Business Policy and Strategy Questions

1 The Nature of Strategic Management

CHAPTER OBJECTIVES

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

• 1. Discuss the nature and role of a chief strategy officer (CSO).

• 2. Describe the strategic-management process.

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

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

• 5. Discuss the nature of strategy formulation, implementation, and evaluation activities.

• 6. Describe the benefits of good strategic management.

• 7. Discuss the relevance of Sun Tzu’s The Art of War to strategic management.

• 8. Discuss how a firm may achieve sustained competitive advantage.

ASSURANCE OF LEARNING EXERCISES

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

• EXERCISE 1A Compare Business Strategy with Military Strategy

• EXERCISE 1B Gather Strategy Information for PepsiCo

• EXERCISE 1C Update the PepsiCo Cohesion Case

• EXERCISE 1D Strategic Planning for Your University

• EXERCISE 1E Strategic Planning at a Local Company

• EXERCISE 1F Get Familiar With the Strategy Club Website

• EXERCISE 1G Get Familiar With the Case MyLab

When CEOs from the big three U.S. automakers—Ford, General Motors (GM), and Chrysler—showed up a few years ago 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 Barack 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 nowhere.”1 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 at the beginning of each chapter reveals how some firms are doing really well competing in a growing economy. The firms showcased are utilizing excellent strategic management to prosper as their rivals weaken. Each boxed insert examines the strategies of firms doing great amid rising consumer demand and intense price competition. The first company featured for excellent performance is the popular hamburger place, Five Guys Enterprises. Note that there are more than 1,000 Five Guys grills in the United States and Canada.

PepsiCo is featured as the new Cohesion Case because it is a well-known global firm undergoing strategic change and is well managed. By working through the PepsiCo–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.

Five Guys Enterprises: EXCELLENT STRATEGIC MANAGEMENT SHOWCASED

Have you ever eaten at a Five Guys grill? Headquartered in Lorton, Virginia, Five Guys Enterprises has grown every year for 25 years and still is growing, thanks to excellent strategic management (and great hamburgers served with all the peanuts you can eat). Five Guys Burgers and Fries is a quick-service restaurant company that offers a simple menu of burgers, fries, and hot dogs. With more than 1,000 stores in the United States and Canada, Five Guys prides itself on using only top-notch ingredients, the best ground beef, rolls, and fries, and uses only peanut oil; in keeping with the peanut theme, its restaurants serve peanuts in bulk. Founded in 1986 by Jerry Murrell, his wife, and their five sons (Jim, Matt, Chad, Ben, and Tyler), Five Guys grill succeeds every day in taking business from all the larger fast food hamburger chains.

Five Guys’ strategy has always been to use only the best ingredients, do no advertising or marketing except by word-of-mouth, “treat people right,” provide great employee pay and benefits, and offer outstanding customer service. All 30,000-plus Five Guys employees have access to the company’s Secret Shopper Bonus program in which employees anonymously go check on operations at other stores. All employees receive additional store-level bonuses to ensure that every store provides great burgers with great service. Five Guys employees all have a sense of ownership in their store because their compensation package is tied to how well their store performs. Five Guys employees are determined to “make your day” every time you visit their restaurant. Five Guys burgers are a bit pricey, but customers keep coming back daily to eat the freshly prepared product in an upscale décor with exceptional service.

Another Five Guys strategy is franchising (discussed in Chapter 5). About 800 Five Guys grills are owned by franchisees. All of the territory in both the USA and Canada has been sold to franchisees, and Five Guys plans to open its first restaurant in Great Britain in 2013, with plans to open four in the UK in 2013. Murrell says in starting a business, do not rely on banks, but rather rely on venture capitalists that include friends and family. With more than $1 billion in revenue in 2013, Murrell, now 62, gives this advice to all current and future businesspersons: “Treat your employees and customers right. Find something you love to do and just do it. Make sure your heart is in it. You can’t be everything to everybody. You’ve got to be what you are. That’s all you can do.” Do a Google search for “Jerry Murrell Video” to watch a 2-minute excellent video of Murrell sharing lessons he learned in building Five Guys.

Source: Based on Lottie Joiner, “Five Guys Family Keeps It Simple,” USA Today (July 30, 2012): 3B.

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.

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 objectives. As this definition implies, strategic management focuses on integrating management, marketing, finance and accounting, production and 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 and 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 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. Many companies today have a chief strategy officer (CSO).

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 are so slim that there is little room for error in the overall strategic plan. A strategic plan results from tough managerial choices among numerous good alternatives, and it signals commitment to specific markets, policies, 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 title for the capstone course in business administration. This course integrates material from all business courses, and, in addition, introduces new strategic management concepts and techniques being widely used by firms in strategic planning.

Stages of Strategic Management

The strategic-management process consists of three stages: strategy formulation, strategy implementation, and strategy evaluation. Strategy formulation includes developing a vision and mission, identifying an organization’s external opportunities and threats, determining internal strengths and weaknesses, establishing long-term objectives, generating alternative strategies, and choosing particular strategies to pursue. Strategy-formulation issues include deciding what new businesses to enter, what businesses to abandon, whether to expand operations or diversify, whether to enter international markets, whether to merge or form a joint venture, and how to avoid a hostile takeover.

Because no organization has unlimited resources, strategists must decide which alternative 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 ramifications of strategy-formulation decisions; they have the authority to commit the resources necessary for implementation.

Strategy implementation requires a firm to establish annual objectives, devise policies, motivate employees, and allocate resources so that formulated strategies can be executed. Strategy implementation includes developing a strategy-supportive culture, creating an effective organizational structure, redirecting marketing efforts, preparing budgets, developing and using information systems, and linking employee compensation to organizational performance.

Strategy implementation often is called the “action stage” of strategic management. Implementing strategy means mobilizing employees and managers to put formulated strategies into action. Often considered to be the most difficult stage in strategic management, strategy implementation requires personal discipline, commitment, and sacrifice. Successful strategy implementation hinges on managers’ ability to motivate employees, which is more an art than a science. Strategies formulated but not implemented serve no useful purpose.

Interpersonal skills are especially critical for successful strategy implementation. Strategy-implementation activities affect all employees and managers in an organization. Every division and department must decide on answers to questions such as “What must we do to implement our part of the organization’s strategy?” and “How best can we get the job done?” The challenge of implementation is to stimulate managers and employees throughout an organization to work with pride and enthusiasm toward achieving stated objectives.

Strategy evaluation is the final stage in strategic management. Managers desperately need to know when particular strategies are not working well; strategy evaluation is the primary means for obtaining this information. All strategies are subject to future modification because external and internal factors are constantly changing. Three fundamental strategy-evaluation activities are (1) reviewing external and internal factors that are the bases for current strategies, (2) measuring performance, and (3) taking corrective actions. Strategy evaluation is needed because success today is no guarantee of success tomorrow! Success always creates new and different problems; complacent organizations experience demise.

Formulation, implementation, and evaluation of strategy activities occur at three hierarchical levels in a large organization: corporate, divisional or strategic business unit, and functional. By fostering communication and interaction among managers and employees across hierarchical levels, strategic management helps a firm function as a competitive team. Most small businesses and some large businesses do not have divisions or strategic business units; they have only the corporate and functional levels. Nevertheless, managers and employees at these two levels should be actively involved in strategic-management activities.

Peter Drucker says the prime task of strategic management is thinking through the overall mission of a business:

• that is, of asking the question, “What is our business?” This leads to the setting of objectives, the development of strategies, and the making of today’s decisions for tomorrow’s results. This clearly must be done by a part of the organization that can see the entire business; that can balance objectives and the needs of today against the needs of tomorrow; and that can allocate resources of men and money to key results.2

Integrating Intuition and Analysis

Edward Deming once said, “In God we trust. All others bring data.” The strategic-management process can be described as an objective, logical, systematic approach for making major decisions in an organization. It attempts to organize qualitative and quantitative information in a way that allows effective decisions to be made under conditions of uncertainty. Yet strategic management is not a pure science that lends itself to a nice, neat, one-two-three approach.

Based on past experiences, judgment, and feelings, most people recognize that intuition is essential to making good strategic decisions. Intuition is particularly useful for making decisions in situations of great uncertainty or little precedent. It is also helpful when highly interrelated variables exist or when it is necessary to choose from several plausible alternatives. Some managers and owners of businesses profess to have extraordinary abilities for using intuition alone in devising brilliant strategies. For example, Will Durant, who organized GM, was described by Alfred Sloan as “a man who would proceed on a course of action guided solely, as far as I could tell, by some intuitive flash of brilliance. He never felt obliged to make an engineering hunt for the facts. Yet at times, he was astoundingly correct in his judgment.”3 Albert Einstein acknowledged the importance of intuition when he said, “I believe in intuition and inspiration. At times I feel certain that I am right while not knowing the reason. Imagination is more important than knowledge, because knowledge is limited, whereas imagination embraces the entire world.”4

Although some organizations today may survive and prosper because they have intuitive geniuses managing them, most are not so fortunate. Most organizations can benefit from strategic management, which is based on integrating intuition and analysis in decision making. Choosing an intuitive or analytic approach to decision making is not an either-or proposition. Managers at all levels in an organization inject their intuition and judgment into strategic-management analyses. Analytical thinking and intuitive thinking complement each other.

Operating from the I’ve-already-made-up-my-mind-don’t-bother-me-with-the-facts mode is not management by intuition; it is management by ignorance.5 Drucker says, “I believe in intuition only if you discipline it. ‘Hunch’ artists, who make a diagnosis but don’t check it out with the facts, are the ones in medicine who kill people, and in management kill businesses.”6 As Henderson notes:

• The accelerating rate of change today is producing a business world in which customary managerial habits in organizations are increasingly inadequate. Experience alone was an adequate guide when changes could be made in small increments. But intuitive and experience-based management philosophies are grossly inadequate when decisions are strategic and have major, irreversible consequences.7

In a sense, the strategic-management process is an attempt to duplicate what goes on in the mind of a brilliant, intuitive person who knows the business and assimilates and integrates that knowledge using analysis to formulate effective strategies.

Adapting to Change

The strategic-management process is based on the belief that organizations should continually monitor internal and external events and trends so that timely changes can be made as needed. The rate and magnitude of changes that affect organizations are increasing dramatically, as evidenced by how the global economic recession caught so many firms by surprise. Firms, like organisms, must be “adept at adapting” or they will not survive.

One company trying hard to adapt is the Washington Post Company, best known as publisher of the Washington Post newspaper that has a circulation of 525,000 in the Washington, DC area. But the newspaper industry is in decline globally, so the Washington Post Company recently diversified by acquiring Celtic Healthcare, a provider of hospice and home health care facilities in Pennsylvania and Maryland. Treating patients at home instead of paying for hospital stays is a much faster growing industry than selling newspapers. The Washington Post Company also owns Kaplan, a well-known source of test preparation materials, and six TV stations.

To survive, all organizations must astutely identify and adapt to change. The strategic-management process is aimed at allowing organizations to adapt effectively to change over the long run. As Waterman has noted:

• In today’s business environment, more than in any preceding era, the only constant is change. Successful organizations effectively manage change, continuously adapting their bureaucracies, strategies, systems, products, and cultures to survive the shocks and prosper from the forces that decimate the competition.8

On a political map, the boundaries between countries may be clear, but on a competitive map showing the real flow of financial and industrial activity, the boundaries have largely disappeared. The speedy flow of information has eaten away at national boundaries so that people worldwide readily see for themselves how other people live and work. We have become a borderless world with global citizens, global competitors, global customers, global suppliers, and global distributors! U.S. firms are challenged by large rival companies in many industries. For example, Samsung recently surpassed Apple and Lenovo surpassed HP and Dell in revenues.

The need to adapt to change leads organizations to key strategic-management questions, such as “What kind of business should we become?” “Are we in the right field(s)?” “Should we reshape our business?” “What new competitors are entering our industry?” “What strategies should we pursue?” “How are our customers changing?” “Are new technologies being developed that could put us out of business?”

The Internet promotes endless comparison shopping, which thus enables consumers worldwide to band together to demand discounts. The Internet has transferred power from businesses to individuals. Buyers used to face big obstacles when attempting to get the best price and service, such as limited time and data to compare, but now consumers can quickly scan hundreds of vendor offerings. Both the number of people shopping online and the average amount they spend is increasing dramatically. Digital communication has become the name of the game in marketing. Consumers today are flocking to blogs, sending tweets, watching and posting videos on YouTube, and spending hours on Tumbler, Facebook, Reddit, Instagram, and LinkedIn instead of watching television, listening to the radio, or reading newspapers, and magazines. Facebook and Myspace recently unveiled features that further marry these social sites to the wider Internet. Users on these social sites now can log on to many business shopping sites from their social site so their friends can see what items they have purchased on various shopping sites. Both of these social sites want their members to use their identities to manage all their online identities. Most traditional retailers have learned that their online sales can boost in-store sales if they use their websites to promote in-store promotions.

Key Terms in Strategic Management

Before we further discuss strategic management, we should define nine key terms: competitive advantage, strategists, vision and mission statements, external opportunities and threats, internal strengths and weaknesses, long-term objectives, strategies, annual objectives, and policies.

Competitive Advantage

Strategic management is all about gaining and maintaining competitive advantage. This term can be defined as “anything that a firm does especially well compared to rival firms.” When a firm can do something that rival firms cannot do or owns something that rival firms desire, that can represent a competitive advantage. For example, having ample cash on the firm’s balance sheet can provide a major competitive advantage. Some cash-rich firms are buying distressed rivals. Examples of cash-rich (cash as a percentage of total assets) companies today include Priceline.com (63%), Altera (80%), Franklin Resources (51%), Gilead Sciences (57%), and Lorillard (54%). Microsoft, Apple, and Samsung are cash rich, as is the Cohesion Case company, PepsiCo.

Having less fixed assets than rival firms also can provide major competitive advantages. For example, Apple has no manufacturing facilities of its own, and rival Sony has 57 electronics factories. Apple relies exclusively on contract manufacturers for production of all of its products, whereas Sony owns its own plants. Less fixed assets has enabled Apple to remain financially lean with virtually no long-term debt. Sony, in contrast, has built up massive debt on its balance sheet.

CEO Paco Underhill of Envirosell says, “Where it used to be a polite war, it’s now a 21 st-century bar fight, where everybody is competing with everyone else for the customers’ money.” Shoppers are “trading down,” so Nordstrom is taking customers from Neiman Marcus and Saks Fifth Avenue, TJ Maxx and Marshalls are taking customers from most other stores in the mall, and Family Dollar is taking revenues from Walmart.9 Getting and keeping competitive advantage is essential for long-term success in an organization. In mass retailing, big-box companies such as Walmart, Best Buy, and Sears are losing competitive advantage to smaller stores, so there is a dramatic shift in mass retailing to becoming smaller. As customers shift more to online purchases, less brick and mortar is definitely better for sustaining competitive advantage in retailing. Walmart Express stores of less than 40,000 square feet each, rather than 185,000-square-foot Supercenters, and Office Depot’s new 5,000-square-foot stores are examples of smaller is better.

Normally, a firm can sustain a competitive advantage for only a certain period because of rival firms imitating and undermining that advantage. Thus, it is not adequate to simply obtain competitive advantage. A firm must strive to achieve sustained competitive advantage by (1) continually adapting to changes in external trends and events and internal capabilities, competencies, and resources; and by (2) effectively formulating, implementing, and evaluating strategies that capitalize on those factors.

An increasing number of companies are gaining a competitive advantage by using the Internet for direct selling and for communication with suppliers, customers, creditors, partners, shareholders, clients, and competitors who may be dispersed globally. E-commerce allows firms to sell products, advertise, purchase supplies, bypass intermediaries, track inventory, eliminate paperwork, and share information. In total, e-commerce is minimizing the expense and cumbersomeness of time, distance, and space in doing business, thus yielding better customer service, greater efficiency, improved products, and higher profitability.

Strategists

Strategists are the individuals most responsible for the success or failure of an organization. Strategists have various job titles, such as chief executive officer, president, owner, chair of the board, executive director, chancellor, dean, or entrepreneur. Jay Conger, professor of organizational behavior at the London Business School and author of Building Leaders, says, “All strategists have to be chief learning officers. We are in an extended period of change. If our leaders aren’t highly adaptive and great models during this period, then our companies won’t adapt either, because ultimately leadership is about being a role model.”

Strategists help an organization gather, analyze, and organize information. They track industry and competitive trends, develop forecasting models and scenario analyses, evaluate corporate and divisional performance, spot emerging market opportunities, identify business threats, and develop creative action plans. Strategic planners usually serve in a support or staff role. Usually found in higher levels of management, they typically have considerable authority for decision making in the firm. The CEO is the most visible and critical strategic manager. Any manager who has responsibility for a unit or division, responsibility for profit and loss outcomes, or direct authority over a major piece of the business is a strategic manager (strategist). In the last few years, the position of CSO has emerged as a new addition to the top management ranks of many organizations, including Sun Microsystems, Network Associates, Clarus, Lante, Marimba, Sapient, Commerce One, BBDO, Cadbury Schweppes, General Motors, Ellie Mae, Cendant, Charles Schwab, Tyco, Campbell Soup, Morgan Stanley, and Reed-Elsevier. This corporate officer title represents recognition of the growing importance of strategic planning in business. Franz Koch, the CSO of German sportswear company Puma AG, was recently promoted to CEO of Puma. When asked about his plans for the company, Koch said on a conference call “I plan to just focus on the long-term strategic plan.”

Strategists differ as much as organizations themselves, and these differences must be considered in the formulation, implementation, and evaluation of strategies. Some strategists will not consider some types of strategies because of their personal philosophies. Strategists differ in their attitudes, values, ethics, willingness to take risks, concern for social responsibility, concern for profitability, concern for short-run versus long-run aims, and management style. The founder of Hershey Foods, Milton Hershey, built the company to manage an orphanage. From corporate profits, Hershey Foods today cares for about 900 boys and 1,000 girls in its boarding school for pre-K through 12 grade.

Several CSOs who spoke at the CSO Summit in May 2013 in San Francisco were:

• Roland Pan at Skype

• Mark Achler at Redbox

• Jon Berlin at Wells Fargo

• Drew Aldrich at Trans-Lux

• Ann Neir at Cisco Systems

• Jennifer Scott at Virgin Media

• Gina Copeland at Mitsubishi Electric

• Raj Ratnaker at Tyco Electronics

• Tim Johnsone at Hopelink

• Nhat Ngo at Omnicell

• Daniel Gastel at UBS

• Clarence So at Salesforce

• Barry Margerum at Plantronics

Vision and Mission Statements

Many organizations today develop a vision statement that answers the question “What do we want to become?” Developing a vision statement is often considered the first step in strategic planning, preceding even development of a mission statement. Many vision statements are a single sentence. For example, the vision statement of Stokes Eye Clinic in Florence, South Carolina, is “Our vision is to take care of your vision.”

Mission statements are “enduring statements of purpose that distinguish one business from other similar firms. A mission statement identifies the scope of a firm’s operations in product and market terms.”10 It addresses the basic question that faces all strategists: “What is our business?” A clear mission statement describes the values and priorities of an organization. Developing a mission statement compels strategists to think about the nature and scope of present operations and to assess the potential attractiveness of future markets and activities. A mission statement broadly charts the future direction of an organization. A mission statement is a constant reminder to its employees of why the organization exists and what the founders envisioned when they put their fame and fortune at risk to breathe life into their dreams.

External Opportunities and Threats

External opportunities and external threats refer to economic, social, cultural, demographic, environmental, political, legal, governmental, technological, and competitive trends and events that could significantly benefit or harm an organization in the future. Opportunities and threats are largely beyond the control of a single organization—thus the word external. A few opportunities and threats that face many firms are listed here:

• • Availability of capital can no longer be taken for granted.

• • Consumers expect green operations and products.

• • Marketing is moving rapidly to the Internet.

• • Commodity food prices are increasing.

• • Political unrest in the Middle East is raising oil prices.

• • Computer hacker problems are increasing.

• • Intense price competition is plaguing most firms.

• • Unemployment and underemployment rates remain high globally.

• • Interest rates are rising.

• • Product life cycles are becoming shorter.

• • State and local governments are financially weak.

• • Drug cartel-related violence in Mexico.

• • Winters are colder and summers hotter than usual.

• • Home prices remain exceptionally low.

• • Global markets offer the highest growth in revenues.

These types of changes are creating a different type of consumer and consequently a need for different types of products, services, and strategies. Many companies in many industries face the severe external threat of online sales capturing increasing market share in their industry.

Other opportunities and threats may include the passage of a law, the introduction of a new product by a competitor, a national catastrophe, or the declining value of the Euro. A competitor’s strength could be a threat. A growing middle class in Africa, rising energy costs, or social media networking could represent an opportunity or a threat.

A basic tenet of strategic management is that firms need to formulate strategies to take advantage of external opportunities and avoid or reduce the impact of external threats. For this reason, identifying, monitoring, and evaluating external opportunities and threats are essential for success. This process of conducting research and gathering and assimilating external information is sometimes called environmental scanning or industry analysis. Lobbying is one activity that some organizations use to influence external opportunities and threats.

Internal Strengths and Weaknesses

Internal strengths and internal weaknesses are an organization’s controllable activities that are performed especially well or poorly. They arise in the management, marketing, finance/accounting, production/operations, research and development (R&D), and management information systems (MIS) activities of a business. Identifying and evaluating organizational strengths and weaknesses in the functional areas of a business is an essential strategic-management activity. Organizations strive to pursue strategies that capitalize on internal strengths and eliminate internal weaknesses.

Strengths and weaknesses are determined relative to competitors. Relative deficiency or superiority is important information. Also, strengths and weaknesses can be determined by elements of being rather than performance. For example, a strength may involve ownership of natural resources or a historic reputation for quality. Strengths and weaknesses may be determined relative to a firm’s own objectives. For example, high levels of inventory turnover may not be a strength for a firm that seeks never to stock-out.

In performing a strategic-management case analysis, it is important to be as divisional as possible when determining and stating internal strengths and weaknesses. In other words, for a company such as Walmart saying that Sam Club’s revenues grew 11 percent in the recent quarter, rather than Walmart couching all of their internal factors in terms of Walmart as a whole. This practice will enable strategies to be more effectively formulated because in strategic planning, firms must allocate resources among divisions (segments) of the firm (that is, by product, region, customer, or whatever the various units of the firm are), such as Sam’s Club versus Supercenters or Mexico versus Europe at Walmart.

Both internal and external factors should be stated in specific terms to the extent possible, using numbers, percentages, dollars, and ratios, as well as comparisons over time and to rival firms. Specificity is important because strategies will be formulated and resources allocated based on this information. The more specific the underlying external and internal factors, the more effectively strategies can be formulated and resources allocated. Determining the numbers takes more time, but survival of the firm often is at stake, so identifying and estimating numbers associated with key factors is essential.

Internal factors can be determined in a number of ways, including computing ratios, measuring performance, and comparing to past periods and industry averages. Various types of surveys also can be developed and administered to examine internal factors such as employee morale, production efficiency, advertising effectiveness, and customer loyalty.

Long-Term Objectives

Objectives can be defined as specific results that an organization seeks to achieve in pursuing its basic mission. Long-term means more than one year. Objectives are essential for organizational success because they provide direction; aid in evaluation; create synergy; reveal priorities; focus coordination; and provide a basis for effective planning, organizing, motivating, and controlling activities. Objectives should be challenging, measurable, consistent, reasonable, and clear. In a multidimensional firm, objectives should be established for the overall company and for each division.

Strategies

Strategies are the means by which long-term objectives will be achieved. Business strategies may include geographic expansion, diversification, acquisition, product development, market penetration, retrenchment, divestiture, liquidation, and joint ventures. Strategies currently being pursued by some companies are described in Table 1-1

Strategies are potential actions that require top management decisions and large amounts of the firm’s resources. In addition, strategies affect an organization’s long-term prosperity, typically for at least five years, and thus are future-oriented. Strategies have multifunctional or multidivisional consequences and require consideration of both the external and internal factors facing the firm.

Annual Objectives

Annual objectives are short-term milestones that organizations must achieve to reach long-term objectives. Like long-term objectives, annual objectives should be measurable, quantitative, challenging, realistic, consistent, and prioritized. They should be established at the corporate, divisional, and functional levels in a large organization. Annual objectives should be stated in terms of management, marketing, finance/accounting, production/operations, R&D, and MIS accomplishments. A set of annual objectives is needed for each long-term objective. Annual objectives are especially important in strategy implementation, whereas long-term objectives are particularly important in strategy formulation. Annual objectives represent the basis for allocating resources.

TABLE 1-1 Sample Strategies in Action in 2013

Policies

Policies are the means by which annual objectives will be achieved. Policies include guidelines, rules, and procedures established to support efforts to achieve stated objectives. Policies are guides to decision making and address repetitive or recurring situations.

Policies are most often stated in terms of management, marketing, finance/accounting, production/operations, R&D, and MIS activities. Policies can be established at the corporate level and apply to an entire organization at the divisional level and apply to a single division, or they can be established at the functional level and apply to particular operational activities or departments. Policies, like annual objectives, are especially important in strategy implementation because they outline an organization’s expectations of its employees and managers. Policies allow consistency and coordination within and between organizational departments.

Substantial research suggests that a healthier workforce can more effectively and efficiently implement strategies. Smoking has become a heavy burden for Europe’s state-run social welfare systems, with smoking-related diseases costing more than $100 billion a year. Smoking also is a huge burden on companies worldwide, so firms are continually implementing policies to curtail smoking. Starbucks in mid-2013 banned smoking within 25 feet of its 7,000 stores not located inside another retail establishment.

Hotel and motels in the United States are rapidly going “smoke-free throughout” with more than 13,000 now having this policy. The American Hotel and Lodging Association says there are 50,800 hotel/motels in the USA with 15 or more rooms. All Marriotts are now nonsmoking. Almost all (except Hertz) car rental companies are exclusively nonsmoking, including Avis, Dollar, Thrifty, and Budget. Most rental car companies charge a $250 cleaning fee if a customer smokes in their rental vehicle. More cigarettes are smoked in Russia per capita (2,786) than any other country in the world, but that country in 2013 instituted strict, mandatory new antismoking policies among all restaurants and bars and government facilities.11 Sixty percent of men in Russia smoke. Other heavily smoking countries per capita include Japan (1,841), China (1,711), and Indonesia (1,085), compared to the USA (1,028). Excise taxes in Russia on tobacco products are set to rise 135 percent by 2015. About 400,000 Russians die each year as a result of smoking, costing the country 1.5 trillion rubles ($48.1 billion) annually in health-care costs.

The Strategic-Management Model

FIGURE 1-1 A Comprehensive Strategic-Management Model

Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40.

The strategic-management process can best be studied and applied using a model. Every model represents some kind of process. The framework illustrated in Figure 1-1 with white shading is a widely accepted, comprehensive model of the strategic-management process.12 This model does not guarantee success, but it does represent a clear and practical approach for formulating, implementing, and evaluating strategies. Relationships among major components of the strategic-management process are shown in the model, which appears in all subsequent chapters with appropriate areas