important than the actual decision, because no one knows for sure what the best strategy is for a particular organization at a given point in time. This fact accents the subjective, contingency nature of the strategic-management process. Use the concepts and tools presented in this text, coupled with your own intuition, to recommend strategies that you can defend as being most appropriate for the organizations that you study. You will also need to integrate knowledge acquired in previous business courses. For this reason, strategic management is often called a capstone course; you may want to keep this book for your personal library. A trademark of this text is its practitioner and applications orientation. This book pre- sents techniques and content that will enable you to actually formulate, implement, andPREFACE xxi evaluate strategies in all kinds of profit and nonprofit organizations. The end-of-chapter Assurance of Learning Exercises allow you to apply what you’ve read in each chapter to the new McDonald’s Cohesion Case and to your own university. Definitely visit the Strategic Management Club Online at www.strategyclub.com. The templates and links there will save you time in performing analyses and will make your work look professional. Work hard in this course and have fun. Good luckAcknowledgments Many persons have contributed time, energy, ideas, and suggestions for improving this text over 12 editions. The strength of this text is largely attributed to the collective wisdom, work, and experiences of strategic-management professors, researchers, students, and practitioners. Names of particular individuals whose published research is referenced in this edition of this text are listed alphabetically in the Name Index. To all individuals involved in making this text so popular and successful, I am indebted and thankful. Many special persons and reviewers contributed valuable material and suggestions for this edition. I would like to thank my colleagues and friends at Auburn University, Mississippi State University, East Carolina University, and Francis Marion University. I have served on the management faculty at all these universities. Scores of students and professors at these schools helped shape the development of this text. Many thanks go to the following 15 reviewers of the prior edition whose comments shaped this thirteenth edition: Moses Acquaah, The University of North Carolina at Greensboro Charles M. Byles, Virginia Commonwealth University Charles J. Capps III, Sam Houston State University Neil Dworkin, Western Connecticut State University John Frankenstein, Brooklyn College/City University of New York Bill W. Godair, Landmark College, Community College of Vermont Carol Jacobson, Purdue University Susan M. Jensen, University of Nebraska at Kearney Thomas E. Kulik, Washington University at St. Louis Jerrold K. Leong, Oklahoma State University Trina Lynch-Jackson, Indiana University NW, Purdue Calumet, Calumet College of St. Joseph, Indiana Wesleyan University Raza Mir, William Paterson University Thomas W. Sharkey, University of Toledo Jill Lynn Vihtelic, Saint Mary’s College Michael W. Wakefield, Colorado State University–Pueblo Individuals who develop cases for the North American Case Research Association Meeting, the Midwest Society for Case Research Meeting, the Eastern Case Writers Association Meeting, the European Case Research Association Meeting, and Harvard Case Services are vitally important for continued progress in the field of strategic manage- ment. From a research perspective, writing strategic management cases represents a valu- able scholarly activity among faculty. Extensive research is required to structure business policy cases in a way that exposes strategic issues, decisions, and behavior. Pedagogically, strategic management cases are essential for students in learning how to apply concepts, evaluate situations, formulate a “game plan,” and resolve implementation problems. Without a continuous stream of updated business policy cases, the strategic-management course and discipline would lose much of its energy and excitement. Professors who teach this course supplement lecture with simulations, guest speakers, experiential exercises, class projects, and/or outside readings. Case analysis, however, is typically the backbone of the learning process in most strategic-management courses across the country. Case analysis is almost always an integral part of this course. Analyzing strategic-management cases gives students the opportunity to work in teams to evaluate the internal operations and external issues facing various organizations and to craft strategies that can lead these firms to success. Working in teams gives students practical experience solving problems as part of a group. In the business world, important decisions are generally made within groups; strategic-management students learn to dealxxiv ACKNOWLEDGMENTS with overly aggressive group members and also timid, noncontributing group members. This experience is valuable as strategic-management students near graduation and soon enter the working world a full time. Students can improve their oral and written communication skills as well as their ana- lytical and interpersonal skills by proposing and defending particular courses of action for the case companies. Analyzing cases allows students to view a company, its competitors, and its industry concurrently, thus simulating the complex business world. Through case analysis, students learn how to apply concepts, evaluate situations, formulate strategies, and resolve implementation problems. Instructors typically ask students to prepare a three-year strategic plan for the firm. Analyzing a strategic-management case entails students applying concepts learned across their entire business curriculum. Students gain experience dealing with a wide range of organizational problems that impact all the business functions. The following people wrote cases that were selected for inclusion in this thirteenth edition. These persons helped develop the most current compilation of cases ever assem- bled in a strategic-management text: Dr. Alen Badal, The Union Institute Dr. Mernoush Banton, Florida International University Dr. Rochelle R. Brunson, Baylor University Dr. John J. Burbridge, Elon University Dr. Charles M. Byles, Virginia Commonwealth University Dr. Donald Crooks, Wagner College Forest R. David, MBA, Francis Marion University Dr. James Harbin, Texas A&M University–Texarkana Dr. Randall D. Harris, California State University–Stanislaus Dr. Linda Herkenhoff, Saint Mary’s College Dr. Patricia Humphrey, Texas A&M University–Texarkana Dr. Hamid H. Kazeroony, William Penn University Dr. Joe W. Leonard, Miami University Dr. Joanne Mack, Alverno College Dr. Ellen Mansfield, La Salle University Dr. Vijaya Narapareddy, University of Denver Dr. Carol V. Pope, Alverno College Dr. Lori Radulovich, Baldwin-Wallace College Dr. John Ross III, Southwest Texas State University–San Marcos Sherry Ross, Southwest Texas State University–San Marcos Dr. Amit J. Shah, Frostburg State University Dr. Greg Stone, Regent University Dr. Sharynn M. Tomlin, Angelo State University Mary Vradelis, Consultant in Berkeley, California Dr. Anne M. Walsh, La Salle University Scores of Prentice Hall employees and salespersons have worked diligently behind the scenes to make this text a leader in strategic management. I appreciate the continued hard work of all those professionals, such as Sally Yagan, Kim Norbuta, Claudia Fernandes, Ann Pulido, and Ana Jankowski. I also want to thank you, the reader, for investing the time and effort to read and study this text. It will help you formulate, implement, and evaluate strategies for any organiza- tion with which you become associated. I hope you come to share my enthusiasm for the rich subject area of strategic management and for the systematic learning approach taken in this text.ACKNOWLEDGMENTS xxv Finally, I want to welcome and invite your suggestions, ideas, thoughts, comments, and questions regarding any part of this text or the ancillary materials. Please call me at 910-612-5343, fax me at 910-579-5132, e-mail me at freddavid9gmail.com, or write me at the School of Business, Francis Marion University, Florence, SC 29501. I sincerely appreciate and need your input to continually improve this text in future editions. Your willingness to draw my attention to specific errors or deficiencies in coverage or exposition will especially be appreciated. Thank you for using this text. Fred R. DavidAbout the Author Dr. Fred R. David is the sole author of two mainstream strategic- management textbooks: (1) Strategic Management: Concepts and Cases, and (2) Strategic-Management Concepts. These texts have been on a two-year revision cycle since 1986 when the first edition was pub- lished. They are among the best if not the best-selling strategic- management textbooks in the world and have been used at more than 500 colleges and universities, including Harvard University, Duke University, Carnegie-Mellon University, Johns Hopkins University, the University of Maryland, University of North Carolina, University of Georgia, San Francisco State University, University of South Carolina, and Wake Forest University. This textbook has been translated and published in Chinese, Japanese, Farsi, Spanish, Indonesian, Indian, Thai, and Arabic and is widely used across Asia and South America. It is the best-selling strategic-management textbook in Mexico, China, Peru, Chile, Japan, and number two in the United States. Approximately 90,000 students read Dr. David’s textbook annually as well as thousands of businesspersons. The book has led the field of strategic manage- ment for more than a decade in providing an applications/practitioner approach to the discipline. A native of Whiteville, North Carolina, Fred David received a BS degree in mathe- matics and an MBA from Wake Forest University before being employed as a bank manager with United Carolina Bank. He received a PhD in Business Administration from the University of South Carolina, where he majored in management. Currently the TranSouth Professor of Strategic Management at Francis Marion University (FMU) in Florence, South Carolina, Dr. David has also taught at Auburn University, Mississippi State University, East Carolina University, the University of South Carolina, and the University of North Carolina at Pembroke. He is the author of 152 referred publications, including 40 journal articles and 55 proceedings publications. David has articles pub- lished in such journals as Academy of Management Review, Academy of Management Executive, Journal of Applied Psychology, Long Range Planning, and Advanced Management Journal. Dr. David received a Lifetime Honorary Professorship Award from the Universidad Ricardo Palma in Lima, Peru. He delivered the keynote speech at the twenty-first Annual Latin American Congress on Strategy hosted by the Centrum School of Business in Peru. Dr. David recently delivered an eight-hour Strategic Planning Workshop to the faculty at Pontificia Universidad Catolica Del in Lima, Peru, and an eight-hour Case Writing/ Analyzing Workshop to the faculty at Utah Valley State College in Orem, Utah. He has received numerous awards, including FMU’s Board of Trustees Research Scholar Award, the university’s Award for Excellence in Research given annually to the best faculty researcher on campus, and the Phil Carroll Advancement of Management Award, given annually by the Society for the Advancement of Management (SAM) to a management scholar for outstanding contributions in management research. He recently gave the graduation commencement speech at Troy University.xxviii CASE COMPANY INFORMATION MATRIX Case Information Matrix 2008 Revenues Case Company Stock Symbol Headquarters Web Site Address Employees in millions Cohesion Case McDonald’s Corp. MCD Oak Brook, IL www.mcdonalds.com 400,000 23,522 SERVICE FIRMS Hospitality/Entertainment 1. Walt Disney Co. DIS Burbank, CA www.disney.com 150,000 37,843 2. Merryland Amusement Kansas City, MO 100 0.890 Park Airlines 3. JetBlue Airways JBLU Forest Hills, NY www.jetblue.com 10,047 3,388 4. AirTran Airways AAI Orlando, FL www.airtran.com 7,850 2,552 Retail Stores 5. Family Dollar Stores FDO Charlotte, NC www.familydollar.com 25,000 6,983 6. Wal-Mart Stores WMT Bentonville, AR www.walmartstores.com 2.1M 405,607 7. Whole Foods Market WFMI Austin, TX www.wholefoodsmarket.com 46,800 7,953 8. Macy’s M Cincinnati, Ohio www.macysinc.com 167,000 24,892 Internet Based 9. Yahoo YHOO Sunnyvale, CA www.yahoo.com 13,600 7,208 10. eBay Inc. EBAY San Jose, CA www.ebay.com 16,200 8,541 Financial 11. Wells Fargo WFC San Francisco, CA www.wellsfargo.com 272,800 52,389 Restaurants 12. Krispy Kreme KKD Winston-Salem, NC www.krispykreme.com 2,700 383 13. Starbucks Corporation SBUX Seattle, WA www.starbucks.com 176,000 10,383 Nonprofit 14. The United States Washington, DC www.usps.com 764,000 75,000 Postal Service - 15. Amtrak (NRPC) - Washington, DC www.amtrak.com 19,000 2,400 16. Goodwill Industries San Francisco, CA www.sfgoodwill.org/ 500 28.1 of San Francisco, storeLocations2.aspx San Mateo and Marin Counties MANUFACTURING Transportation 17. Harley-Davidson HOG Milwaukee, WI www.harlety-davidson.com 10,100 5,971 18. Ford Motor FORD Dearborn, MI www.ford.com 213,000 146,277 Food 19. Kraft Foods KFT Norfield, IL www.kraft.com 98,000 42,201 20. Hershey Foods HSY Hershey, PA www.hersheys.com 12,800 5,132 (continued)CASE COMPANY INFORMATION MATRIX xxix Case Information Matrix (continued) 2008 Revenues Case Company Stock Symbol Headquarters Web Site Address Employees in millions Personal Care 21. Johnson & Johnson JNJ New www.jnj.com 118,700 63,747 Brunswick, NJ 22. Avon Products AVP New York, NY www.avon.com 42,000 10,690 Beverage 23. Molson Coors TAP Denver, CO www.molsoncoors.com 14,000 4,774 Brewing 24. PepsiCo PEP Purchase, NY www.pepsico.com 198,000 43,251 Health Care 25. Pfizer PFE New York, NY www.pfizer.com 81,800 48,296 26. Merck MRK Whitehouse Station, NJ www.merck.com 55,200 23,850 Sports 27. Nike NKE Beaverton, OR www.nike.com 32,500 18,627 28. Callaway Golf ELY Carlsbad, CA www.callawaygolf.com 2,700 1,117 Energy 29. Chevron CVX San Ramon, CA www.chevron.com 67,000 273,005xxx CASE COMPANY INFORMATION MATRIX Case Description Matrix Topical Content Areas (Y = Yes and N = No) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Cohesion Case – McDonald’s Corp. Y Y Y Y Y Y Y Y Y N N Y Y N Service Firms Hospitality/Entertainment 1. Walt Disney Company Y Y Y Y Y Y Y Y Y N N Y Y N 2. Merryland Amusement Park Y Y Y Y Y Y Y Y Y Y Y Y Y N Airlines 3. JetBlue Airways Y N Y Y Y Y Y Y Y Y N Y Y N 4. AirTran Airways Y Y Y Y Y Y Y Y Y Y Y Y Y N Retail Stores 5. Family Dollar Stores Y Y Y N Y Y Y Y Y N N Y Y N 6. Wal-Mart Stores Y Y Y N Y Y Y Y Y N N Y Y N 7. Whole Foods Market Y Y Y N Y Y Y Y Y N N Y Y N 8. Macy’s Y Y Y N Y Y Y Y Y N N Y Y N Internet Based 9. Yahoo Y Y Y N Y Y Y Y Y Y Y Y Y N 10. eBay Inc. Y Y Y Y Y Y Y Y Y N Y Y Y N Financial 11. Wells Fargo Y Y Y Y Y Y Y Y N N Y Y Y Y Restaurants 12. Krispy Kreme Y Y N Y Y Y Y Y Y N N Y Y N 13. Starbucks Corporation Y Y Y Y Y Y Y Y Y Y N Y Y Y Nonprofit 14. The United States Postal Service Y Y N N Y Y Y Y Y N Y Y Y N 15. Amtrak Y N Y Y Y Y Y Y Y Y Y Y Y N 16. Goodwill Industries of San Francisco, Y N Y Y Y Y Y Y Y Y Y Y Y N San Mateo and Marin Counties Manufacturing Firms Transportation 17. Harley-Davidson Y Y Y Y Y Y Y Y Y N N Y Y N 18. Ford Motor Y Y Y Y Y Y Y Y Y N Y Y Y N Food 19. Kraft Foods Y Y Y N Y Y Y Y Y Y N Y Y N 20. Hershey Foods Y Y Y Y Y Y Y Y Y Y Y Y Y N Personal Care 21. Johnson & Johnson Y Y Y N Y Y Y Y Y Y Y Y Y N 22. Avon Products Y Y Y N Y Y Y Y Y N N Y Y N Beverage 23. Molson Coors Brewing Y Y Y Y Y Y Y Y Y Y Y Y Y Y 24. PepsiCo Y N Y N Y Y Y Y Y N N Y Y N Health Care 25. Pfizer Y Y Y Y Y Y Y Y Y N N Y Y Y 26. Merck Y Y Y Y Y Y Y Y Y N Y Y Y N (continued)CASE COMPANY INFORMATION MATRIX xxxi Case Description Matrix (continued) Topical Content Areas (Y = Yes and N = No) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Sports 27. Nike Y N Y N Y Y Y Y Y N Y Y Y N 28. Callaway Golf Company Y Y Y Y Y Y Y Y Y N N Y Y N Energy 29. Chevron Y Y Y Y Y N Y Y Y Y Y Y Y N 1. Year-end 2006 Financial Statements Included? 2. Is Organizational Chart Included? 3. Does Company Do Business Outside the United States? 4. Is a Vision or Mission Statement Included? 5. E-Commerce Issues Included? 6. Natural Environment Issues Included? 7. Strategy Formulation Emphasis? 8. Strategy Implementation Included? 9. By-Segment Financial Data Included? 10. Firm Has Declining Revenues? 11. Firm Has Declining Net Income? 12. Discussion of Competitors is Provided? 13. Case Appears in Text for the First Time Ever? 14. Is Firm Headquartered Outside the United States?Strategic Management CONCEPTSPART 1 Overview of Strategic Management CHAPTER 1 The Nature of Strategic Management CHAPTER OBJECTIVES After studying this chapter, you should be able to do the following: 1. Describe the strategic-management 5. Describe the benefits of good process. strategic management. 2. Explain the need for integrating 6. Discuss the relevance of Sun Tzu’s The analysis and intuition in strategic Art of War to strategic management. management. 7. Discuss how a firm may achieve 3. Define and give examples of key terms sustained competitive advantage. in strategic management. 4. Discuss the nature of strategy formulation, implementation, and evaluation activities. Assurance of Assurance of Assurance of Assurance of Learning Exercise 1A Learning Exercise 1B Learning Exercise 1C Learning Exercise 1D Gathering Strategy Strategic Planning for My Strategic Planning at a Getting Familiar with SMCO Information University Local CompanySource: Shutterstock/Photographer Jim Lopes “Notable Quotes” "If we know where we are and something about how we got "Most of us fear change. Even when our minds say change there, we might see where we are trending—and if the out- is normal, our stomachs quiver at the prospect. But for comes which lie naturally in our course are unacceptable, strategists and managers today, there is no choice but to make timely change." to change." —Abraham Lincoln —Robert Waterman Jr. "Without a strategy, an organization is like a ship without "If a man takes no thought about what is distant, a rudder, going around in circles. It’s like a tramp; it has he will find sorrow near at hand. He who will not worry no place to go." about what is far off will soon find something worse —Joel Ross and Michael Kami than worry." —Confucius "Plans are less important than planning." —Dale McConkey "The formulation of strategy can develop competitive advantage only to the extent that the process can give meaning to workers in the trenches." —David Hurst4 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT When CEOs from the big three American automakers, Ford, General Motors (GM), and Chrysler, showed up without a clear strategic plan to ask congressional leaders for bailout monies, they were sent home with instructions to develop a clear strategic plan for the future. Austan Goolsbee, one of President Obama’s top economic advisers, said, “Asking for a bailout without a convincing business plan was crazy.” Goolsbee also said, “If the three auto CEOs need a bridge, it’s got to be a bridge to somewhere, not a bridge to 1 nowhere.” This textbook gives the instructions on how to develop a clear strategic plan— a bridge to somewhere rather than nowhere. This chapter provides an overview of strategic management. It introduces a practical, integrative model of the strategic-management process; it defines basic activities and terms in strategic management. This chapter also introduces the notion of boxed inserts. A boxed insert is provided in each chapter to examine how some firms are doing really well competing in a global eco- nomic recession. Some firms are strategically capitalizing on the harsh business climate and prospering as their rivals weaken. These firms are showcased in this edition to reveal how those companies achieved prosperity. Each boxed insert examines the strategies of firms doing great amid the worst recession in almost 30 years, the biggest stock market decline since 1937, high unemployment, record high and then record low oil prices, low consumer confidence, low interest rates, bankruptcies, liquidations, unavailability of credit, falling consumer demand for almost everything, and intense price competition as Doing Great in a Weak Economy MCDonald’s Corporation hen most firms were struggling in 2008, WMcDonald’s increased its revenues from 22.7 billion in 2007 to 23.5 billion in 2008. Headquartered in Oak Brook, Illinois McDonald’s net income nearly doubled during that time from 2.4 billion to 4.3 billion—quite impressive. Fortune magazine in 2009 rated McDonald’s as their 16th “Most Admired Company in the World” in terms of their management and performance. McDonald’s added 650 new outlets in 2009 when many restaurants struggled to keep their doors open. McDonald’s low prices and expanded menu items have attracted millions of new customers away from sit-down chains and independent eateries. Jim Skinner, CEO of McDonald’s, says, “We do so well every day in 2009, 2 million more than in 2008. Nearly because our strategies have been so well planned 80 percent of McDonald’s are run by franchisees out.” McDonald’s served about 60 million customers (or affiliates).CHAPTER 1 • THE NATURE OF STRATEGIC MANAGEMENT 5 McDonald’s in 2009 spent 2.1 billion to remodel The other two firms were Wal-Mart and Family Dollar many of its 32,000 restaurants and build new ones at Stores. a more rapid pace than in recent years. This is in stark Other strategies being pursued currently by contrast to most restaurant chains that are struggling McDonald’s include replacing gasoline-powered cars to survive, laying off employees, closing restaurants, with energy-efficient cars, lowering advertising rates, and reducing expansion plans. McDonald's restaurants halting building new outlets on street corners are in 120 countries. Going out to eat is one of the first where nearby development shows signs of weakness, activities that customers cut in tough times. A rising boosting the firm’s coffee business, and improving U.S. dollar is another external factor that hurts the drive-through windows to increase sales and McDonald’s. An internal weakness of McDonald’s is efficiency. that the firm now offers upscale coffee drinks like lattes McDonald’s receives nearly two thirds of its rev- and cappuccinos in over 7,000 locations just as budget- enues from outside the United States. The company conscious consumers are cutting back on such extrava- has 14,000 U.S. outlets and 18,000 outlets outside the gances. About half of McDonald’s 31,000 locations are United States. McDonald’s feeds 58 million customers outside the United States. every day. The company operates Hamburger University But McDonald’s top management team says every- in suburban Chicago. McDonald's reported that first thing the firm does is for the long term. McDonald’s quarter 2009 profits rose 4 percent and same-store for several years referred to their strategic plan as sales rose 4.3 percent across the globe. Same-store “Plan to Win.” This strategy has been to increase sales sales in the second quarter of 2009 were up another at existing locations by improving the menu, remodel- 4.8 percent. ing dining rooms, extending hours, and adding Source: Based on Janet Adamy, “McDonald’s Seeks Way to Keep snacks. The company has avoided deep price cuts on Sizzling,” Wall Street Journal (March 10, 2009): A1, A11. Also, Geoff its menu items. McDonald’s was only one of three Colvin, “The World’s Most Admired Companies,” Fortune (March 16, large U.S. firms that saw its stock price rise in 2008. 2009): 76–86. consumers today purchase only what they need rather than what they want. Societies worldwide confront the most threatening economic conditions in nearly a century. The boxed insert in each chapter showcases excellent strategic management under harsh economic times. The first company featured for excellent performance in the global recession is McDonald’s Corporation, also showcased as the Cohesion Case in this 13th edition. McDonald’s is featured as the Cohesion Case also because it is a well-known global firm undergoing strategic change and well managed. By working through McDonald’s-related Assurance of Learning Exercises at the end of each chapter, you will be well prepared to develop an effective strategic plan for any company assigned to you this semester. The end-of-chapter exercises apply chapter tools and concepts. What Is Strategic Management? Once there were two company presidents who competed in the same industry. These two presidents decided to go on a camping trip to discuss a possible merger. They hiked deep into the woods. Suddenly, they came upon a grizzly bear that rose up on its hind legs and snarled. Instantly, the first president took off his knapsack and got out a pair of jogging shoes. The second president said, “Hey, you can’t outrun that bear.” The first president responded, “Maybe I can’t outrun that bear, but I surely can outrun you” This story captures the notion of strategic management, which is to achieve and maintain competitive advantage.6 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT Defining Strategic Management Strategic management can be defined as the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objec- tives. As this definition implies, strategic management focuses on integrating management, marketing, finance/accounting, production/operations, research and development, and information systems to achieve organizational success. The term strategic management in this text is used synonymously with the term strategic planning. The latter term is more often used in the business world, whereas the former is often used in academia. Sometimes the term strategic management is used to refer to strategy formulation, implementation, and evaluation, with strategic planning referring only to strategy formulation. The purpose of strategic management is to exploit and create new and different opportunities for tomorrow; long-range planning, in contrast, tries to optimize for tomorrow the trends of today. The term strategic planning originated in the 1950s and was very popular between the mid-1960s and the mid-1970s. During these years, strategic planning was widely believed to be the answer for all problems. At the time, much of corporate America was “obsessed” with strategic planning. Following that “boom,” however, strategic planning was cast aside during the 1980s as various planning models did not yield higher returns. The 1990s, however, brought the revival of strategic planning, and the process is widely practiced today in the business world. A strategic plan is, in essence, a company’s game plan. Just as a football team needs a good game plan to have a chance for success, a company must have a good strategic plan to compete successfully. Profit margins among firms in most industries have been so reduced by the global economic recession that there is little room for error in the overall strategic plan. A strategic plan results from tough managerial choices among numerous good alternatives, and it signals commitment to specific markets, policies, procedures, and operations in lieu of other, “less desirable” courses of action. The term strategic management is used at many colleges and universities as the subti- tle for the capstone course in business administration. This course integrates material from all business courses. The Strategic Management Club Online at www.strategyclub.com offers many benefits for business policy and strategic management students. Professor Hansen at Stetson University provides a strategic management slide show for this entire text (www.stetson.edu/rhansen/strategy). Stages of Strategic Management The strategic-management process consists of three stages: strategy formulation, strategy implementation, and strategy evaluation. Strategy formulation includes developing a vision and mission, identifying an organization’s external opportunities and threats, determining internal strengths and weaknesses, establishing long-term objectives, generating alternative strategies, and choosing particular strategies to pursue. Strategy-formulation issues include deciding what new businesses to enter, what businesses to abandon, how to allocate resources, whether to expand operations or diversify, whether to enter international markets, whether to merge or form a joint venture, and how to avoid a hostile takeover. Because no organization has unlimited resources, strategists must decide which alter- native strategies will benefit the firm most. Strategy-formulation decisions commit an organization to specific products, markets, resources, and technologies over an extended period of time. Strategies determine long-term competitive advantages. For better or worse, strategic decisions have major multifunctional consequences and enduring effects on an organization. Top managers have the best perspective to understand fully the ramifi- cations of strategy-formulation decisions; they have the authority to commit the resources necessary for implementation. Strategy implementation requires a firm to establish annual objectives, devise poli- cies, motivate employees, and allocate resources so that formulated strategies can be executed. Strategy implementation includes developing a strategy-supportive culture, creating an effective organizational structure, redirecting marketing efforts, preparing budgets, developing and utilizing information systems, and linking employee compensa- tion to organizational performance.

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