Which of them are important, and which have you never thought about until now?
Discussion Questions
1. Who are the stakeholders in your life? Which of them are important, and which have you never thought about until now?
2. Who are the stakeholders in a politician’s life? Do you believe that the most important stake- holder—the voter—is often ignored? Why might this be so? Which stakeholders are given most attention? Why?
3. Investment brokers, by their very nature, invest their clients’ money where they believe returns will be greatest given the risk involved. Who are their stakeholders? Is it just the clients they serve? If not, are all of them equally served? If not, why not?
4. Health-insurance companies have come under fire recently for raising premiums of their sub- scribers by substantial amounts. They are accused, especially by those whose premiums have been raised, of catering to only themselves and their stockholders. Do they serve other stake- holders? If so, why aren’t they perceived as serving other stakeholders?
CHAPTER 1Summary
Companies compete in many ways—on price, through differentiating by making it easier for cus- tomers to buy, or through partnering with other companies. Competition has now become global; many foreign companies have the advantage of very low manufacturing costs and are increasingly taking over the manufacturing function of domestic companies.
Strategic thinking is a fundamental driver of good strategic planning and decision making. Strategic thinking involves having as accurate a perception as possible of a company’s external environment. The extraordinary pace of change is making the job of strategic thinking more difficult and urgent. Doing strategic planning without strategic thinking leads to poor strategies and strategic decisions.
The outputs of strategic thinking, coupled with a candid assessment of the company itself and the resources at its disposal, form the basis for arriving at strategic issues—the most pressing issues facing the company at that time—and what strategic alternatives (or alternative futures) the com- pany should consider before deciding on the strategies it should pursue over the next three or so years. It’s the logical framework of a strategic analysis and of strategic planning for determining the best strategy a company should pursue.
The strategies that companies follow to compete effectively include concentration, innovation, differentiation, low-cost leadership, focus or specialization, finding a “blue ocean,” acquiring or merging with another company, forming strategic alliances, diversifying into another industry or segment, retrenchment, and divesting.
Although similar on the surface, strategies differ from business models; a strategy is how a com- pany actually competes, whereas a business model states how a company attracts customers, how it expects to make money, and how it will grow and includes its strategy.
“Success” means doing well on a set of performance-related measures and is different for every company. Success criteria include revenues, NIAT, profit ratios, shareholder value, market share, developing a competitive advantage, brand value and, for some companies going through hard times, their very survival.
A corporation owes some measure of duty to its stakeholders. These include stockholders and investors, creditors, employees, customers, host communities, and the environment. Ideally, a corporation should fulfill its duty to all its stakeholders; in practice this is rarely the case. Employ- ees, customers, host communities, and the environment are the stakeholders most likely to have their interests ignored.
Key Terms
acquisition strategy Involves buying another company to take full control of it (anywhere from a majority 51% stake to an outright 100% ownership).
applied research Takes something already discovered and patented and finds ways of commercializing it (part of the “R” in R&D).
basic research Focuses on discovering new things and processes unimagined before and is very costly with uncertain outcomes (part of the “R” in R&D).
being acquired strategy A special case of a divestiture strategy where the whole company is divested (i.e., sold to another company or per- son). It is the opposite of an acquisition strategy.
CHAPTER 1Summary
blue ocean An unserved market. The name stems from an analogy where a “red ocean” represents a bloody shark-feeding frenzy all going after some prey (too much competition), whereas a “blue ocean” is free of any preda- tors except you—no competition, no blood.
blue-ocean strategy A strategy that involves finding a market space that is not served at all, where the company is the only provider of a product or service and has no competitors; such a market space is called a blue ocean.
book value The value of a company asset shown on its balance sheet (which might have been depreciated or amortized); this may differ from what the same asset might fetch if sold on the open market (market value).
brand Represents a unique set of promises that a company warrants to its customers and that customers in turn expect from a company. Carefully crafted, a brand is used to position a company in the consumer’s mind (safety, taste, performance, power, reliability, etc.). A strong brand is an indication of a successful differen- tiation strategy.
brand equity Refers to the power of a brand to influence purchases and loyalty. It can increase, remain the same, or decline over time. The main reasons for its erosion are com- petitors duplicating the quality of a brand so that it is no longer unique or a company failing to perform in ways that the brand promises.
business model Describes the way in which a company does what it does to deliver cus- tomer value. It should describe how it gets customers, how it will make money, and how it will grow.
concentration strategy Involves some com- bination of producing an existing, improved, or new product or service for an existing, expanded, or new market. Includes an innova- tion strategy and a technology strategy (both geared toward new-product development).
conglomerate-diversification strategy Produc- ing a brand new product or service for a brand new market. A seldom-used form of a concen- tration strategy.
core competence A capability that gives a company a strategic or competitive advantage over its competitors.
differentiation Developing a product that is unique from or superior to the product offered by the competition, and, as a consequence, having a strong and distinctive brand, which enables companies to charge more for their products because, in the consumer’s mind, they are offering something no one else is offering (one of Michael Porter’s three generic strategies).
differentiation strategy The development of a product that is unique from or superior to the product offered by the competition.
diversification strategy A strategy to enter another industry or segment, which could be related or unrelated to a company’s current industry. Companies can do this through inter- nal R&D or through acquisition of a company already in the new industry.
divestiture strategy A strategy to sell off a divi- sion or major assets of the firm.
focus strategy Targets a very small market (often called a niche market) and, in so doing, avoids competing with large competitors that are not interested in serving such a small market.
free market A market in which the state does not regulate or interfere with the economy, apart from overseeing property ownership and private contracts.
generic strategies First introduced by Michael Porter in the early 1980s as ways for a com- pany to achieve a competitive advantage and above-industry-average profits. They are dif- ferentiation, low-cost leadership, and focus or niche strategies.
CHAPTER 1Summary
globalization Describes the process by which regional economies, societies, and cultures have become integrated through a global network of political ideas through communica- tion, transportation, and trade. It is typically identified as being propelled by a combination of economic, technological, sociocultural, polit- ical, and biological factors. The term can also refer to the transmission of ideas, languages, or popular culture across national boundaries. Any facet of life that has undergone this pro- cess can be considered to be globalized.
hypercompetitive industries Industries in which technological changes are occurring so rapidly that changes in market share are fleet- ing and temporary.
innovation strategy A product-development strategy that requires research and develop- ment (R&D) and focuses on introducing tech- nologically advanced products or processes.
industry A collection of firms that provides similar products or services to the same customers.
internal analysis Knowing, analyzing, and understanding everything about the com- pany itself, especially what makes it a strong competitor.
joint venture (JV) Requires the formation of a new corporate entity (referred to in the literature as a “child”) jointly owned by two companies (referred to as “the parents”). It is a kind of strategic alliance that enables the two parents to accomplish more than just having an agreement between them.
key strategic issues A synthesis of both the external and internal analyses that focuses the company’s attention on the most important issues it faces.
low-cost leadership A strategy that gives a company the lowest costs in its industry. One of Porter’s three generic strategies.
maquiladoras Duty-free zones in large cities along the U.S.-Mexico border that contain low- cost-labor-manufacturing plants owned mostly by U.S. and Japanese companies.
market The collective name given to the buy- ers of the products or services produced by an industry.
market-development strategies Penetrating an existing market, expanding into related markets, or finding new markets. Part of a concentration strategy.
market share A firm’s annual sales as a per- centage of the annual sales of its industry or segment (really “industry share” but univer- sally known as “market share”).
market value The value that any company asset might fetch if sold on the open market; this value may differ from that carried on the company’s books (book value).
mental model What we know or think we know about something, which can be modified or updated as we come to learn more about it over time. Everyone has a mental model about everything but may not realize it.
merger strategy This strategy combines two companies, but through making joint deci- sions. Mergers succeed only when the cultures of the two entities are similar and both parties feel that merging would be in their mutual interest. A merger strategy is often used syn- onymously with an acquisition strategy, which is very different.
mixed economy A free market but where sub- stantial state intervention (regulation) exists to protect the public interest.
model A way of codifying a complex activity in a way that is at once easy to explain, under- stand, and learn—and gives someone a “road map” as to how everything fits together.
CHAPTER 1Summary
monopoly When a particular firm is the only company in an industry and can charge any price it likes, since customers cannot get the product from anyone else.
net profit after taxes (NIAT) On the income statement, the amount that is left after all allowable expenses (including deprecia- tion and amortization, which are accounting artifacts and not real expenses) have been deducted (often also referred to as “the bot- tom line”). Income statements are typically produced quarterly or annually.
net profit margin (NPM) A financial ratio cal- culated by dividing NIAT by revenues.
niche market A small subset of a larger mar- ket that has particular needs and which large competitors avoid because it is too small to be worth their time to serve.
operational decisions Made when doing oper- ational planning and involve deciding what has to be done (programs, activities, tasks, proj- ects), who will do it, who is accountable, what amount of budget is allocated, and a deadline for completing it.
product-development strategy Continu- ing to produce existing products or services, improving them over time, or introducing new products, all for the same market. Part of a concentration strategy.
retrenchment strategy A strategy reflecting a conscious decision to become a smaller com- petitor in the industry.
return on equity (ROE) A financial ratio calcu- lated by dividing NIAT by total stockholders’ equity.
shareholder value A computed value based on a company’s projected cash flows for the next 10 years, discounted to the present time using discounted-cash-flow (DCF) analysis and an appropriate discount rate, and subtracting from the result all current debt.
stakeholders Individuals and groups that can impact a company’s strategic outcomes and who have a vested interest in and power over a company’s performance. Or groups of people to whom a company owes some form of duty, including investors, creditors, employees, customers, host communities, and the envi- ronment (the public interest and the future of the planet).
strategic alliance Two firms partnering for their mutual benefit but retaining their dis- tinct corporate identity. Strategic alliances vary in their level of integration and commit- ment, ranging from simple contracts to joint ventures and owning minority stakes in other companies.
strategic alternatives Bona fide strategic options (more like alternative futures) from which a company can choose the best one. They consist of strategies, strategic intent, pro- grams, and how they might be financed.
strategic decisions These differ from opera- tional or tactical decisions primarily in their complexity and consequences, which are more substantial for the organization.
strategic management Steering and managing a company to be successful over time—not just for one year, but also year after year. Strategic management involves both strategy formulation and strategy implementation.
strategic-management model A reproduc- ible series of activities that if followed would enable a company to formulate and implement strategies (i.e., do strategic management). The one used in this book is shown in Figure 1.1.
strategic planning The process by which a company develops a strategy to achieve cer- tain purposes (what it considers “success”).
strategic thinking A continual activity that seeks to find a better strategy and business model, including a market space that is not currently served and has no competitors (blue ocean). This cannot be done without knowing
CHAPTER 1Summary
and understanding what is changing in a company’s external environment and what the future might hold.
strategy How a company actually competes.
strategy formulation Otherwise known as strategic planning and a complex process in its own right, involves (1) strategic thinking (which includes external analysis), (2) internal analysis, (3) determining key strategic issues, (4) developing viable strategic alternatives, and (5) choosing the best strategy using as criteria whatever the company defines as “success.”
strategy implementation Involves executing the strategies successfully and enabling the company to achieve its vision and meet its objectives.
supply chain Includes all companies from whom the firm buys parts or materials in order to make or assemble their product and the companies that supply those companies, and so on back to the raw material. Includes only the part of the value chain “upstream” of the company (toward the raw materials).
technology Both the abstract and concrete tools—such as knowledge, skills, and arti- facts—that can be used to create, produce, and deliver products.
technology strategy Focuses on developing new, or improving existing, technologies.