strama

Question 1

is a set of managerial decisions and actions that help determine
the long-term performance of an organization. It includes environmental scanning (both
external and internal),

Answer 1

Strategic management

Question 2

Phase 1—Basic financial planning
Phase 2—Forecast-based planning
Phase 3—Externally oriented (strategic) planning
Phase 4—Strategic management

Answer 2

PHASES OF STRATEGIC MANAGEMENT

Question 3

Managers initiate serious planning when they
are requested to propose the following year’s budget. Projects are proposed on the basis
of very little analysis, with most information coming from within the firm. The sales
force usually provides the small amount of environmental information used in this
effort. Such simplistic operational planning only pretends to be strategic management,
yet it is quite time consuming. Normal company activities are often suspended for
weeks while managers try to cram ideas into the proposed budget. The time horizon is
usually one year.

Answer 3

Phase 1—Basic financial planning

Question 4

As annual budgets become less useful at
stimulating long-term planning, managers attempt to propose five-year plans. At this
point, they consider projects that may take more than one year. In addition to internal
information, managers gather any available environmental data—usually on an ad hoc
basis—and extrapolate current trends. This phase is also time consuming, often
involving a full month or more of managerial activity to make sure all the proposed
budgets fit together. The process gets very political as managers compete for larger
shares of limited funds. Seemingly endless meetings take place to evaluate proposals
and justify assumptions. The time horizon is usually three to five years.

Answer 4

Phase 2—Forecast-based planning

Question 5

Frustrated with highly political yet
ineffectual five-year plans, top management takes control of the planning process by initiating a formal
strategic planning system. The company seeks to increase its responsiveness to changing markets and
competition by thinking and acting strategically. Planning is taken out of the hands of lower-level
managers and concentrated in a planning staff whose task is to develop strategic plans for the
corporation. Consultants often provide the sophisticated and innovative techniques that the planning
staff uses to gather information and forecast future trends.

Answer 5

Phase 3—Externally oriented (strategic) planning

Question 6

Realizing that even the best strategic plans are worthless without
the input and commitment of lower-level managers, top management forms planning groups of
managers and key employees at many levels, from various departments and workgroups. They develop
and integrate a series of plans focused on emphasizing the company’s true competitive advantages.
Strategic plans at this point detail the implementation, evaluation, and control issues. Rather than
attempting to perfectly forecast the future, the plans emphasize probable scenarios and contingency
strategies. The sophisticated annual five-year strategic plan is replaced with strategic thinking at all
levels of the organization throughout the year. Strategic information, previously available only
centrally to top management, is used by people throughout the organization. Instead of a large
centralized planning staff, internal and external planning consultants are available to help guide
group strategy discussions. Although top management may still initiate the strategic planning process,
the resulting strategies may come from anywhere in the organization. Planning is typically interactive
across levels and is no longer strictly top down. People at all levels are now involved.

Answer 6

Phase 4—Strategic management

Question 7

■■ A clearer sense of strategic vision for the firm

■■ A sharper focus on what is strategically important.

■■ An improved understanding of a rapidly changing environment.

Answer 7

BENEFITS OF STRATEGIC MANAGEMENT

Question 8

as the term is used in business, is meant to describe new products, services,
methods, and organizational approaches that allow the business to achieve
extraordinary returns.

Answer 8

Innovation

Question 9

refers to the use of business practices to manage the triple bottom line as
was discussed earlier. That triple bottom line involves (1) the management of
traditional profit/loss; (2) the management of the company’s social responsibility; and
(3) the management of its environmental responsibility. The company has a relatively
obvious long-term responsibility to the shareholders of the organization. That means
that the company has to be able to thrive despite changes in the industry, society, and
the physical environment. This is the focus of much of this textbook and the focus of
strategy in business. The company that pursues a sustainable approach to business has
a responsibility to its employees, its customers, and the community in which it operates.

Answer 9

Impact of Sustainability

Question 10

■■ Environmental scanning
■■ Strategy formulation
■■ Strategy implementation
■■ Evaluation and control.

Answer 10

Basic Model of Strategic Management

Question 11

is the monitoring, evaluating, and disseminating of
information from the external and internal environments to key people within the
corporation. Its purpose is to identify strategic factors—those external and internal
elements that will assist in the analysis of the strategic decisions of the corporation.
The simplest way to represent the outcomes of environmental scanning is through a
SWOT approach. SWOT is an acronym used to describe the particular Strengths,
Weaknesses, Opportunities, and Threats that appear to be strategic factors for a
specific company. The external environment consists of variables (opportunities and
threats) that are outside the organization and not typically within the short-run control
of top management. These variables form the context within which the corporation
exists.

Answer 11

Environmental scanning

Question 12

is the process of investigation, analysis, and decision making that
provides the company with the criteria for attaining a competitive advantage. It
includes defining the competitive advantages of the business, identifying weaknesses
that are impacting the company’s ability to grow, crafting the corporate mission,
specifying achievable objectives, and setting policy guidelines.

Answer 12

Strategy formulation

Question 13

An organization’s mission is the purpose or reason for the organization’s existence. It
announces what the company is providing to society—either a service such as
consulting, a set of products such as automobile tires, or a combination of the two such
as tablets and their associated Apps. A well-conceived mission statement defines the
fundamental, unique purpose that sets a company apart from other firms of its type.
Research reveals that firms with mission statements containing explicit descriptions of
their competitive advantages have significantly higher growth than firms without such
statements.

Answer 13

Mission: Stating Purpose

Question 14

■■ 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)

Answer 14

Objectives: Listing Expected Results

Question 15

■■ 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)

Answer 15

Objectives: Listing Expected Results

Question 16

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,

Answer 16

Competitive Advantages

Question 17

describes a company’s overall direction in terms of growth and
the management of its various businesses. generally fit within the
three main categories of stability, growth, and retrenchment.

Answer 17

Corporate strategy

Question 18

usually occurs at the business unit or product level, and it
emphasizes improvement of the competitive position of a corporation’s products or
services in the specific industry or market segment served by that business unit.
It may fit within the two overall categories

Answer 18

Business strategy

Question 19

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
company or business unit with a competitive advantage.

Answer 19

Functional strategy

Question 20

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
throughout 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:

Answer 20

Policies: Setting Guidelines

Question 21

is a process by which strategies and policies are put into
action through the development of programs, budgets, and procedures. This process
might involve changes within the overall culture, structure, and/or management system
of the entire organization. Except when such drastic corporate wide changes are needed,

however, is typically conducted by middle- and lower-
level managers, with review by top management. Sometimes referred to as operational planning, often involves day-to-day decisions in resource
allocation.

Answer 21

Strategy implementation

Question 22

is a statement of the activities or steps needed to support a
strategy. The terms are interchangeable. In practice, a program is a collection of tactics
where a tactic is the individual action taken by the organization as an element of the
effort to accomplish a plan. makes a strategy action-oriented. It
may involve restructuring the corporation, changing the company’s internal culture, or
beginning a new research effort.

Answer 22

A program or a tactic

Question 23

is a statement of a corporation’s programs in terms of dollars. Used in
planning and control, a budget lists the detailed cost of each program. Many
corporations demand a certain percentage return on investment, often called a “hurdle
rate,” before management will approve a new program. This is done so that the new
program has the potential to significantly add to the corporation’s profit performance
and thus build shareholder value. The budget not only serves as a detailed plan of the
new strategy in action, it also specifies through proforma financial statements the
expected impact on the firm’s financial future.

Answer 23

Budgets: Costing Programs

Question 24

are a system of
sequential steps or techniques that describe in detail how a particular task or job is to
be done. They typically detail the various activities that must be carried out in order to
complete the corporation’s program.

Answer 24

Standard Operating Procedures (SOP)

Question 25

is a process in which corporate activities and performance results are monitored so that
actual performance can be compared with desired performance. Managers at all levels
use the resulting information to take corrective action and resolve problems. Although
evaluation and control is the final major element of strategic management, it can also
pinpoint weaknesses in previously implemented strategic plans and thus stimulates the
entire process to begin again.

Answer 25

Evaluation and control

Question 26

is the end result of activities. It includes the actual outcomes of the strategic management process. The practice of strategic management is justified in terms of its
ability to improve an organization’s performance, typically measured in terms of profits
and return on investment. For evaluation and control to be effective, managers must
obtain clear, prompt, and unbiased information from the people below them in the
corporation’s hierarchy. Using this information, managers compare what is actually
happening with what was originally planned in the formulation stage.

Answer 26

Performance

Question 27

is something that acts as a stimulus for a change in strategy.

Answer 27

A triggering event

Question 28

As organizations grow larger and more complex, with more uncertain
environments, decisions become increasingly complicated and difficult to make. In
agreement with the strategic choice perspective mentioned earlier, this book proposes a
strategic decision-making framework that can help people make these decisions
regardless of their level and function in the corporation.

Answer 28

Strategic Decision Making

Question 29

Entrepreneurial mode: Strategy
Adaptive mode:
Planning mode:
Logical incrementalism:

Answer 29

MINTZBERG’S MODES OF STRATEGIC DECISION
MAKING

Question 30

Strategy is made by one powerful individual. The focus is on
opportunities; problems are secondary. Strategy is guided by the founder’s own vision of
direction and is exemplified by large, bold decisions. The dominant goal is growth of the
corporation. Amazon.com, founded by Jeff Bezos, is an example of this mode of strategic
decision making. The company reflects Bezos’ vision of using the Internet to market
everything that can be bought.

Answer 30

Entrepreneurial mode

Question 31

Sometimes referred to as “muddling through,” this decision-making
mode is characterized by reactive solutions to existing problems, rather than a
proactive search for new opportunities. Much bargaining goes on concerning the
priority of objectives. Strategy is fragmented and is developed to move a corporation
forward incrementally.

Answer 31

Adaptive mode

Question 32

This decision-making mode involves the systematic gathering of
appropriate information for situation analysis, the generation of feasible alternative
strategies, and the rational selection of the most appropriate strategy. It includes both
the proactive search for new opportunities and the reactive solution of existing
problems.

Answer 32

Planning mode

Question 33

A fourth decision-making mode can be viewed as a
synthesis of the planning, adaptive, and, to a lesser extent, the entrepreneurial modes.
In this mode, top management has a reasonably clear idea of the corporation’s mission
and objectives, but, in its development of strategies, it chooses to use “an interactive
process in which the organization probes the future, experiments, and learns from a
series of partial (incremental) commitments rather than through global formulations of
total strategies.

Answer 33

Logical incrementalism

Question 34

■■ Evaluate current performance results in terms of (a) return on investment,
profitability, and so forth, and (b) the current mission, objectives, strategies, and
policies.
■■ Review corporate governance—that is, the performance of the firm’s board of
directors and top management.
■■ Scan and assess the external environment to determine the strategic factors that
pose opportunities and threats.
■■ Scan and assess the internal corporate environment to determine the strategic
factors that are strengths (especially core competencies) and weaknesses. ■■ Analyze
strategic factors to (a) pinpoint problem areas and (b) review and revise the corporate
mission and objectives, as necessary.

Answer 34

STRATEGIC DECISION-MAKING PROCESS: AID TO
BETTER DECISIONS

Question 35

■■ Generate, evaluate, and select the best alternative strategies in light of the analysis
conducted in the previous step.
■■ Implement selected strategies via programs, budgets, and procedures.
■■ Evaluate implemented strategies via feedback systems, and the control of activities
to ensure their minimum deviation from plans.

Answer 35

STRATEGIC DECISION-MAKING PROCESS: AID TO
BETTER DECISIONS

Question 36

is a mechanism established to allow different parties to contribute capital,
expertise, and labor for their mutual benefit. The investor/shareholder participates in the
profits (in the form of dividends and stock price increases) of the enterprise without taking
responsibility for the operations. Management runs the company without being responsible
for personally providing the funds. To make this possible, laws have been passed that give
shareholders limited liability and, correspondingly, limited involvement in a corporation’s
activities. That involvement does include, however, the right to elect directors who have a
legal duty to represent the shareholders and protect their interests. As representatives of
the shareholders, directors have both the authority and the responsibility to establish basic
corporate policies and to ensure that they are followed. The board of directors, therefore, has
an obligation to approve all decisions that might affect the long-term performance of the
corporation. This means that the corporation is fundamentally governed by the board of
directors overseeing top management, with the concurrence of the shareholder. The term
corporate governance refers to the relationship among these three groups in determining the
direction and performance of the corporation. Increasingly, shareholders, activist investors,
and various interest groups have seriously questioned the role of the board of directors in
corporations. They are concerned that inside board members may use their position to
feather their own nests and that outside board members often lack sufficient knowledge,
involvement, and enthusiasm to do an adequate job of monitoring and providing guidance to
top management.

Answer 36

A corporation

Question 37

1. Effective board leadership including the processes, makeup, and output of the board
2. Strategy of the organization
3. Risk vs. initiative and the overall risk profile of the organization
4. Succession planning for the board and top management team
5. Sustainability

Answer 37

Responsibilities of the Board

Question 38

Monitor
Evaluate and influence
Initiate and determine

Answer 38

Role of the Board in Strategic Management

Question 39

By acting through its committees, a board can keep abreast of
developments inside and outside the corporation, bringing to management’s attention
developments it might have overlooked. A board should, at the minimum, carry out this
task.

Answer 39

Monitor

Question 40

A board can examine management’s proposals, decisions,
and actions; agree or disagree with them; give advice and offer suggestions; and outline
alternatives. More active boards perform this task in addition to monitoring.

Answer 40

Evaluate and influence

Question 41

A board can delineate a corporation’s mission and specify
strategic options to its management. Only the most active boards take on this task in
addition to the two previous ones

Answer 41

Initiate and determine

Question 42

The boards of most publicly owned corporations are composed of both inside and outside
directors. Inside directors (sometimes called management directors) are typically
officers or executives employed by the corporation. Outside directors (sometimes called
non-management directors) may be executives of other firms but are not employees of
the board’s corporation. Although there is yet no clear evidence indicating that a high
proportion of outsiders on a board results in improved financial performance.

Answer 42

Board of Directors Composition

Question 43

is concerned with analyzing and resolving two problems that occur in relationships
between principals (owners/shareholders) and their agents (top management):
1. Conflict of interest arises when the desires or objectives of the owners and the
agents conflict. For example, attitudes toward risk may be quite different. Agents
may shy away from riskier strategies in order to protect their jobs.
2. Moral hazard refers to the situation where it is difficult or expensive for the owners
to verify what the agents are actually doing.

Answer 43

Agency theory

Question 44

arises when the desires or objectives of the owners and the
agents conflict. For example, attitudes toward risk may be quite different. Agents
may shy away from riskier strategies in order to protect their jobs.

Answer 44

Conflict of interest

Question 45

refers to the situation where it is difficult or expensive for the owners
to verify what the agents are actually doing.

Answer 45

Moral hazard

Question 46

suggests that executives tend to be more motivated to
act in the best interests of the corporation than in their own self-interests. Whereas
agency theory focuses on extrinsic rewards that serve lower-level needs, such as pay
and security, stewardship theory focuses on the higher-order needs, such as
achievement and self-actualization.

Answer 46

stewardship theory

Question 47

who, though not really employed by the corporation, handle the
legal or insurance work for the company or are important suppliers (and thus
dependent on the current management for a key part of their business)

Answer 47

Affiliated directors

Question 48

who used to work for the company, such as the past
CEO who is partly responsible for much of the corporation’s current strategy and
who probably groomed the current CEO as his or her replacement. In the recent
past, many boards of large firms kept the firm’s recently retired CEO on the board
for a year or two after retirement as a courtesy, especially if he or she had
performed well as the CEO.

Answer 48

Retired executive directors

Question 49

who are descendants of the founder and own significant blocks of
stock (with personal agendas based on a family relationship with the current CEO).
The Schlitz Brewing Company, for example, was unable to complete its turnaround
strategy with a non-family CEO because family members serving on the board
wanted their money out of the company, forcing it to be sold.

Answer 49

Family directors

Question 50

Traditionally, the CEO of a corporation decided whom to invite to board membership
and merely asked the shareholders for approval in the annual proxy statement. All
nominees were usually elected. There are some dangers, however, in allowing the CEO
free rein in nominating directors. The CEO might select only board members who, in
the CEO’s opinion, will not disturb the company’s policies and functioning.

Answer 50

Nomination and Election of Board Members

Question 51

1. Boards are getting more involved not only in reviewing and evaluating company
   strategy but also in shaping it.
2. Women and minorities are being increasingly represented on boards.
3. Boards are establishing mandatory retirement ages for board members—typically
   around age 70.
4. As corporations become more global, they are increasingly looking for board
   members with international experience.
5. Society, in the form of special interest groups, increasingly expects boards of
   directors to balance the economic goal of profitability with the social needs of
   society. Issues dealing with workforce diversity and environmental sustainability
   are now reaching the board level.

Answer 51

Trends in Corporate Governance

Question 52

especially those of the CEO, involve getting things
accomplished through and with others in order to meet the corporate objectives. Top
management’s job is thus multidimensional and is oriented toward the welfare of the
total organization.
Specific top management tasks vary from firm to firm and are developed from an
analysis of the mission, objectives, strategies, and key activities of the corporation.
Tasks are typically divided among the members of the top management team. A
diversity of skills can thus be very important.
Research indicates that top management teams with a diversity of functional
backgrounds, experiences, and length of time with the company tend to be significantly
related to improvements in corporate market share and profitability. In addition, highly
diverse teams with some international experience tend to emphasize international
growth strategies and strategic innovation, especially in uncertain environments, as a
means to boost financial performance. The CEO, with the support of the rest of the top
management team, has two primary responsibilities when it comes to strategic
management. The first is to provide executive leadership and a vision for the firm. The
second is to manage a strategic planning process.

Answer 52

Responsibilities of Top Management

Question 53

is the directing of activities toward the accomplishment of
corporate objectives. ___ is important because it sets the tone for the
entire corporation. A strategic vision is a description of what the company is capable of
becoming. It is often communicated in the company’s vision statement. People in an
organization want to have a sense of direction, but only top management is in the
position to specify and communicate their unique strategic vision to the general
workforce. Top management’s enthusiasm (or lack of it) about the corporation tends to
be contagious.

Answer 53

Executive leadership

Question 54

The CEO envisions the company not as it currently is but as it can become. The new
perspective that the CEO’s vision brings gives renewed meaning to everyone’s work and
enables employees to see beyond the details of their own jobs to the functioning of the
total corporation. Louis Gerstner proposed a new vision for IBM when he proposed that
the company change its business model from computer hardware to services. In a
survey of 1,500 senior executives from 20 different countries, when asked the most
important behavioral trait a CEO must have, 98% responded that the CEO must convey
“a strong sense of vision.”

Answer 54

The CEO articulates a strategic vision for the
corporation

Question 55

The leader empathizes with followers and sets an example in terms of behavior, dress,
and actions. The CEO’s attitudes and values concerning the corporation’s purpose and
activities are clear-cut and constantly communicated in words and deeds.

Answer 55

The CEO presents a role for others to identify with
and to follow

Question 56

The leader empowers followers by raising their beliefs in their own capabilities. No
leader ever improved performance by setting easily attainable goals that provided no
challenge. Communicating high expectations to others can often lead to high
performance. The CEO must be willing to follow through by coaching people. As a
result, employees view their work as very important and thus motivating. Ivan
Seidenberg, chief executive of Verizon Communications, was closely involved in
deciding Verizon’s strategic direction, and he showed his faith in his people by letting
his key managers handle important projects and represent the company in public
forums. Grateful for his faith in them, his managers were fiercely loyal both to him and
the company.

Answer 56

The CEO communicates high-performance standards

Question 57

Economic responsibilities
Legal responsibilities
Ethical responsibilities
Discretionary responsibilities

Answer 57

Carroll’s Four Responsibilities of Business

Question 58

responsibilities of a business organization’s management are to produce goods and services
of value to society so that the firm may repay its creditors and increase the wealth of its shareholders.

Answer 58

Economic responsibilities

Question 59

responsibilities are defined by governments in laws that management is expected to obey. For
example, U.S. business firms are required to hire and promote people based on their credentials rather
than to discriminate on non-job-related characteristics such as race, gender, or religion.

Answer 59

Legal responsibilities

Question 60

responsibilities of an organization’s management are to follow the generally held beliefs about
behavior in a society. For example, society generally expects firms to work with the employees and the
community in planning for layoffs, even though no law may require this. The affected people can get
very upset if an organization’s management fails to act according to generally prevailing ethical values.

Answer 60

Ethical responsibilities

Question 61

responsibilities are the purely voluntary obligations a corporation assumes. Examples are
philanthropic contributions, training the hard-core unemployed, and providing day-care centers. The
difference between ethical and discretionary responsibilities is that few people expect an organization to
fulfill discretionary responsibilities, whereas many expect an organization to fulfill ethical ones

Answer 61

Discretionary responsibilities

Question 62

is the identification and evaluation of corporate stakeholders. This can be done in a
three-step process.

Answer 62

Stakeholder analysis

Question 63

Once stakeholder impacts have been identified, managers should decide whether stakeholder input
should be invited into the discussion of the strategic alternatives. A group is more likely to accept or
even help implement a decision if it has some input into which alternative is chosen and how it is to
be implemented.

Answer 63

Stockholder Input

Question 64

refers to the process of evaluating and choosing among alternatives in a manner consistent with ethical
principles. In making ________it is necessary to perceive and eliminate unethical options and select the best ethical
alternative.

Answer 64

Ethical decision-making

Question 65

The desire to do the right thing regardless of the cost

Answer 65

Commitment

Question 66

The awareness to act consistently and apply moral convictions to daily behavior

Answer 66

Consciousness

Question 67

The ability to collect and evaluate information, develop alternatives, and foresee potential consequences and risks

Answer 67

Competency

Question 68

Effective decisions are effective if they accomplish what we want accomplished and if they advance our purposes. A choice
that produces unintended and undesirable results is ineffective. The key to making effective decisions is to think about choices
in terms of their ability to accomplish our most important goals. This means we have to understand the difference between
immediate and short-term goals and longer-range goals.

Answer 68

Good decisions are both ethical and effective

Question 69

generate and sustain trust; demonstrate respect, responsibility, fairness and caring; and are consistent with
good citizenship. These behaviors provide a foundation for making better decisions by setting the ground rules for our behavior.

Answer 69

Ethical decisions

Question 70

are effective if they accomplish what we want accomplished and if they advance our purposes. A choice
that produces unintended and undesirable results is ineffective. The key to making effective decisions is to think about choices
in terms of their ability to accomplish our most important goals. This means we have to understand the difference between
immediate and short-term goals and longer-range goals.

Answer 70

Effective decisions

Question 71

Some people justify their seemingly unethical positions by arguing that there is no one absolute code
of ethics and that morality is relative. Simply put, moral relativism claims that morality is relative to
some personal, social, or cultural standard and that there is no method for deciding whether one
decision is better than another. At one time or another, most managers have probably used one of the
four types of moral relativism—naïve, role, social group, or cultural—to justify questionable
behavior.

Answer 71

Moral Relativism

Question 72

Based on the belief that all moral decisions are deeply personal and that
individuals have the right to run their own lives, adherents of moral relativism argue that each person
should be allowed to interpret situations and act according to his or her own moral values. This is not
so much a belief as it is an excuse for not having a belief or is a common excuse for not taking action
when observing others lying or cheating

Answer 72

Naïve relativism

Question 73

Based on the belief that social roles carry with them certain obligations to that role,
adherents of role relativism argue that a manager in charge of a work unit must put aside his or her
personal beliefs and do instead what the role requires—that is, act in the best interests of the unit.
Blindly following orders was a common excuse provided by Nazi war criminals after World War II.

Answer 73

Role relativism

Question 74

Another reason why some business people might be seen as unethical is that they may have no
well-developed personal sense of ethics. A person’s ethical behavior is affected by his or her level of
moral development, certain personality variables, and such situational factors as the job itself, the
supervisor, and the organizational culture.42 Kohlberg proposes that a person progresses through
three levels of moral development. 43 Similar in some ways to Maslow’s hierarchy of needs, in
Kohlberg’s system, the individual moves from total self-centeredness to a concern for universal
values. Kohlberg’s three levels are as follows:

Answer 74

Kohlberg’s Levels of Moral Development

Question 75

This level is characterized by a concern for self. Small children and
others who have not progressed beyond this stage evaluate behaviors on the basis of personal
interest—avoiding punishment or quid pro quo.

Answer 75

The preconventional level

Question 76

This level is characterized by a person’s adherence to an internal moral
code. An individual at this level looks beyond norms or laws to find universal values or
principles.

Answer 76

The principled level

Question 77

This level is characterized by considerations of society’s laws and
norms. Actions are justified by an external code of conduct.

Answer 77

The conventional level

Question 78

Following Carroll’s work, if business people do not act ethically, government will be forced to pass
laws regulating their actions—and usually increasing their costs. For self-interest, if for no other
reason, managers should be more ethical in their decision making. One way to do that is by
developing codes of ethics. Another is by providing guidelines for ethical behavior.

Answer 78

Encouraging Ethical Behavior

Question 79

specifies how an organization expects its employees to behave while on the job.
Developing a _____ can be a useful way to promote ethical behavior, especially for people
who are operating at Kohlberg’s conventional level of moral development. Such codes are currently
being used by more than half of U.S. business corporations. A code of ethics (1) clarifies company
expectations of employee conduct in various situations and (2) makes clear that the company expects
its people to recognize the ethical dimensions in decisions and actions.

Answer 79

Code of ethics

Question 80

Ethics is defined as the consensually accepted standards of behavior for an occupation, a trade, or a
profession. Morality, in contrast, constitutes one’s rules of personal behavior based on religious or
philosophical grounds. Law refers to formal codes that permit or forbid certain behaviors and may or
may not enforce ethics or morality.57 Given these definitions, how do we arrive at a comprehensive
statement of ethics to use in making decisions in a specific occupation, trade, or profession? A
starting point for such a code of ethics is to consider the three basic approaches to ethical behavior:

Answer 80

Views on Ethical Behavior

Question 81

proposes that actions and plans should be judged by
their consequences. People should, therefore, behave in a way that will produce the greatest benefit to
society and produce the least harm or the lowest cost. A problem with this approach is the difficulty
in recognizing all the benefits and costs of any particular decision. Research reveals that only the
stakeholders who have the most power (ability to affect the company), legitimacy (legal or moral
claim on company resources), and urgency (demand for immediate attention) are given priority by
CEOs.59 It is, therefore, likely that only the most obvious stakeholders will be considered, while
others are ignored.

Answer 81

Utilitarian approach

Question 82

proposes that human beings have
certain fundamental rights that should be respected in all decisions. A particular decision or behavior
should be avoided if it interferes with the rights of others. A problem with this approach is in
defining “fundamental rights.” The U.S. Constitution includes a Bill of Rights that may or may not
be accepted throughout the world. The approach can also encourage selfish behavior when a person
defines a personal need or want as a “right.”

Answer 82

Individual rights approach

Question 83

proposes that decision makers be equitable, fair, and
impartial in the distribution of costs and benefits to individuals and groups. It follows the principles
of distributive justice (people who are similar on relevant dimensions such as job seniority should be
treated in the same way) and fairness (liberty should be equal for all persons). The _____
can also include the concepts of retributive justice (punishment should be proportional to the offense)
and compensatory justice (wrongs should be compensated in proportion to the offense). Affirmative
action issues such as reverse discrimination are examples of conflicts between distributive and
compensatory justice.

Answer 83

Justice approach

Question 84

Utility: Does it optimize the satisfactions of all stakeholders?

Rights: Does it respect the rights of the individuals involved?

Justice: Is it consistent with the canons of justice?

Answer 84

Views on Ethical Behavior

Question 85

 The threat of entry of new competitors (entrants)

 The bargaining power of suppliers

 The bargaining power of customers (buyers)

 The threat of substitute products or services

 The rivalry

Answer 85

Porter’s Five Forces

Question 86

 Knowledgeable customers can force down prices by pitting rivals against each other.

 Influential suppliers can drive down profits by charging higher prices for supplies.

 Competition can steal customers.

 New market entrants can steal potential investment capital.  Substitute products can steal
customers.

Answer 86

Porter’s Five Forces (cont’d)

Question 87

will enter your market is high when entry is easy and low when
there are significant barriers to entry.

A feature of a product or service that customers have come to expect and entering

Answer 87

Threat of Entry of New Competitors (Entrants)

Question 88

 Supplier power is high when buyers have few choices from whom to buy and low when buyers
have many choices.

 The suppliers’ ability to influence the prices they charge for supplies.

 Possible ways to reduce supplier power:

 Alternative products or suppliers – Locating alternative supply sources.

 Reverse auction – The sellers compete to obtain business from the buyer and prices will typically
decrease as the sellers undercut each other.

Answer 88

Bargaining Power of Suppliers

Question 89

 Buyer power is high when buyers have many choices from whom to buy and low when buyers
have few choices.

 The ability of buyers to affect the price of an item.

Possible ways to reduce buyer power:

 Switching cost – Manipulating costs that make customers reluctant to switch to another product or
service.

 Loyalty program – Rewards customers based on the amount of business they do with a particular
organization.

Answer 89

Bargaining Power of Buyers

Question 90

The ______ is high when there are many alternatives for an organization’s products or
services and low where there are few alternatives.

Possible ways to reduce the threat:

 Switching costs – Costs that can make customers reluctant to switch to another product.

 Adding values – Offering add-on services to the product.

Answer 90

Threat of Substitute Products or Services

Question 91

Costs that can make customers reluctant to switch to another product.

Answer 91

Switching costs

Question 92

Offering add-on services to the product.

Answer 92

Adding values

Question 93

The threat from rivalry is high when there is intense competition among many firms in an industry.
The threat is low when the competition is among fewer firms and is not as intense.

Possible ways to reduce the threat:

 Product differentiation – Occurs when a company develops unique differences in its products or
services with the intent to influence demand.

Answer 93

Rivalry among Existing Firms in an Industry

Question 94

Occurs when a company develops unique differences in its products or
services with the intent to influence demand.

Answer 94

Product differentiation

Question 95

This model identifies specific activities where organizations can use competitive strategies for
greatest impact.

 Primary activities – those business activities that relate to the production and distribution of the
firm’s products and services, thus creating value for which customers are willing to pay.

 Support activities – do not add value directly to a firm’s products and services, but support the
primary activities.

Answer 95

Porter’s Value Chain Model

Question 96

those business activities that relate to the production and distribution of the
firm’s products and services, thus creating value for which customers are willing to pay.

Answer 96

Primary activities

Question 97

do not add value directly to a firm’s products and services, but support the
primary activities.

Answer 97

Support activities

Question 98

 Inbound logistics – Acquires raw materials and resources, and distributes

 Operations – Transforms raw materials or inputs into goods and services

 Outbound logistics – Distributes goods and services to customers

 Marketing and sales – Promotes, prices and sells products to customers

 Service – Provides customer support

 Firm infrastructure – Includes the company format or departmental structures, environment, and
systems

 Human resource management – Provides employee training, hiring and compensation

 Technology development – Applies MIS to processes to add value

 Procurement – Purchases inputs such as raw materials, resources, equipment and supplies

Answer 98

The Value Chain – Primary Value Activities

Question 99

Acquires raw materials and resources, and distributes

Answer 99

Inbound logistics

Question 100

Transforms raw materials or inputs into goods and services

Answer 100

Operations

Question 101

Distributes goods and services to customers

Answer 101

Outbound logistics

Question 102

Promotes, prices and sells products to customers

Answer 102

Marketing and sales

Question 103

Provides customer support

Answer 103

Service

Question 104

Includes the company format or departmental structures, environment, and
systems

Answer 104

Firm infrastructure

Question 105

Provides employee training, hiring and compensation

Answer 105

Human resource management

Question 106

Applies MIS to processes to add value

Answer 106

Technology development

Question 107

Purchases inputs such as raw materials, resources, equipment and supplies

Answer 107

Procurement

Question 108

Create the strategy

 What should we do?

Implement the strategy

 How do we do it?

Evaluate the strategy

 How well are we doing in meeting our long-term goals?

Answer 108

What “Strategy” Means?

Question 109

 To define the fundamentals of your business strategy, you need to answer three questions:

Who is/are your target customer(s)?

What is the value proposition to those customers?

What are the essential capabilities needed to deliver that value proposition?

 Without clear and coherent answers to these three questions, you may have an exciting vision, a
compelling mission, clear goals and an ambitious strategic plan with many actions under way, but
you won’t have a strategy.

Answer 109

Defining Business Strategy

Question 110

 Competitive Advantage – A product or service that an organization’s customers place a greater
value on than similar offerings from a competitor

 First-mover Advantage – Occurs when an organization can significantly impact its market share by
being first to market with a competitive advantage

Answer 110

Identifying Competitive Advantages

Question 111

A product or service that an organization’s customers place a greater
value on than similar offerings from a competitor

Answer 111

Competitive Advantage

Question 112

Occurs when an organization can significantly impact its market share by
being first to market with a competitive advantage

Answer 112

First-mover Advantage

Question 113

 A good business strategy provides a clear roadmap, consisting of a set of guiding principles or
rules, that defines the actions people in the business should take (and not take) and the things they
should prioritize (and not prioritize) to achieve desired goals.

 The target market, value proposition and capabilities must hang together in a coherent way.

Answer 113

How to Create a Good Business Strategy?

Question 114

In undertaking environmental scanning, strategic managers must first be aware of the many variables
within a corporation’s natural, societal, and task environments. The natural environment includes
physical resources, wildlife, and climate that are an inherent part of existence on Earth. These factors
form an ecological system of interrelated life. The societal environment is mankind’s social system
that includes general forces that do not directly touch on the short-run activities of the organization,
but that can influence its long-term decisions. These factors affect multiple industries and are as
follows:

■■ Economic forces that regulate the exchange of materials, money, energy, and information.

■■ Technological forces that generate problem-solving inventions.

■■ Political–legal forces that allocate power and provide constraining and protecting laws and
regulations.

■■ Sociocultural forces that regulate the values, mores, and customs of society.

Answer 114

Identifying External Environmental Variables

Question 115

The natural environment includes physical resources, wildlife, and climate that are an inherent part of
existence on Earth. Until the 20th century, the natural environment was generally perceived by
business people to be a given—something to exploit, not conserve. It was viewed as a free resource,
something to be taken or fought over, like arable land, diamond mines, deep water harbors, or fresh
water. Once they were controlled by a person or entity, these resources were considered assets and
thus valued as part of the general economic system—a resource to be bought, sold, or sometimes
shared. Side effects, such as pollution, were considered to be externalities, costs not included in a
business firm’s accounting system, but felt by others. Eventually these externalities were identified
by governments, which passed regulations to force business corporations to deal with the side effects
of their activities.

Answer 115

Scanning the Natural Environment

Question 116

The number of possible strategic factors in the societal environment is very high. The number
becomes enormous when we realize that, generally speaking, each country in the world can be
represented by its own unique set of societal forces—some of which are very similar to those of
neighboring countries and some of which are very different. For example, even though Korea and
China share Asia’s Pacific Rim area with Thailand, Taiwan, and Hong Kong (sharing many similar
cultural values), they have very different views about the role of business in society. It is generally
believed in Korea and China (and to a lesser extent in Japan) that the role of business is primarily to
contribute to national development. However, in Hong Kong, Taiwan, and Thailand (and to a lesser
extent in the Philippines, Indonesia, Singapore, and Malaysia), the role of business is primarily to
make profits for the shareholders.5 Such differences may translate into different trade regulations and
varying difficulty in the repatriation of profits (the transfer of profits from a foreign subsidiary to a
corporation’s headquarters) from one group of Pacific Rim countries to another.

Answer 116

STEEP Analysis

Question 117

Recycling and conservation are becoming more than slogans. Busch Gardens, for
example, has eliminated the use of disposable Styrofoam trays in favor of washing and reusing plastic trays.

Answer 117

Increasing environmental awareness

Question 118

Concerns about personal health fuel the trend toward physical fitness and healthier living.
There has been a general move across the planet to attack obesity. The U.S. Centers for Disease Control and Prevention cites
that more than two-thirds of American adults and one-third of American youth are now obese or overweight. A number of
states have enacted provisions to encourage grocery stores to open in so-called “food deserts” where the population has
virtually no access to fresh foods.17 In 2012, Chile decided to ban toys that are included in various fast-food meals aimed at
children in order to increase the fight against childhood obesity.

Answer 118

Growing health consciousness

Question 119

As their numbers increase, people over age 55 will become an even more important market.
Already some companies are segmenting the senior population into Young Matures, Older Matures, and the Elderly—each
having a different set of attitudes and interests. Both mature segments, for example, are good markets for the health care and
tourism industries; whereas, the elderly are the key market for long-term care facilities. The desire for companionship by
people whose children are grown is causing the pet care industry to grow by more than 5% annually in the United States. In
2014, for example, 73 million households in the United States spent US$58 billion on their pets. That was up from just above
US$41 billion 2007.

Answer 119

Expanding seniors market

Question 120

Born between 1980 and 1996 to the baby boomers and Generation Xers, this cohort is almost as large
as the baby boomer generation. In 1957, the peak year of the postwar boom, 4.3 million babies were born. In 1990, there
were 4.2 million births; the Millennials’ peak year. By 2000, they were overcrowding elementary and high schools and
entering college in numbers not seen since the baby boomers. Now in its 20s and 30s, this cohort is expected to have a strong
impact on future products and services.

Answer 120

Impact of millennials

Question 121

Niche markets are defining the marketers’ environment. People want products and services that are
adapted more to their personal needs. For example, Estée Lauder’s “All Skin” and Maybelline’s “Shades of You” lines of cosmetic
products are specifically made for African-American women. “Mass customization”—the making and marketing of products
tailored to a person’s requirements is replacing the mass production and marketing of the same product in some markets. The past
10 years have seen a real fracturing of the chocolate market with the advent of craft chocolate making and flavored chocolates.
These products command significantly higher margins and have become a force in the retailing environment. By 2010, 43% of
chocolate sales occurred in nontraditional channels.

Answer 121

Declining mass market

Question 122

Instant communication via e-mail, cell phones, and overnight mail enhances efficiency, but
it also puts more pressure on people. Merging the personal or tablet computer with the communication and entertainment industries
through telephone lines, satellite dishes, and Internet connections increases consumers’ choices and allows workers to telecommute
from anywhere.

Answer 122

Changing pace and location of life

Question 123

Single-person households, especially those consisting of single women with children, could
soon become the most common household type in the United States. According to the U.S. Census, married-couple households
slipped from nearly 80% in the 1950s to 48% of all households by 2010.21 By 2007, for the first time in U.S. history, more than
half the adult female population was single. Those women are also having more children. As of 2012, 41% of all births in the
United States were to unmarried women. A typical family household is no longer the same as it was once portrayed in Happy Days
in the 1970s.

Answer 123

Changing household composition

Question 124

Between now and 2050, minorities will account for nearly 90% of population
growth in the United States. Over time, group percentages of the total U.S. population are expected to change as follows: Non-
Hispanic Whites—from 90% in 1950 to 74% in 1995 to 53% by 2050; Hispanic Whites—from 9% in 1995 to 22% in 2050;
Blacks—from 13% in 1995 to 15% in 2050; Asians—from 4% in 1995 to 9% in 2050; American Indians—1%, with slight
increase.

Answer 124

Increasing diversity of workforce and markets

Question 125

Combining the computing power of the personal
computer, the networking of the Internet, the images of television, and the convenience of the telephone,
tablets and Smartphones will soon be used by a majority of the population of industrialized nations to make
phone calls, stay connected in business and personal relationships, and transmit documents and other data.
Homes, autos, and offices are rapidly being connected (via wires and wirelessly) into intelligent networks that
interact with one another. This trend is being accelerated by the development of cloud computing, in which a
person can access their data anywhere through a Web connection.27 This is being dramatically improved by
companies like Microsoft who are releasing cloud versions of their Office package available for rent.28 The
traditional stand-alone desktop computer will someday join the manual typewriter as a historical curiosity.

Answer 125

Portable information devices and electronic networking

Question 126

The use of wind, geothermal, hydroelectric, solar, biomass, and other
alternative energy sources should increase considerably. Over the past two decades, the cost of manufacturing
and installing a photovoltaic solar-power system has decreased by 20% with every doubling of installed
capacity.

Answer 126

Alternative energy sources

Question 127

The computerized management of crops to suit variations in land characteristics will
make farming more efficient and sustainable. Farm equipment dealers such as Case and John Deere now add
this equipment to tractors for an additional fee. It enables farmers to reduce costs, increase yields, and
decrease environmental impact. The old system of small, low-tech farming is becoming less viable as large
corporate farms increase crop yields on limited farmland for a growing population.

Answer 127

Precision farming

Question 128

Very smart computer programs that monitor e-mail, faxes, and phone
calls will be able to take over routine tasks, such as writing a letter, retrieving a file, making a phone
call, or screening requests. Acting like a secretary, a person’s virtual assistant could substitute for a
person at meetings or in dealing with routine actions.

Answer 128

Virtual personal assistants

Question 129

A convergence of biotechnology and agriculture is creating a new
field of life sciences. Plant seeds can be genetically modified to produce more needed vitamins or to
be less attractive to pests and more able to survive. Animals (including people) could be similarly
modified for desirable characteristics and to eliminate genetic disabilities and diseases.

Answer 129

Genetically altered organisms

Question 130

Robot development has been limited by a lack of sensory devices and
sophisticated artificial intelligence systems. Improvements in these areas mean that robots will be
created to perform more sophisticated factory work, run errands, do household chores, and assist the
disabled.

Answer 130

Smart, mobile robots

Question 131

Companies in much of the world were already subject to the first commitment period of the
Kyoto Protocol, which required 37 industrialized countries and the European Community to reduce Greenhouse
Gases (GHG) emissions to an average of 5% against 1990 levels. During the second commitment period, parties
committed to reduce GHG emissions by at least 18% below 1990 levels in the eight-year period from 2013 to
2020. The European Union has an emissions trading program that allows companies that emit greenhouse gases
beyond a certain point to buy additional allowances from other companies whose emissions are lower than that
allowed. Companies can also earn credits toward their emissions by investing in emissions abatement projects
outside their own firms. Although the United States withdrew from the Kyoto Protocol, various regional, state,
and local government policies affect company activities in the United States. For example, seven Northeastern
states, six Western states, and four Canadian provinces have adopted proposals to cap carbon emissions and
establish carbon-trading programs.

Answer 131

Regulatory Risk

Question 132

Suppliers will be increasingly vulnerable to government regulations—leading to higher
component and energy costs as they pass along increasing carbon-related costs to their customers. Global supply
chains will be at risk from an increasing intensity of major storms and flooding. Higher sea levels resulting from
the melting of polar ice will create problems for seaports. China, where much of the world’s manufacturing is
currently being outsourced, is becoming concerned with environmental degradation. Twelve Chinese ministries
produced a report on global warming foreseeing a 5%–10% reduction in agricultural output by 2030; more
droughts, floods, typhoons, and sandstorms; and a 40% increase in population threatened by plague.34 The
increasing scarcity of fossil-based fuel is already boosting transportation costs significantly. For example, Tesla
Motors, the maker of an electric-powered sports car, transferred assembly of battery packs from Thailand to
California because Thailand’s low wages were more than offset by the costs of shipping thousandpound battery
packs across the Pacific Ocean.

Answer 132

Supply Chain Risk

Question 133

Environmental sustainability can be a prerequisite to profitable growth. Sixty percent
of U.S. respondents to an Environics study stated that knowing a company is mindful of its impact on the environment
and society makes them more likely to buy their products and services.36 Carbon-friendly products using new
technologies are becoming increasingly popular with consumers. Those automobile companies, for example, that were
quick to introduce hybrid or alternative energy cars gained a competitive advantage.

Answer 133

Product and Technology Risk

Question 134

Companies that generate significant carbon emissions face the threat of lawsuits similar to those in
the tobacco, pharmaceutical, and building supplies (e.g., asbestos) industries. For example, oil and gas companies were
sued for greenhouse gas emissions in the federal district court of Mississippi, based on the assertion that these
companies contributed to the severity of Hurricane Katrina.

Answer 134

Litigation Risk

Question 135

A company’s impact on the environment can affect its overall reputation. The Carbon Trust, a
consulting group, found that in some sectors the value of a company’s brand could be at risk because of negative
perceptions related to climate change. In contrast, a company with a good record of environmental sustainability may
create a competitive advantage in terms of attracting and keeping loyal consumers, employees, and investors. For
example, Wal-Mart’s pursuit of environmental sustainability as a core business strategy has helped soften its negative
reputation as a low-wage, low-benefit employer. By setting objectives for its retail stores of reducing greenhouse gases
by 20%, reducing solid waste by 25%, increasing truck fleet efficiency by 25%, and using 100% renewable energy, it is
also forcing its suppliers to become more environmentally sustainable.37 Tools have recently been developed to
measure sustainability on a variety of factors. For example, the SAM (Sustainable Asset Management) Group of
Zurich, Switzerland, has been assessing and documenting the sustainability performance of over 1000 corporations
annually since 1999. SAM lists the top 15% of firms in its Sustainability Yearbook and classifies them into gold, silver,
and bronze categories.

Answer 135

Reputational Risk

Question 136

The direct risk posed by climate change includes the physical effects of droughts,
floods, storms, and rising sea levels. Average Arctic temperatures have risen four to five degrees
Fahrenheit (two to three degrees Celsius) in the past 50 years, leading to melting glaciers and sea
levels rising one inch per decade.41 Industries most likely to be affected are insurance, agriculture,
fishing, forestry, real estate, and tourism. Physical risk can also affect other industries, such as oil and
gas, through higher insurance premiums paid on facilities in vulnerable areas. CocaCola, for
example, studies the linkages between climate change and water availability to decide the location of
new bottling plants. The warming of the Tibetan plateau has led to a thawing of the
permafrost—thereby threatening the newly-completed railway line between China and Tibet.

Answer 136

Physical Risk

Question 137

Each country or group of countries in which a company operates presents a unique societal environment with
a different set of sociocultural, technological, economic, ecological, and political–legal variables for the
company to face. International societal environments vary so widely that a corporation’s internal environment
and strategic management process must be very flexible. Cultural trends in Germany, for example, have
resulted in the inclusion of worker representatives in corporate strategic planning. Because Islamic law
(sharia) forbids interest (riba), loans of capital in Islamic countries must be arranged on the basis of
profit-sharing instead of interest rates. Differences in societal environments strongly affect the ways in which
a multinational corporation (MNC), a company with significant assets and activities in multiple countries,
conducts its marketing, financial, manufacturing, and other functional activities. For example, Europe’s lower
labor productivity, due to a shorter work week and restrictions on the ability to lay off unproductive workers,
forces Europeanbased MNCs to expand operations in countries where labor is cheaper and productivity is
higher. Moving manufacturing to a lower-cost location, such as China, was a successful strategy during the
1990s, but a country’s labor costs rise as it develops economically. For example, China required all firms in
January 2008 to consult employees on material work-related issues, enabling the country to achieve its stated
objective of having trade unions in all of China’s non-state-owned enterprises. By September 2008, the
All-China Federation of Trade Unions had signed with 80% of the largest foreign companies.50 See the
Global Issues feature to see how demand for SUVs has exploded in China.

Answer 137

International Societal Considerations

Question 138

Although the Internet has opened up a tremendous volume of information, scanning and making
sense of that data is one of the important skills of an effective manager. It is a daunting task for even
a large corporation with many resources. To deal with this problem, in 2002 IBM created a tool
called WebFountain to help the company analyze the vast amounts of environmental data available
on the Internet. WebFountain is an advanced information discovery system designed to help extract
trends, detect patterns, and find relationships within vast amounts of raw data. For example, IBM
sought to learn whether there was a trend toward more positive discussions about e-business. Within
a week, the company had data that experts within the company used to replace their hunches with
analysis.

Answer 138

Creating a Scanning System

Question 139

a corporation’s scanning of the environment includes analyses of all the relevant elements in the task
environment. These analyses take the form of individual reports written by various people in different
parts of the firm. At Procter & Gamble (P&G), for example, people from each of the brand
management teams work with key people from the sales and market research departments to research
and write a “competitive activity report” each quarter on each of the product categories in which
P&G competes. People in purchasing also write similar reports concerning new developments in the
industries that supply P&G. These and other reports are then summarized and transmitted up the
corporate hierarchy for top management to use in strategic decision making. If a new development is
reported regarding a particular product category, top management may then send memos asking
people throughout the organization to watch for and report on developments in related product areas.
The many reports resulting from these scanning efforts, when boiled down to their essentials, act as a
detailed list of external strategic factors.

Answer 139

Scanning the Task Environment

Question 140

Scanning and analyzing the external environment for opportunities and threats is necessary for the
firm to be able to understand its competitive environment and its place in that environment. It is the
absolute starting place for strategic analysis. However, in order for the organization to thrive, the
senior leadership team must look within the corporation itself to identify internal strategic
factors—critical strengths and weaknesses that are likely to determine whether a firm will be able to
take advantage of opportunities while avoiding threats. This internal scanning, often referred to as
organizational analysis, is concerned with identifying, developing, and taking advantage of an
organization’s resources and competencies.

Answer 140

A Resource-Based Approach to Organizational Analysis - Vrio

Question 141

A core competency is a collection of competencies that crosses divisional boundaries, is widespread
within the corporation, and is something that the corporation can do exceedingly well. Thus, new
product development is a core competency if it goes beyond one division.3 For example, a core
competency of Avon Products is its expertise in door-to-door selling. FedEx has a core competency
in its application of information technology to all its operations. A company must continually
reinvest in a core competency or risk its becoming a core rigidity or deficiency—that is, a strength
that over time matures and becomes a weakness. Although it is typically not an asset in the
accounting sense, a core competency is a very valuable capability—it does not “wear out” with use.
In general, the more core competencies are used, the more refined they get, and the more valuable
they become. When unique resources and/or core competencies are superior to those of the
competition, they are called distinctive competencies. For example, General Electric is well known
for its distinctive competency in management development. Its executives are sought out by other
companies hiring top managers.

Answer 141

Core and Distinctive Competencies

Question 142

The approach used today has its roots in works by Wernerfelt in 1984 followed by an effective
operationalization by Jay Barney who first proposed a VRIN framework that he later developed into
the VRIO framework of analysis, proposing four questions to evaluate a firm’s competencies:

Valuable: Does it provide customer value and competitive advantage?

Rareness: Does only one other competitor or preferably do no competitors possess it at relatively
the same level?

Imitability: Do the competitors have the financial ability (viewed in the widest sense) to imitate?

Organization: Is the firm organized to exploit the resource?

Answer 142

VRIO Framework

Question 143

is the rate at which a firm’s underlying resources, capabilities, or core competencies can be
duplicated by others. To the extent that a firm’s distinctive competency gives it competitive
advantage in the marketplace, competitors will do what they can to learn and imitate that set of skills
and capabilities. Competitors’ efforts may range from reverse engineering (which involves taking
apart a competitor’s product in order to find out how it works), to hiring employees from the
competitor, to outright patent infringement. A core competency can be easily imitated to the extent
that it is transparent, transferable, and replicable.

Answer 143

Imitability

Question 144

is the speed with which other firms can understand the relationship of resources and capabilities
supporting a successful firm’s strategy. Gillette has always supported its dominance in the marketing of razors with
excellent R&D. A competitor could never understand how the Fusion razor was produced simply by taking one apart.
Gillette’s razor designs are very difficult to copy, partly because the manufacturing equipment needed to produce it is
so expensive and complicated.

Answer 144

Transparency

Question 145

is the ability of competitors to gather the resources and capabilities necessary to support a
competitive challenge. For example, it may be very difficult for a winemaker to duplicate a French winery’s key
resources of land and climate, especially if the imitator is located in Iowa.

Answer 145

Transferability

Question 146

is the ability of competitors to use duplicated resources and capabilities to imitate the other firm’s
success. For example, even though many companies have tried to imitate Procter & Gamble’s success with brand
management by hiring brand managers away from P&G, they have often failed to duplicate P&G’s success. The
competitors failed to identify less visible P&G coordination mechanisms or to realize that P&G’s brand management
style conflicted with the competitor’s own corporate culture.

Answer 146

Replicability

Question 147

Where do these resources/competencies come from? A corporation can gain access to a distinctive
competency in four ways:

■■ It may be an asset endowment, such as a key patent, coming from the founding of the company.
Such was the case with Xerox, which grew on the basis of its original copying patent.

■■ It may be acquired from someone else. Disney bought Pixar in order to reestablish itself in the
animated movie market.

■■ It may be shared with another business unit or alliance partner. LG has taken its electronics and
production expertise into appliances with astonishing success in the market.

■■ It may be carefully built and accumulated over time within the company. For example, Honda
carefully extended its expertise in small motor manufacturing from motorcycles to autos, boat
engines, generators, and lawnmowers

Answer 147

Using Resources / Capabilities to Gain Competitive Advantage

Question 148

When analyzing a company, it is helpful to learn what sort of business model it is following. A
business model is a company’s method for making money in the current business environment. It
includes the key structural and operational characteristics of a firm—how it earns revenue and makes
a profit. A business model is usually composed of five elements:

■■ Who it serves

■■ What it provides

■■ How it makes money

■■ How it differentiates and sustains competitive advantage

■■ How it provides its product/service.

Answer 148

Business Models

Question 149

is to provide a good or service that can be sold such that revenues
exceed costs and all expenses.

Answer 149

Business Models

Question 150

IBM uses this model to make money not by selling IBM products, but
by selling its expertise to improve its customers’ operations. This is a consulting model.

Answer 150

Customer solutions model

Question 151

General Motors offers a full line of automobiles in order to close out any
niches where a competitor might find a position. The key is to get customers to buy in at the
low-priced, low-margin entry point (Chevrolet Spark— manufacturer’s suggested retail price US
$13,485)20 and move them up to highpriced, high-margin products (Cadillac and Buick) where the
company makes its money.

Answer 151

Profit pyramid model

Question 152

Gillette invented this classic model to sell razors at
break-even pricing in order to make money on higher-margin razor blades. HP does the same with
printers and printer cartridges. The product is thus a system, not just one product, with one
component providing most of the profits.

Answer 152

Multicomponent system/installed base model

Question 153

Similar to the multicomponent system/installed base model, this model offers
its basic product free in order to make money on advertising. Originating in the newspaper industry,
this model is used heavily in commercial radio and television. Many web-based firms offer freemium
versions to users in order to expose them to the basics and then hope to sell premium features to a
smaller set of customers.

Answer 153

Advertising model

Question 154

In this model, a firm acts as an intermediary to connect multiple sellers to
multiple buyers. Financial planners juggle a wide range of products for sale to multiple customers
with different needs. This model has been successfully used by eBay and Amazon.com.

Answer 154

Switchboard model

Question 155

Product R&D and speed are the keys to success in the ____. Being the first to
market with a new innovation allows a pioneer such as Google to earn extraordinary returns. By the
time the rest of the industry catches up, Google has moved on to a newer, more innovative approach
to keep people coming back.

Answer 155

Time model

Question 156

In this model, a company waits until a product becomes standardized and then
enters the market with a low-priced, low-margin approach that appeals to the mass market. This
model is used by Spirit Airlines, KIA Motors, and Vanguard.

Answer 156

Efficiency model

Question 157

In some industries, such as pharmaceuticals and motion picture studios, profitability
is driven by a few key products. The focus is on high investment in a few products with high potential
payoffs—especially if they can be protected by patents.

Answer 157

Blockbuster model

Question 158

The idea of this model is to develop a concept that may or may not make money
on its own but, through synergy, can spin off many profitable products. Walt Disney invented this concept by
using cartoon characters to develop high-margin theme parks, merchandise, and licensing opportunities.

Answer 158

Profit multiplier model

Question 159

In this model, a company offers specialized products/ services to market niches
that are too small to be worthwhile to large competitors but have the potential to grow quickly. Small, local
brew pubs have been very successful in a mature industry dominated by AB InBev and MillerCoors. This
model has often been used by small high-tech firms that develop innovative prototypes in order to sell off the
companies (without ever selling a product) to bigger players.

Answer 159

Entrepreneurial model

Question 160

In this model, a company offers products free or at a very low price in
order to saturate the market and become the industry standard. Once users are locked in, the company offers
higher-margin products using this standard. LinkedIn has used this approach very successfully while
TurboTax makes its most basic program free.

Answer 160

De facto industry standard model

Question 161

is a linked set of value-creating activities that begin with basic raw materials coming
from suppliers, moving on to a series of value-added activities involved in producing and marketing a
product or service, and ending with distributors getting the final goods into the hands of the ultimate
consumer. _____ analysis works for every type of business regardless of whether they provide
a service or manufacture a product.

Answer 161

value chain

Question 162

An industry can be analyzed in terms of the profit margin available at any point along the value chain. For
example, the U.S. auto industry’s revenues and profits are divided among many value-chain activities,
including manufacturing, new and used car sales, gasoline retailing, insurance, after-sales service and parts,
and lease financing. From a revenue standpoint, auto manufacturers dominate the industry, accounting for
almost 60% of total industry revenues. Profits, however, are a different matter. The various North American
automakers have gone from earning most of their profit from leasing, insurance, and financing operations just
a few years ago, to a resurgence of the manufacturing part of the value chain as the driver of profits. After
undergoing a painful few years from 2008–2010, the automakers have emerged again as
manufacturing-driven organizations. In 2016, the once bankrupt General Motors reported income for the year
of $9.7 billion, up from $2.8 billion in 2014 and Ford Motor Company which took no bailout from the
government, reported profits of $7.4 billion. In analyzing the complete value chain of a product, note that
even if a firm operates up and down the entire industry chain, it usually has an area of expertise where its
primary activities lie. A company’s center of gravity is the part of the chain where the company’s greatest
expertise and capabilities lie—its core competencies. According to Galbraith, a company’s center of gravity
is usually the point at which the company started. After a firm successfully establishes itself at this point by
obtaining a competitive advantage, one of its first strategic moves is to move forward or backward along the
value chain in order to reduce costs, guarantee access to key raw materials, or to guarantee distribution.

Answer 162

Industry Value Chain Analysis

Question 163

Examine each product line’s value chain in terms of the various activities involved in producing
that product or service: Which activities passed the VRIO test and are therefore true strengths
(core competencies) or areas where the organization is substantially behind and therefore
weaknesses (core deficiencies)?

Examine the “linkages” within each product line’s value chain: Linkages are the connections
between the way one value activity (for example, marketing) is performed and the cost of
performance of another activity (for example, quality control). In seeking ways for a corporation
to gain competitive advantage in the marketplace, the same function can be performed in
different ways with different results.

Examine the potential synergies among the value chains of different product lines or business
units: Each value element, such as advertising or manufacturing, has an inherent economy of
scale in which activities are conducted at their lowest possible cost per unit of output.

Answer 163

Corporate Value Chain Analysis

Question 164

The simplest way to begin an analysis of a corporation’s value chain is by carefully examining its
traditional functional areas for potential strengths and weaknesses. Functional resources and
capabilities include not only the financial, physical, and human assets in each area but also the ability
of the people in each area to formulate and implement the necessary functional objectives, strategies,
and policies. These resources and capabilities include the knowledge of analytical concepts and
procedural techniques common to each area, as well as the ability of the people in each area to use
them effectively. If used properly, these resources and capabilities serve as strengths to carry out
value-added activities and support strategic decisions. In addition to the usual business functions of
marketing, finance, R&D, operations, human resources, and information systems/technology, we also
discuss structure and culture as key parts of a business corporation’s value chain.

Answer 164

Scanning Functional Resources and Capabilities

Question 165

is a variant of the divisional structure and is thus not depicted as a fourth
structure. If one of the basic structures does not easily support a strategy under consideration, top
management must decide whether the proposed strategy is feasible or whether the structure should be
changed to a more complicated structure such as a matrix or network.

Answer 165

conglomerate structure

Question 166

has no functional or product categories and is appropriate for a small,
entrepreneur-dominated company with one or two product lines that operates in a reasonably
small, easily identifiable market niche. Employees tend to be generalists and jacks-of-all-trades.

Answer 166

Simple structure

Question 167

is appropriate for a medium-sized firm with several product lines in one
industry. Employees tend to be specialists in the business functions that are important to that
industry, such as manufacturing, marketing, finance, and human resources. In terms of stages of
development, this is a Stage II company

Answer 167

Functional structure

Question 168

is appropriate for a large corporation with many product lines in several related
industries. Employees tend to be functional specialists organized according to product/market
distinctions. The Clorox Company is made up of five big divisions: (1) Cleaning (e.g., Clorox, 409, and
Tilex); (2) Household (e.g., Glad, Kingsford, and Fresh Step); (3) Lifestyle (e.g., Brita and Burt’s Bees);
(4) Professional (Commercial Solutions); and (5) International (e.g., Chux and Poett).26 Management
attempts to find some synergy among divisional activities through the use of committees and horizontal
linkages. In terms of stages of development (to be discussed in Chapter 9), this is a Stage III company.

Answer 168

Divisional structure

Question 169

are a modification of the divisional structure. Strategic business units are
divisions or groups of divisions composed of independent product-market segments that are given
primary responsibility and authority for the management of their own functional areas.

Answer 169

Strategic business units (SBUs)

Question 170

is appropriate for a large corporation with many product lines in several
unrelated industries. A variant of the divisional structure, the conglomerate structure (sometimes called a
holding company) is typically an assemblage of legally independent firms (subsidiaries) operating under
one corporate umbrella but controlled through the subsidiaries’ boards of directors. The unrelated nature
of the subsidiaries prevents any attempt at gaining synergy among them.

Answer 170

Conglomerate structure

Question 171

has two distinct attributes, intensity and integration. Cultural intensity is the degree to which
members of a unit accept the norms, values, or other cultural content associated with the unit. This shows the culture’s
depth. Organizations with strong norms promoting a particular value, such as quality at BMW, have intensive cultures,
whereas new firms (or those in transition) have weaker, less intensive cultures. Employees in an intensive culture tend
to exhibit consistent behavior—that is, they tend to act similarly over time. Cultural integration is the extent to which
units throughout an organization share a common culture. This is the culture’s breadth. Organizations with a pervasive
dominant culture may be hierarchically controlled and power-oriented, such as a military unit, and have highly
integrated cultures. All employees tend to hold the same cultural values and norms. In contrast, a company that is
structured into diverse units by functions or divisions usually exhibits some strong subcultures (for example, R&D
versus manufacturing) and a less integrated corporate culture.

Answer 171

Corporate culture

Question 172

Conveys a sense of identity for employees

Helps generate employee commitment to something greater than themselves

Adds to the stability of the organization as a social system

Serves as a frame of reference for employees to use to make sense of organizational activities and to use as a
guide for appropriate behavior

Answer 172

Corporate culture fulfills several important functions in an organization:

Question 173

is a company’s primary link to the customer and the competition. The
manager, therefore, must be especially concerned with the market position and marketing mix of the
firm as well as with the overall reputation of the company and its brands.

Answer 173

The marketing manager

Question 174

deals with the question, “Who are our customers?” It refers to the selection of
specific areas for marketing concentration and can be expressed in terms of market, product, and
geographic locations. Through market research, corporations are able to practice market
segmentation with various products or services so that managers can discover what niches to seek,
which new types of products to develop, and how to ensure that a company’s many products do not
directly compete with one another.

Answer 174

Market position

Question 175

refers to the particular combination of key variables under a corporation’s control that
can be used to affect demand and to gain competitive advantage.

Answer 175

Marketing mix

Question 176

is a name given to a company’s product which embodies all of the characteristics of that item in the
mind of the consumer. Over time and with effective advertising and execution, a brand connotes various
characteristics in the consumers’ minds. For example, Disney stands for family entertainment. Carnival has
the “fun ships.” BMW means high-performance autos. A brand can thus be an important corporate resource.
If done well, a brand name is connected to the product to such an extent that a brand may stand for an entire
product category, such as Kleenex for facial tissue. The objective is for the customer to ask for the brand
name (Coke or Pepsi) instead of the product category (cola). The world’s 10 most valuable brands in 2015
were Apple, Microsoft, Google, Coca-Cola, IBM, McDonald’s, Samsung, Toyota, General Electric, and
Facebook, in that order. According to Forbes, the value of the Apple brand is US$145.3 billion.

Answer 176

brand

Question 177

Titi

Answer 177

Oo

Question 178

is a widely held perception of a company by the general public. It consists of
two attributes: (1) stakeholders’ perceptions of a corporation’s ability to produce quality goods and
(2) a corporation’s prominence in the minds of stakeholders.38 A good _____ can be a
strategic resource. It can serve in marketing as both a signal and an entry barrier. It contributes to its
goods having a price premium.39 Reputation is especially important when the quality of a company’s
product or service is not directly observable and can be learned only through experience. For
example, retail stores are willing to stock a new product from P&G or Coca-Cola because they know
that both companies market only good-quality products that are highly advertised. Like tacit
knowledge, reputation tends to be long-lasting and hard for others to duplicate. It can deteriorate over
time without constant vigilance, but has the potential to provide a sustainable competitive advantage.
It might also have a significant impact on a firm’s stock price. Research reveals a positive
relationship between corporate reputation and financial performance.

Answer 178

corporate reputation

Question 179

must ascertain the best sources of funds, uses of funds, and the control of funds.
All strategic issues have financial implications. Cash must be raised from internal or external (local
and global) sources and allocated for different uses. The flow of funds in the operations of an
organization must be monitored. To the extent that a corporation is involved in international
activities, currency fluctuations must be dealt with to ensure that profits aren’t wiped out by the rise
or fall of the dollar versus the yen, euro, or other currencies. Benefits in the form of returns,
repayments, or products and services must be given to the sources of outside financing. All these
tasks must be handled in a way that complements and supports overall corporate strategy. A firm’s
capital structure (amounts of debt and equity) can influence its strategic choices. Corporations with
increased debt tend to be more risk-averse and less willing to invest in R&D.

Answer 179

financial manager

Question 180

is the analyzing and ranking of possible investments in fixed assets such as land,
buildings, and equipment in terms of the additional outlays and additional receipts that will result
from each investment. A good finance department will be able to prepare such capital budgets and to
rank them on the basis of some accepted criteria or hurdle rate (for example, years to pay back
investment, desired rate of return, or time to break-even point) for the purpose of strategic decision
making. Most firms have more than one hurdle rate and vary it as a function of the type of project
being considered. Projects with high strategic significance, such as entering new markets or
defending market share, will often have lower hurdle rates.

Answer 180

Capital budgeting

Question 181

The R&D manager is responsible for suggesting and implementing a company’s technological strategy in
light of its corporate objectives and policies. The manager’s job, therefore, involves (1) choosing among
alternative new technologies to use within the corporation, (2) developing methods of embodying the new
technology in new products and processes, and (3) deploying resources so that the new technology can be
successfully implemented.

Answer 181

Strategic Research and Development (R&D) Issues

Question 182

Basic R&D is conducted by scientists in well-equipped laboratories where the focus is on theoretical
problem areas. The best indicators of a company’s capability in this area are its patents and research
publications. Product R&D concentrates on marketing and is concerned with product or
product-packaging improvements. The best measurements of ability in this area are the number of
successful new products introduced and the percentage of total sales and profits coming from
products introduced within the past five years. Engineering (or process) R&D is concerned with
engineering, concentrating on quality control, and the development of design specifications and
improved production equipment. A company’s capability in this area can be measured by consistent
reductions in unit manufacturing costs and by the number of product defects.

Answer 182

R&D Mix

Question 183

A conceptual framework that many large corporations have used successfully is the experience curve
(originally called the learning curve). The _______ suggests that unit production costs
decline by some fixed percentage (commonly 20%–30%) each time the total accumulated volume of
production in units doubles.

Answer 183

Experience Curve

Question 184

Management practice has moved to more flexible utilization of employees in order for human
resources to be classified as a strength. Human resource managers, therefore, need to be
knowledgeable about work options such as part-time work, job sharing, flex-time, extended leaves,
and contract work, and especially about the proper use of teams. Over two-thirds of large U.S.
companies are successfully using autonomous (selfmanaging) work teams in which a group of people
work together without a supervisor to plan, coordinate, and evaluate their own work.

Virtual teams are groups of geographically and/or organizationally dispersed co-workers that are
assembled using a combination of telecommunications and information technologies to accomplish
an organizational task.A study conducted in 2012 found that 46% of organizations polled used virtual
teams and that multinational companies were twice as likely (66%) to use virtual teams as compared
to those having U.S.-based operations (28%).63 According to the Gartner Group, more than 60% of
professional employees now work in virtual teams.

Answer 184

Increasing Use of Teams

Question 185

Information systems/technology offers four main contributions to corporate performance. First,
(beginning in the 1970s with mainframe computers) it is used to automate existing back-office
processes, such as payroll, human resource records, accounts payable and receivable, and to establish
huge databases. Second, (beginning in the 1980s) it is used to automate individual tasks, such as
keeping track of clients and expenses, through the use of personal computers with word processing
and spreadsheet software. Corporate databaare accessed to provide sufficient data to analyze and to
create what-if scenarios. These first two contributions tend to focus on reducing costs. Third,
(beginning in the 1990s) it is used to enhance key business functions, such as marketing and
operations. This third contribution focuses on productivity improvements. The system provides
customer support and help in distribution and logistics. For example, in an early effort on the
Internet, FedEx found that by allowing customers to directly access its package-tracking database via
the Web instead of having to ask a human operator, the company saved up to US$2 million annually.

Answer 185

Impact on Performance

Question 186

The expansion of the marketing-oriented Internet into intranets and extranets is making significant
contributions to organizational performance through supply chain management. Supply chain
management is the forming of networks for sourcing raw materials, manufacturing products or
creating services, storing and distributing the goods, and delivering them to customers and
consumers.82 Research indicates that supplier network resources have a significant impact on firm
performance.83 A survey of global executives revealed that their interest in supply chains was first to
reduce costs, and then to improve customer service and get new products to market faster.84 More
than 85% of senior executives stated that improving their firm’s supply-chain performance was a top
priority. Companies like Wal-Mart, Dell, and Toyota, who are known to be exemplars in
supply-chain management, spend only 4% of their revenues on supply-chain costs compared to 10%
by the average firm.

Answer 186

Supply Chain Management

Question 187

The Strategic Audit: A Checklist for Organizational Analysis

The audit provides a checklist of questions by area of concern. For example, Part IV of the audit
examines corporate structure, culture, and resources. It looks at organizational resources and
capabilities in terms of the functional areas of marketing, finance, R&D, operations, human
resources, and information systems, among others.