Basic Concepts of Strategic Management 43
that have embraced sustainable practices have seen dramatic increases in risk miti- gation and innovation, and an overall feeling of corporate social responsibility. The 2014 Sustainability & Employee Engagement survey managed by GreenBiz in association with the National Environmental Education Foundation found that employees at companies who focused on business sustainability reported 57% applied more effort in their jobs and 87% were less likely to leave the company. In addition, more than 50% of companies place at least some or a great deal of value on a job candidate’s sustainability knowledge.22 In fact, a Gallop research study found that these engaged organizations had 3.9 times the earnings per share (EPS) growth rates when compared to organizations with lower engagement in the same industry.23
The company also has a responsibility to treat the environment well. This is usually defined as trying to achieve (or approach) zero impact on the environment. Recycling, increased use of renewable resources, reduction of waste, and refitting buildings to reduce their impact on the environment, among many other techniques, are included in this element of the triple bottom line. The most recognized worldwide standard for environmental efficiency is the ISO 14001 designation. It is not a set of standards, but a framework of activities aimed at effective environmental management.24
South American countries are also working to harmonize their trading relationships with each other and to form trade associations. The establishment of the Mercosur (Mercosul in Portuguese) free-trade area among Argentina, Brazil, Paraguay, Uruguay, and Venezuela brings together a group that includes 295 million people and $3.5 tril- lion in combined GDP. As of late 2015 Bolivia was in the final stages of accession. The Andean Community (Comunidad Andina de Naciones) is a free-trade alliance com- posed of Columbia, Ecuador, Peru, and Bolivia (until its acceptance into Mercosur). On May 23, 2008, the Union of South American Nations was formed to unite the two existing free-trade areas with a secretariat in Ecuador and a parliament in Bolivia. It consists of 12 South American countries.
In 2004, the five Central American countries of El Salvador, Guatemala, Honduras, Nicaragua, and Costa Rica, plus the United States, signed the Central American Free Trade Agreement (CAFTA). The Dominican Republic joined soon thereafter. Previ- ously, Central American textile manufacturers had to pay import duties of 18%–28% to sell their clothes in the United States unless they bought their raw material from U.S. companies. Under CAFTA, members can buy raw material from anywhere, and their exports are duty free. In addition, CAFTA eliminated import duties on 80% of U.S. goods exported to the region, with the remaining tariffs being phased out over 10 years.
The Association of Southeast Asian Nations (ASEAN)—composed of Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam—is in the process of linking its members into a border- less economic zone by 2020. Increasingly referred to as ASEAN+3, ASEAN now includes China, Japan, and South Korea in its annual summit meetings. The ASEAN nations negotiated linkage of the ASEAN Free Trade Area (AFTA) with the exist- ing free-trade area of Australia and New Zealand. With the EU extending eastward and NAFTA extending southward to someday connect with CAFTA and the Union of South American Nations, pressure is building on the independent Asian nations to join ASEAN.
Porter and Reinhardt warn that “in addition to understanding its emissions costs, every firm needs to evaluate its vulnerability to climate-related effects such as regional shifts in the availability of energy and water, the reliability of infrastructures and sup- ply chains, and the prevalence of infectious diseases.”25 The National Centers for
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44 PART 1 Introduction to Strategic Management and Business Policy
Environmental Information has calculated that there were 178 weather and climate disasters where damages exceeded $1 billion between 1980 and 2014. The total cost of these 178 events exceeded $1 trillion.26
Theories of Organizational Adaptation Globalization, innovation, and sustainability present real challenges to the strategic management of businesses. How can any one company keep track of all the chang- ing technological, economic, political–legal, and sociocultural trends around the world in order to make the necessary adjustments? This is not an easy task. Vari- ous theories have been proposed to account for how organizations obtain fit with their environment and how these approaches have been used to varying degrees by researchers trying to understand firm performance. The theory of population ecology suggests that once an organization is successfully established in a particular environmental niche, it is unable to adapt to changing conditions. Inertia prevents the organization from changing in any significant manner. The company is thus replaced (is bought out or goes bankrupt) by other organizations more suited to the new environment. Although it is a popular theory in sociology, research fails to support the arguments of population ecology.27 Institution theory, in contrast, proposes that organizations can and do adapt to changing conditions by imitating other successful organizations. Many examples can be found of companies that have adapted to changing circumstances by imitating an admired firm’s strategies and management techniques.28 The theory does not, however, explain how or by whom successful new strategies are developed in the first place. The strategic choice per- spective goes a significant step further by proposing that not only do organizations adapt to a changing environment, but they also have the opportunity and power to reshape their environment. This perspective is supported by research indicating that the decisions of a firm’s management have at least as great an impact on firm performance as overall industry factors.29 Because of its emphasis on managers mak- ing rational strategic decisions, the strategic choice perspective is the dominant one taken in strategic management. Its argument that adaptation is a dynamic process fits with the view of organizational learning theory, which says that an organization adjusts defensively to a changing environment and uses knowledge offensively to improve the fit between itself and its environment. This perspective expands the strategic choice perspective to include people at all levels becoming involved in providing input into strategic decisions.30
In agreement with the concepts of organizational learning theory, an increasing number of companies are realizing that they must shift from a vertically organized, top-down type of organization to a more horizontally managed, interactive organiza- tion. They are attempting to adapt more quickly to changing conditions by becoming “learning organizations.”
Creating a Learning Organization Strategic management has now evolved to the point that its primary value is in helping an organization operate successfully in a dynamic, complex environment. To be com- petitive in dynamic environments, corporations are becoming less bureaucratic and more flexible. In stable environments such as those that existed in years past, a com- petitive strategy simply involved defining a competitive position and then defending it.