Environmental Variables
Sociocultural Forces
Economic Forces
Political–Legal Forces
Societal Environment
Technological Forces
Structure Culture
Resources
Governments
Natural Physical
Environment
Wildlife
Physical Resources
Climate
Shareholders
Suppliers
Competitors
Trade Associations
Communities
Creditors
Customers
Employees/ Labor Unions
Special Interest Groups
Structure
Shareholders
Task Environment
(Industry)
Internal Environment
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CHAPTER 1 Basic Concepts of Strategic Management 49
better kept as a separate document. A well-crafted mission statement describes what the company is now and what it wants to become—management’s strategic vision of the firm’s future. The mission statement promotes a sense of shared expectations in employees and communicates a public image to important stakeholder groups in the company’s task environment. Some people like to consider vision and mission as two different concepts: Mission describes what the organization is now; vision describes what the organization would like to become. We prefer to combine these ideas into a single mission statement.43
A classic example is that etched in bronze at Newport News Shipbuilding, unchanged since its founding in 1886:
We shall build good ships here—at a profit if we can—at a loss if we must—but always good ships.44
A mission may be defined narrowly or broadly in scope. An example of a broad mission statement is that used by many corporations: “Serve the best interests of shar- eowners, customers, and employees.” A broadly defined mission statement such as this keeps the company from restricting itself to one field or product line, but it fails to clearly identify either what it makes or which products/markets it plans to emphasize. Broad statements are relatively useless while narrow statements provide direction and value to the organization.
Objectives: Listing Expected Results Objectives are the end results of planned activity. They should be stated as action verbs and tell employees what is to be accomplished and when, with appropriate metrics. The achievement of corporate objectives should result in the fulfillment of a corporation’s mission. In effect, this is what society gives back to the corporation when the corpora- tion does a good job of fulfilling its mission. Coca-Cola has set the standard of a focused, international company. In their Vision 2020 plan, they have laid out specific objectives including reducing the overall carbon footprint of their business operations by 15% by 2020, as compared to the 2007 baseline, and reducing the impact of their packaging by maximizing their use of renewable, reusable, and recyclable resources to recover the equivalent of 100% of their packaging. This type of focus has made Coca-Cola a perennial member of the Fortune 500, one of the Fortune 50 Most Admired Companies, one of Barron’s Most Respected Companies in the World, and a Diversity, Inc. Top 50 company. Over the past 10 years, they have raised their dividend an average of 9.8% per year and the company’s earnings per share have jumped 11.3% per year over the past five years.45
The term goal is often used interchangeably with the term objective. In this book, we prefer to differentiate the two terms. In contrast to an objective, we consider a goal as an open-ended statement of what one wants to accomplish, with no quantification of what is to be achieved and no time criteria for completion. For example, a simple statement of “increased profitability” is thus a goal, not an objective, because it does not state how much profit the firm wants to make the next year. A good objective should be action-oriented and begin with the word to. An example of an objective is “to increase the firm’s profitability in 2017 by 10% over 2016.”
Some of the areas in which a corporation might establish its goals and objectives are:
■■ Profitability (net profits) ■■ Efficiency (low costs, etc.) ■■ Growth (increase in total assets, sales, etc.) ■■ Shareholder wealth (dividends plus stock price appreciation) ■■ Utilization of resources (Return on Equity (ROE) or Return on Investment (ROI))
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50 PART 1 Introduction to Strategic Management and Business Policy
■■ Reputation (being considered a “top” firm) ■■ Contributions to employees (employment security, wages, diversity) ■■ Contributions to society (taxes paid, participation in charities, providing a needed
product or service) ■■ Market leadership (market share) ■■ Technological leadership (innovations, creativity) ■■ Survival (avoiding bankruptcy) ■■ Personal needs of top management (using the firm for personal purposes, such as
providing jobs for relatives)
Strategy: Defining the Competitive Advantages An organization must examine the external environment in order to determine who constitutes the perfect customer for the business as it exists today, who the most direct competitors are for that customer, what the company does that is necessary to compete, and what the company does that truly sets it apart from its competitors. These elements can be rephrased into the strengths of the business, the understanding of its weaknesses relative to its competitors, what opportunities would be most prudent, and what threats might affect the business’s primary competitive advantages.
A strategy of a business forms a comprehensive master approach that states how the business will achieve its mission and objectives. It maximizes competitive advantage and minimizes competitive disadvantage. Pfizer, the giant drug company has embraced the need for this type of approach. Faced with the rapid fall-off of its biggest blockbuster drugs (patents expiring), Pfizer was faced with the question of how to generate the R&D to create new drugs. Historically, the company had relied upon its cadre of scientists, but this changed in the past few years. Pfizer moved aggressively to acquire drug makers in the emerging biosimiliar market (small molecule biologics made from living cells). Pfizer’s late-stage biosimiliar drugs have a very good chance of allowing the company to capture a significant part of what is expected to be a US$20 billion market by 2020. This is the crucial new ground from which they hope to replace such blockbusters as Lipitor, which saw its sales drop from US$12 billion in 2012 to just over US$2 billion in 2015 after the patent expired.46
The typical larger business addresses three types of strategy: corporate, business, and functional.
■■ Corporate strategy describes a company’s overall direction in terms of growth and the management of its various businesses. Corporate strategies generally fit within the three main categories of stability, growth, and retrenchment.
■■ Business strategy usually occurs at the business unit or product level, and it empha- sizes improvement of the competitive position of a corporation’s products or services in the specific industry or market segment served by that business unit. Business strat- egies may fit within the two overall categories: competitive and cooperative strategies. For example, Staples, the U.S. office supply store chain, has used a competitive strategy to differentiate its retail stores from its competitors by adding services to its stores, such as copying, UPS shipping, and hiring mobile technicians who can fix computers and install networks. British Airways has followed a cooperative strategy by forming an alliance with American Airlines in order to provide global service. Cooperative strategy may be used to provide a competitive advantage in situations where the cooperating entities are not in direct competition for customers. Intel, a manufacturer of computer microprocessors, uses its alliance (cooperative strategy) with Microsoft to differentiate itself (competitive strategy) from AMD, its primary competitor.
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CHAPTER 1 Basic Concepts of Strategic Management 51
■■ Functional strategy is the approach taken by a functional area to achieve corporate and business unit objectives and strategies by maximizing resource productivity. It is concerned with developing and nurturing a distinctive competence to provide a com- pany or business unit with a competitive advantage. Examples of research and devel- opment (R&D) functional strategies are technological followership (imitation of the products of other companies) and technological leadership (pioneering an innova- tion). For years, Magic Chef had been a successful appliance maker by spending little on R&D but by quickly imitating the innovations of other competitors. This helped the company keep its costs lower than those of its competitors and consequently to compete with lower prices. In terms of marketing functional strategies, Procter & Gamble (P&G) is a master of marketing “pull”—the process of spending huge amounts on advertising in order to create customer demand. This supports P&G’s competitive strategy of differentiating its products from those of its competitors.
Business firms use all three types of strategy simultaneously. A hierarchy of strategy is a grouping of strategy types by level in the organization. Hierarchy of strategy is a nesting of one strategy within another so that they complement and support one another. (See Figure 1–4.) Functional strategies support business strategies, which, in turn, support the corporate strategy(ies).
Policies: Setting Guidelines A policy is a broad guideline for decision making that links the formulation of a strategy with its implementation. Companies use policies to make sure that employees through- out the firm make decisions and take actions that support the corporation’s mission, objectives, and strategies. For example, when Cisco decided on a strategy of growth through acquisitions, it established a policy to consider only companies with no more than 75 employees, 75% of whom were engineers.47 Consider the following company policies:
■■ 3M: 3M says researchers should spend 15% of their time working on something other than their primary project. (This supports 3M’s strong product development strategy.)