Foundations in Strategic Management

Foundations in Strategic Management treats core topics and current issues in the field directly and concisely without compromising learning. With just eight chapters, it flows at a brisk pace. While it is half the size of standard texts, Foundations covers all major strategic management topics, including classic and modern theory; draws on the contributions of leading authors in the field; and interlaces all its presentations with cur- rent debates, current perspectives, and current examples. Foundations gives you strategy at its most essential along with the option to build a course to your own particular spe- cifications: to add your own readings, to run a simulation, to select your own cases, to experiment with exercises—in short, to customize your course to suit your teaching style and goals.

Three theoretical foundations, above all other concerns, influenced the shape of this book:

(1) The Traditional Strategic Management Process Model. This approach is based pri- marily on applications of industrial organization economics and other classic writ- ings from a wide range of the pioneers in the field.

(2) The Resource-Based View (RBV) of Strategic Management. The emphasis in RBV is on acquiring and managing resources that help a firm develop sustainable com- petitive advantage.

(3) Stakeholder Theory. The stakeholder perspective views the firm at the center of a network of contacts with whom mutually beneficial relationships are formed. Effective management of these relationships, and the stakeholder network itself, can enhance competitive performance. Stakeholder theory is also inherently ethics based, which provides a nice balance for the more economically based theories.

CURRENT TOPICS Issues of current relevance—including global interconnectedness, economic cycles, hypercompetition, cooperative strategies and social networks, restructuring, corporate innovation and entrepreneurship, corporate governance, business ethics, and sustain- ability—are treated with depth and sophistication and incorporate cutting-edge research findings. Combined with traditional discussions of environmental analysis, organiza- tional analysis, strategic thinking, strategic leadership, strategic direction, strategy for- mulation, and strategy implementation, the field’s newest trends stay linked to our focus on strategic management—that is, on strategies and strategic decisions that seek to create a future for an organization with long-range, or “strategic,” planning as a cen- tral concern. Issues associated with the service sector and technology-focused businesses are reflected throughout the text in examples, concepts, assumptions, and inferences.

ACADEMICALLY SOLID, GLOBALLY ENGAGED Foundations pays particular attention to the fundamentals of strategic management and takes a traditional approach to topical organization. Chapter 1 covers the strategic management process and strategic thinking. Chapter 2 discusses the external

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environment, including both the broad and task environments. Chapter 3 treats the internal environment and examines how internal resources are associated with competi- tive advantage. Chapter 4 covers elements of strategic direction and strategic leadership. Chapter 5 discusses business-level strategy. Corporate-level strategy is tackled in Chap- ter 6. Chapter 7 focuses on implementation issues, including creation and integration of functional-level strategies, organizational structure, organizational culture, and fostering innovation and entrepreneurship. Chapter 8 treats strategic control and restructuring. The important topic of global strategy is covered in each of the chapters through inte- gration of international concepts, applications, and examples.

For Instructors Instructors of strategic management face significant challenges fitting all the material they may want to cover into a single capstone course. We are mindful of these chal- lenges and believe we have written a text that is uniquely supportive of including a broad range of supplemental materials such as cases, exercises, simulations, and research projects. We also provide standard teaching resources with the text, including an instructor’s manual, test bank, and presentation slides.

Instructor’s Manual with Test Bank. The Instructor’s Manual with Test Bank includes lecture outlines and a bank of test questions.

PowerPoint™ Presentation Slides. Over 150 PowerPoint slides are available to supplement course content. To download now, visit Foundations’ supporting website at http://harrison.swcollege.com.

For Students The decision-making tools you develop during this course are relevant to all levels of an organization and should also help you in your own personal planning. You would not be long on the job before you discover that the techniques of strategic management, such as those required to pull together an industry or organizational analysis, are highly applicable to all types of firms, including small entrepreneurial firms and nonprofits. In addition, the material contained in this book will help you understand, appreciate, and think critically about trends of current and future importance to the business community.

Studying strategic management will help you become better prepared to deal with important issues in our increasingly complex, increasingly global business environment, regardless of your position or of the industry in which you work. We strongly encour- age you to apply the concepts of strategic management to your own employment and career planning decisions. Many of our students have told us that their understanding of strategic management impressed recruiters and allowed them to ask perceptive ques- tions during interviews.

ACKNOWLEDGMENTS In developing this text, we would like to acknowledge the efforts of an outstanding staff at Cengage, as well as the many reviewers, students, and colleagues who have contrib- uted so much to enhancing the value of this book. We are also grateful to our families for their continuing support that made this project possible.

iv Preface

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ToMarie, for unbounded enthusiasm and never-ending support —Jeff

To my daughters, Ashley and Kimberly —Caron

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About the Authors

Jeffrey S. Harrison is the W. David Robbins Chair of Strategic Management at the Robins School of Business, University of Richmond. Prior to his current appointment he served as the Fred G. Peelen Professor of Global Hospitality Strategy at Cornell University. He helped organize the Stakeholder Strategy Interest Group of the Strategic Management Society and has served in a variety of leadership positions for that group. In association with the Strategic Management Society and the European Institute for Advanced Studies in Management, he and Ed Freeman organized a special conference in Barcelona in 2011 on stakeholder theory that attracted scholars from more than two dozen countries. He serves on the editorial review board of Strategic Management Journal and previously served for nine years on the board of Academy of Management Journal. He and Ed Freeman have guest edited special issues on stakeholder themes inAcademy ofManage- ment Journal and Academy of Management Executive. Dr. Harrison’s research interests include strategic management and business ethics, with particular expertise in the areas of corporate strategy and stakeholder theory. Much of his work has been published in presti- gious academic journals such as Academy of Management Journal, Strategic Management Journal, and Journal of Business Ethics. He has authored or coauthored ten books, including Strategic Management of Organizations and Stakeholders; Managing for Stakeholders: Survival, Reputation and Success; and Mergers and Acquisitions: A Guide to Creating Value for Stakeholders. Dr. Harrison has also provided consulting and execu- tive training services to many companies on a wide range of strategic, entrepreneurial, and other business issues.

Caron St. John joined the University of Alabama in Huntsville as the Dean of the College of Business Administration in Spring 2010. Previously she was the Associate Dean of Graduate Programs, Research and Outreach, in the College of Business and Behavioral Science at Clemson University, with responsibility for MBA programs, Executive Educa- tion programs, the Spiro Institute for Entrepreneurial Leadership, the Small Business Development Center, and the Renaissance Center. In 2007, Dr. St. John was the winner of the Dr. Charles Townes Award for Individual Achievement in Innovation for contribu- tions to innovation and entrepreneurship in the upstate of South Carolina, and in January 2010, she was recognized by Greenville Business Magazine as one of the 50 most influen- tial people in Greenville, South Carolina, for 2009. She was also recognized by the Greenville Chamber of Commerce with a Special Chairman’s Award for Education in Business for 2009. Dr. St. John has served as the principal investigator or coprincipal investigator on grants from the National Science Foundation and U.S. Department of Commerce totaling over $1.5 million and has published research in leading management journals including the Academy of Management Review, Strategic Management Journal, Operations Management Journal, Organization Research Methods, Computers and Operations Research, and Production and Operations Management.

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Contents

CHAPTER 1 The Strategic Management Process 2

What is Strategic Management? 4 External and Internal Environmental Analysis 5 Strategic Leadership and Strategic Direction 6 Business and Corporate Strategy Formulation 7 Strategy Implementation and Control 8 Strategic Restructuring 9

Alternative Perspectives on Strategy Development 9 Industrial Organization Economics 10 The Resource-Based View of the Firm 11 The Stakeholder Perspective 11 A Combined Approach 14

Strategic Thinking in a Turbulent Global Environment 14 Key Points Summary 17 Notes 18

CHAPTER 2 The External Environment 22

The Broad Environment 25 Sociocultural Forces 25 Economic Forces 27 Technological Forces 28 Political/Legal Forces 30

The Task Environment 30 Forces That Drive Industry Competition and Profitability 31 Managing External Stakeholders 36 Cooperative Strategies and Alliance Networks 37

Global Business Environments 39 Evaluating a Foreign Investment Environment 40 Competitive Advantages of Nations 40

Key Points Summary 42 Notes 43

CHAPTER 3 Organizational Resources and Competitive Advantage 46

The Strategic Value of Internal Resources and Capabilities 48 Sustainable Competitive Advantage 48 Resource Interconnectedness 50 Human Resources 51 Physical Resources 53 Financial Resources 54 Knowledge and Learning Resources 56 General Organizational Resources 57

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Resource Analysis and the Development of Strategy 59 Value Chain Analysis 59

Basic and Support Activities 59 Using Value Chain Analysis to Guide Strategy 61

Firm Performance 62 Traditional Financial Performance Measures 62 Broader Stakeholder-Based Measures of Firm Performance 63

Key Points Summary 65 Notes 66

CHAPTER 4 Strategic Leadership and Strategic Direction 70

Strategic Leadership 72 Primary Leadership Responsibilities 72 Effective Strategic Leaders 73 Top Management Teams 74 Corporate Governance 75 Agency Problems 76

Strategic Direction 78 Influences on Strategic Direction 78 Organizational Mission and Vision Statements 80 Business Definition 81

Organizational Values and Purpose 82 Codes of Ethics 83 Corporate Social Responsibility and Sustainable Development 85

Key Points Summary 86 Notes 87

CHAPTER 5 Business-Level Strategies 92

Generic Business-Level Strategies 95 Differentiation 95 Low-Cost Leadership 96 Best Cost 99 Focus 99 Business Models 100

Competitive Tactics 102 Growth Strategies 102 Offensive Tactics 102 Defensive Tactics 104 Collaborative Tactics 105 Political Tactics 105 Avoidance (Blue Ocean) Tactics 106 Strategic Flexibility 106

Strategies in an International Context 107 International Growth Tactics 107 Business-Level Strategies in Multiple International Markets 107

Changes in Strategy Over Time 109 Key Points Summary 112 Notes 113

viii Contents

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CHAPTER 6 Corporate Strategies 116

Development of Corporate Strategy 119 Concentration 119 Vertical Integration 120 Diversification 122

Diversification Methods 126 Internal Ventures 126 Mergers and Acquisitions 126 Strategic Alliances and Joint Ventures 128

Portfolio Management 130 Boston Consulting Group Matrix 130 The General Electric Business Screen 132

Key Points Summary 134 Notes 134

CHAPTER 7 Strategy Implementation 140

Functional Strategies 142 Marketing Strategy 143 Operations Strategy 146 Research and Development Strategy 146 Human Resources Strategy 147 Financial Strategy 148 Information Systems Strategy 149

Organizational Structure 150 Standard Structural Forms 150 More Complex Structures 154 Foreign Subsidiaries 155

Organizational Culture and Energy 155 Fostering Innovation and Entrepreneurship 156 Key Points Summary 158 Notes 159

CHAPTER 8 Strategic Control and Restructuring 162

Strategic Control Systems 164 Feedback Controls 166 Concurrent Controls 169 Feedforward Controls 170 Comprehensive Strategic Control Systems 171

Strategic Restructuring 173 Refocusing Corporate Assets 173 Retrenchment 174 Chapter XI Reorganization 174 Leveraged Buyouts 175 Structural Reorganization 175

Dealing with Economic Cycles 176 Key Points Summary 178 Notes 178

Contents ix

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Appendix Preparing a Strategic Analysis 182

Structuring an Environmental Analysis 182 Industry Analysis 183 External Stakeholders and the Broad Environment 183 Factors that Influence Demand and Cost Structures 184 Strategic Issues Facing the Industry 185

Structuring an Organizational Analysis 185 Evaluation of the Internal Environment 185 Identification of Resources and Capabilities 186 Evaluation of Strategies and Business Model 186 Identification of Sources of Competitive Advantage 187

Developing a Strategic Plan 188 Strategic Direction and Major Strategies 188 Evaluation of Opportunities and Recommendations 188 Implementation and Control 190

A Note to Students 190

Index 191

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Foundations in Strategic Management

Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

1 The Strategic ManagementProcess

What Is Strategic Management? External and Internal Environmental Analysis Strategic Leadership and Strategic Direction Business and Corporate Strategy Formulation Strategy Implementation and Control Strategic Restructuring

Alternative Perspectives on Strategy Development Industrial Organization Economics The Resource-Based View of the Firm The Stakeholder Perspective A Combined Approach

Strategic Thinking in a Turbulent Global Environment

Key Points Summary

Notes