Asignment 1

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1.4 Understanding the Strategic Management Process

L E A R N I N G O B J E C T I V E S

1. Learn the strategic management process.

2. Understand the four steps in the strategic management process.

Modeling the Strategy Process

Strategic management is a process that involves building a careful understanding of how the world is

changing, as well as a knowledge of how those changes might affect a particular firm. CEOs, such as late

Apple-founder Steve Jobs, must be able to carefully manage the possible actions that their firms might

take to deal with changes that occur in their environment. We present a model of the strategic

management process in Figure 1.7 "Overall Model of the Strategic Management Process". This model also

guides our presentation of the chapters contained in this book.

Figure 1.7 Overall Model of the Strategic Management Process

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The strategic management process begins with an understanding of strategy and performance. As we have

noted in this introductory chapter, strategic management is both an art and a science, and it involves

multiple conceptualizations of the notion of strategy drawn from recent and ancient history. In Chapter 2

"Leading Strategically", we focus on how leading strategically is needed if the firm is to achieve the long-

term strong performance companies such as Apple have attained. Consequently, how managers

understand and interpret the performance of their firms is often central to understanding strategy.

Environmental and internal scanning is the next stage in the process. Managers must constantly scan the

external environment for trends and events that affect the overall economy, and they must monitor

changes in the particular industry in which the firm operates. For example, Apple’s decision to create the

iPhone demonstrates its ability to interpret that traditional industry boundaries that distinguished the

cellular phone industry and the computer industry were beginning to blur. At the same time, firms must

evaluate their own resources to understand how they might react to changes in the environment. For

example, intellectual property is a vital resource for Apple. Between 2008 and 2010, Apple filed more

than 350 cases with the US Patent and Trademark Office to protect its use of such terms as apple, pod,

and safari. [1]

A classic management tool that incorporates the idea of scanning elements both external and internal to

the firm is SWOT (strengths, weaknesses, opportunities, and threats) analysis. Strengths and weaknesses

are assessed by examining the firm’s resources, while opportunities and threats refer to external events

and trends. The value of SWOT analysis parallels ideas from classic military strategists such as Sun Tzu,

who noted the value of knowing yourself as well as your opponent. Chapter 3 "Evaluating the External

Environment" examines the topic of evaluating the external environment in detail, and Chapter 4

"Managing Firm Resources" presents concepts and tools for managing firm resources.

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The importance of knowing yourself and your opponent is applicable to the knowledge of strategic

management for business, military strategy, and classic strategy games such as chess.

Strategy formulation is the next step in the strategic management process. This involves developing

specific strategies and actions. Certainly, part of Apple’s success is due to the unique products it offers the

market, as well as how these products complement one another. A customer can buy an iPod that plays

music from iTunes—all of which can be stored in Apple’s Mac computer. [2] In Chapter 5 "Selecting

Business-Level Strategies", we discuss how selecting business-level strategies helps to provide firms with

a recipe that can be followed that will increase the likelihood that their strategies will be successful.

In Chapter 6 "Supporting the Business-Level Strategy: Competitive and Cooperative Moves", we present

insights on how firms can support the business-level strategy through competitive and cooperative

moves. Chapter 7 "Competing in International Markets" presents possibilities for firms competing in

international markets, and Chapter 8 "Selecting Corporate-Level Strategies" focuses on selecting

corporate-level strategies.

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Strategy implementation is the final stage of the process. One important element of strategy

implementation entails crafting an effective organizational structure and corporate culture. For example,

part of Apple’s success is due to its consistent focus on innovation and creativity that Steve Jobs described

as similar to that of a start-up. Chapter 9 "Executing Strategy through Organizational Design" offers ideas

on how to manage these elements of implementation. The final chapter explores how to lead an ethical

organization through corporate governance, social responsibility, and sustainability.

K E Y T A K E A W A Y

x Strategic management is a process that requires the ability to manage change. Consequently, executives

must be careful to monitor and to interpret the events in their environment, to take appropriate actions

when change is needed, and to monitor their performance to ensure that their firms are able to survive

and, it is hoped, thrive over time.

E X E R C I S E S

1. Who makes the strategic decisions for most organizations?

2. Why is it important to view strategic management as a process?

3. What are the four steps of the strategic management process?

4. How is chess relevant to the study of strategic management? What other games might help teach

strategic thinking?

[1] Apple Inc. litigation. Wikipedia. Retrieved from en.wikipedia.org/wiki/Apple_Inc._ litigation

[2] Inside CRM Editors. Effective strategies Apple uses to create loyal customers [Online article]. Retrieved

from http://www.insidecrm.com/features/strategies-apple-loyal -customers

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1.5 Conclusion

This chapter provides an overview of strategic management and strategy. Ideas about strategy span

many centuries, and modern understanding of strategy borrows from ancient strategies as well as

classic militaries strategies. You should now understand that there are numerous ways to

conceptualize the idea of strategy and that effective strategic management is needed to ensure the

long-term success of firms. The study of strategic management provides tools to effectively manage

organizations, but it also involves the art of knowing how and when to apply creative thinking.

Knowledge of both the art and the science of strategic management is needed to help guide

organizations as their strategies emerge and evolve over time. Such tools will also help you effectively

chart a course for your career as well as to understand the effective strategic management of the

organizations for which you will work.

E X E R C I S E S

1. Think about the best and worst companies you know. What is extraordinary (or extraordinarily bad) about

these firms? Are their strategies clear and focused or difficult to define?

2. If you were to write a “key takeaway” section for this chapter, what would you include as the material

you found most interesting?

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Chapter 2

Leading Strategically

L E A R N I N G O B J E C T I V E S

After reading this chapter, you should be able to understand and articulate answers to the following

questions:

1. What are vision, mission, and goals, and why are they important to organizations?

2. How should executives analyze the performance of their organizations?

3. In what ways can having a celebrity CEO and a strong entrepreneurial orientation help or harm an

organization?

Questions Are Brewing at Starbucks

Starbucks’s global empire includes this store in Seoul, South Korea.

Image courtesy of Wikimedia,http://commons.wikimedia.org/wiki/File:Starbucks-seoul.JPG.

Chapter 2 from Mastering Strategic Management was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested

by the work’s original creator or licensee. © 2014, The Saylor Foundation.

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March 30, 2011, marked the fortieth anniversary of Starbucks first store opening for business in Seattle,

Washington. From its humble beginnings, Starbucks grew to become the largest coffeehouse company in

the world while stressing the importance of both financial and social goals. As it created thousands of

stores across dozens of countries, the company navigated many interesting periods. The last few years

were a particularly fascinating era.

In early 2007, Starbucks appeared to be very successful, and its stock was worth more than $35 per share.

By 2008, however, the economy was slowing, competition in the coffee business was heating up, and

Starbucks’s performance had become disappointing. In a stunning reversal of fortune, the firm’s stock was

worth less than $10 per share by the end of the year. Anxious stockholders wondered whether Starbucks’s

decline would continue or whether the once high-flying company would return to its winning ways.

Riding to the rescue was Howard Schultz, the charismatic and visionary founder of Starbucks who had

stepped down as chief executive officer eight years earlier. Schultz again took the helm and worked to turn

the company around by emphasizing its mission statement: “to inspire and nurture the human spirit—one

person, one cup and one neighborhood at a time.” [1]About a thousand underperforming stores were shut

down permanently. Thousands of other stores closed for a few hours so that baristas could be retrained to

make inspiring drinks. Food offerings were revamped to ensure that coffee—not breakfast sandwiches—

were the primary aroma that tantalized customers within Starbucks’s outlets.

By the time Starbucks’s fortieth anniversary arrived, Schultz had led his company to regain excellence,

and its stock price was back above $35 per share. In March 2011, Schultz summarized the situation by

noting that “over the last three years, we’ve completely transformed the company, and the health of

Starbucks is quite good. But I don’t think this is a time to celebrate or run some victory lap. We’ve got a lot

of work to do.” [2] Indeed, important questions loomed. Could performance improve further? How long

would Schultz remain with the company? Could Schultz’s eventual successor maintain Schultz’s

entrepreneurial approach as well as keep Starbucks focused on its mission?

[1] Our Starbucks mission statement. Retrieved from http://www.starbucks.com/about-us/company-

information/mission-statement. Accessed March 31, 2011.

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[2] Starbucks CEO: Can you “get big and stay small” [Review of the book Onward: How Starbucks fought for its life

without losing its soul by Howard Schultz]. 2011, March 28. NPR Books. Retrieved

from http://www.npr.org/2011/03/28/134738487/starbucks-ceo-can-you-get-big-and-stay-small.

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2.1 Vision, Mission, and Goals

L E A R N I N G O B J E C T I V E S

1. Define vision and mission and distinguish between them.

2. Know what the acronym SMART represents.

3. Be able to write a SMART goal.

The Importance of Vision

Good business leaders create a vision, articulate the vision, passionately own the vision, and relentlessly

drive it to completion.

- Jack Welch, former CEO of General Electric

Many skills and abilities separate effective strategic leaders like Howard Schultz from poor strategic

leaders. One of them is the ability to inspire employees to work hard to improve their organization’s

performance. Effective strategic leaders are able to convince employees to embrace lofty ambitions and

move the organization forward. In contrast, poor strategic leaders struggle to rally their people and

channel their collective energy in a positive direction.

As the quote from Jack Welch suggests, a vision is one key tool available to executives to inspire the

people in an organization. An organization’s vision describes what the organization hopes to become

in the future. Well-constructed visions clearly articulate an organization’s aspirations. Avon’s vision is

“to be the company that best understands and satisfies the product, service, and self-fulfillment needs

of women—globally.” This brief but powerful statement emphasizes several aims that are important to Avon,

including excellence in customer service, empowering women, and the intent to be a worldwide player.

Like all good visions, Avon sets a high standard for employees to work collectively toward.

Perhaps no vision captures high standards better than that of aluminum maker Alcoa. This firm’s very ambitious

vision is “to be the best company in the world—in the eyes of our customers, shareholders, communities

and people.” By making clear their aspirations, Alcoa’s executives hope to inspire employees to act in ways that

help the firm become the best in the world.

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The results of a survey of one thousand five hundred executives illustrate how the need to create an

inspiring vision creates a tremendous challenge for executives. When asked to identify the most important

characteristics of effective strategic leaders, 98 percent of the executives listed “a strong sense of vision”

first. Meanwhile, 90 percent of the executives expressed serious doubts about their own ability to create a

vision. [1] Not surprisingly, many organizations do not have formal visions. Many organizations that do

have visions find that employees do not embrace and pursue the visions. Having a well-formulated vision

employees embrace can therefore give an organization an edge over its rivals.

Mission Statements

In working to turnaround Starbucks, Howard Schultz sought to renew Starbucks’s commitment to

its mission statement: “to inspire and nurture the human spirit—one person, one cup and one

neighborhood at a time.” A mission such as Starbucks’s states the reasons for an organization’s existence.

Well-written mission statements effectively capture an organization’s identity and provide answers to the

fundamental question “Who are we?” While a vision looks to the future, a mission captures the key

elements of the organization’s past and present.

Organizations need support from their key stakeholders, such as employees, owners, suppliers, and

customers, if they are to prosper. A mission statement should explain to stakeholders why they should

support the organization by making clear what important role or purpose the organization plays in

society. Google’s mission, for example, is “to organize the world’s information and make it universally

accessible and useful.” Google pursued this mission in its early days by developing a very popular Internet

search engine. The firm continues to serve its mission through various strategic actions, including offering

its Internet browser Google Chrome to the online community, providing free e-mail via its Gmail service,

and making books available online for browsing.

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Many consider Abraham Lincoln to have been one of the

greatest strategic leaders in modern history.

Image courtesy of Alexander Gardner,

http://wikimediafoundation.org/wiki/File:Abraham_Li

ncoln_head_on_shoulders_photo_portrait.jpg.

One of Abraham Lincoln’s best-known statements is that “a house divided against itself cannot stand.”

This provides a helpful way of thinking about the relationship between vision and mission. Executives ask

for trouble if their organization’s vision and mission are divided by emphasizing different domains. Some

universities have fallen into this trap. Many large public universities were established in the late 1800s

with missions that centered on educating citizens. As the twentieth century unfolded, however, creating

scientific knowledge through research became increasingly important to these universities. Many

university presidents responded by creating visions centered on building the scientific prestige of their

schools. This created a dilemma for professors: Should they devote most of their time and energy to

teaching students (as the mission required) or on their research studies (as ambitious presidents

demanded via their visions)? Some universities continue to struggle with this trade-off today and remain

houses divided against themselves. In sum, an organization is more effective to the extent that its vision

and its mission target employees’ effort in the same direction.

Pursuing the Vision and Mission through SMART Goals

An organization’s vision and mission offer a broad, overall sense of the organization’s direction. To work

toward achieving these overall aspirations, organizations also need to create goals—narrower aims that

should provide clear and tangible guidance to employees as they perform their work on a daily basis. The

most effective goals are those that are specific, measurable, aggressive, realistic, and time-bound. An easy

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way to remember these dimensions is to combine the first letter of each into one word: SMART.

Employees are put in a good position to succeed to the extent that an organization’s goals are SMART.

A goal is specific if it is explicit rather than vague. In May 1961, President John F. Kennedy proposed a

specific goal in a speech to the US Congress: “I believe that this nation should commit itself to achieving

the goal, before this decade is out, of landing a man on the moon and returning him safely to the

earth.” [2]Explicitness such as was offered in this goal is helpful because it targets people’s energy. A few

moments later, Kennedy made it clear that such targeting would be needed if this goal was to be reached.

Going to the moon, he noted, would require “a major national commitment of scientific and technical

manpower, materiel and facilities, and the possibility of their diversion from other important activities

where they are already thinly spread.” While specific goals make it clear how efforts should be directed,

vague goals such as “do your best” leave individuals unsure of how to proceed.

A goal is measurable to the extent that whether the goal is achieved can be quantified. President

Kennedy’s goal of reaching the moon by the end of the 1960s offered very simple and clear measurability:

Either Americans would step on the moon by the end of 1969 or they would not. One of Coca-Cola’s

current goals is a 20 percent improvement to its water efficiency by 2012 relative to 2004 water usage.

Because water efficiency is easily calculated, the company can chart its progress relative to the 20 percent

target and devote more resources to reaching the goal if progress is slower than planned.

A goal is aggressive if achieving it presents a significant challenge to the organization. A series of

research studies have demonstrated that performance is strongest when goals are challenging but

attainable. Such goals force people to test and extend the limits of their abilities. This can result in

reaching surprising heights. President Kennedy captured this theme in a speech in September 1962: “We

choose to go to the moon. We choose to go to the moon in this decade…not because [it is] easy, but

because [it is] hard, because that goal will serve to organize and measure the best of our energies and

skills.”

In the case of Coca-Cola, reaching a 20 percent improvement will require a concerted effort, but the goal

can be achieved. Meanwhile, easily achievable goals tend to undermine motivation and effort. Consider a

situation in which you have done so well in a course that you only need a score of 60 percent on the final

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exam to earn an A for the course. Understandably, few students would study hard enough to score 90

percent or 100 percent on the final exam under these circumstances. Similarly, setting organizational

goals that are easy to reach encourages employees to work just hard enough to reach the goals.

It is tempting to extend this thinking to conclude that setting nearly impossible goals would encourage

even stronger effort and performance than does setting aggressive goals. People tend to get discouraged

and give up, however, when faced with goals that have little chance of being reached. If, for example,

President Kennedy had set a time frame of one year to reach the moon, his goal would have attracted

scorn. The country simply did not have the technology in place to reach such a goal. Indeed, Americans

did not even orbit the moon until seven years after Kennedy’s 1961 speech. Similarly, if Coca-Cola’s water

efficiency goal was 95 percent improvement, Coca-Cola’s employees would probably not embrace it. Thus

goals must also be realistic, meaning that their achievement is feasible.

You have probably found that deadlines are motivating and that they help you structure your work time.

The same is true for organizations, leading to the conclusion that goals should be time-bound through

the creation of deadlines. Coca-Cola has set a deadline of 2012 for its water efficiency goal, for example.

The deadline for President Kennedy’s goal was the end of 1969. The goal was actually reached a few

months early. On July 20, 1969, Neil Armstrong became the first human to step foot on the moon.

Incredibly, the pursuit of a well-constructed goal had helped people reach the moon in just eight years.

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Americans landed on the moon eight years after President Kennedy set a moon landing as a key

goal for the United States.

Image courtesy of NASA Apollo Archive,

http://upload.wikimedia.org/wikipedia/commons/8/8b/5927_NASA.jpg.

The period after an important goal is reached is often overlooked but is critical. Will an organization rest

on its laurels or will it take on new challenges? The US space program again provides an illustrative

example. At the time of the first moon landing, Time magazine asked the leader of the team that built the

moon rockets about the future of space exploration. “Given the same energy and dedication that took

them to the moon,” said Wernher von Braun, “Americans could land on Mars as early as 1982.” [3] No new

goal involving human visits to Mars was embraced, however, and human exploration of space was de-

emphasized in favor of robotic adventurers. Nearly three decades after von Braun’s proposed timeline for

reaching Mars expired, President Barack Obama set in 2010 a goal of creating by 2025 a new space

vehicle capable of taking humans beyond the moon and into deep space. This would be followed in the

mid-2030s by a flight to orbit Mars as a prelude to landing on Mars. [4] Time will tell whether these goals

inspire the scientific community and the country in general.

K E Y T A K E A W A Y

Strategic leaders need to ensure that their organizations have three types of aims. A vision states what

the organization aspires to become in the future. A mission reflects the organization’s past and present by

stating why the organization exists and what role it plays in society. Goals are the more specific aims that

organizations pursue to reach their visions and missions. The best goals are SMART: specific, measurable,

aggressive, realistic, and time-bound.

E X E R C I S E S

1. Take a look at the website of your college or university. What is the organization’s vision and mission?

Were they easy or hard to find?

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2. As a member of the student body, do you find the vision and mission of your college or university to be

motivating and inspirational? Why or why not?

3. What is an important goal that you have established for your career? Could this goal be improved by

applying the SMART goal concept?

[1] Quigley, J. V. 1994. Vision: How leaders develop it, share it, and sustain it. Business Horizons, 37(5), 37–41.

[2] Key documents in the history of space policy: 1960s. National Aeronautics and Space Administration. Retrieved

from http://history.nasa.gov/spdocs.html#1960s

[3] The Moon: Next, Mars and beyond. 1969, July 15. Time. Retrieved

fromhttp://www.time.com/time/magazine/article/0,9171,901107,00.html

[4] Amos, J. 2010, April 15. Obama sets Mars goal for America. BBC News. Retrieved from

http://news.bbc.co.uk/2/hi/8623691.stm

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2.2 Assessing Organizational Performance

L E A R N I N G O B J E C T I V E S

1. Understand the complexities associated with assessing organizational performance.

2. Learn each of the dimensions of the balanced scorecard framework.

3. Learn what is meant by a “triple bottom line.”

Organizational Performance: A Complex Concept

Organizational performance refers to how well an organization is doing to reach its vision, mission, and

goals. Assessing organizational performance is a vital aspect of strategic management. Executives must

know how well their organizations are performing to figure out what strategic changes, if any, to make.

Performance is a very complex concept, however, and a lot of attention needs to be paid to how it is

assessed.

Two important considerations are (1) performance measures and (2) performance referents (Figure 2.5

"How Organizations and Individuals Can Use Financial Performance Measures and Referents").

A performance measure is a metric along which organizations can be gauged. Most executives examine

measures such as profits, stock price, and sales in an attempt to better understand how well their

organizations are competing in the market. But these measures provide just a glimpse of organizational

performance. Performance referents are also needed to assess whether an organization is doing well. A

performance referent is a benchmark used to make sense of an organization’s standing along a

performance measure. Suppose, for example, that a firm has a profit margin of 20 percent in 2011. This

sounds great on the surface. But suppose that the firm’s profit margin in 2010 was 35 percent and that the

average profit margin across all firms in the industry for 2011 was 40 percent. Viewed relative to these two

referents, the firm’s 2011 performance is cause for concern.

Using a variety of performance measures and referents is valuable because different measures and

referents provide different information about an organization’s functioning. The parable of the blind men

and the elephant—popularized in Western cultures through a poem by John Godfrey Saxe in the

nineteenth century—is useful for understanding the complexity associated with measuring organizational

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performance. As the story goes, six blind men set out to “see” what an elephant was like. The first man

touched the elephant’s side and believed the beast to be like a great wall. The second felt the tusks and

thought elephants must be like spears. Feeling the trunk, the third man thought it was a type of snake.

Feeling a limb, the fourth man thought it was like a tree trunk. The fifth, examining an ear, thought it was

like a fan. The sixth, touching the tail, thought it was like a rope. If the men failed to communicate their

different impressions they would have all been partially right but wrong about what ultimately mattered.

Figure 2.5 How Organizations and Individuals Can Use Financial Performance Measures and

Referents

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This story parallels the challenge involved in understanding the multidimensional nature of organization

performance because different measures and referents may tell a different story about the organization’s

performance. For example, the Fortune 500 lists the largest US firms in terms of sales. These firms are

generally not the strongest performers in terms of growth in stock price, however, in part because they are

so big that making major improvements is difficult. During the late 1990s, a number of Internet-centered

businesses enjoyed exceptional growth in sales and stock price but reported losses rather than profits.

Many investors in these firms who simply fixated on a single performance measure—sales growth—

absorbed heavy losses when the stock market’s attention turned to profits and the stock prices of these

firms plummeted.

The story of the blind men and the elephant provides a metaphor for understanding the

complexities of measuring organizational performance.

Image courtesy of Hanabusa Itcho,

http://en.wikipedia.org/wiki/File:Blind_monks_examining_an_elephant.jpg.

The number of performance measures and referents that are relevant for understanding an organization’s

performance can be overwhelming, however. For example, a study of what performance metrics were used

within restaurant organizations’ annual reports found that 788 different combinations of measures and

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referents were used within this one industry in a single year. [1]Thus executives need to choose a rich yet

limited set of performance measures and referents to focus on.

The Balanced Scorecard

To organize an organization’s performance measures, Professor Robert Kaplan and Professor David

Norton of Harvard University developed a tool called the balanced scorecard. Using the scorecard helps

managers resist the temptation to fixate on financial measures and instead monitor a diverse set of

important measures.

Indeed, the idea behind the framework is to provide a “balance” between financial measures

and other measures that are important for understanding organizational activities that lead to sustained,

long-term performance. The balanced scorecard recommends that managers gain an overview of the

organization’s performance by tracking a small number of key measures that collectively reflect four

dimensions: (1) financial, (2) customer, (3) internal business process, and (4) learning and growth. [2]

Financial Measures

Financial measures of performance relate to organizational effectiveness and profits. Examples include

financial ratios such as return on assets, return on equity, and return on investment. Other common

financial measures include profits and stock price. Such measures help answer the key question “How do

we look to shareholders?”

Financial performance measures are commonly articulated and emphasized within an organization’s

annual report to shareholders. To provide context, such measures should be objective and be coupled with

meaningful referents, such as the firm’s past performance. For example, Starbucks’s 2009 annual report

highlights the firm’s performance in terms of net revenue, operating income, and cash flow over a five-

year period.

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Customer Measures Customer measures of performance relate to customer attraction, satisfaction, and retention. These

measures provide insight to the key question “How do customers see us?” Examples might include the

number of new customers and the percentage of repeat customers.

Starbucks realizes the importance of repeat customers and has taken a number of steps to satisfy and to

attract regular visitors to their stores. For example, Starbucks rewards regular customers with free drinks

and offers all customers free Wi-Fi access. [3] Starbucks also encourages repeat visits by providing cards

with codes for free iTunes downloads. The featured songs change regularly, encouraging frequent repeat

visits.

Internal Business Process Measures

Internal business process measures of performance relate to organizational efficiency. These measures

help answer the key question “What must we excel at?” Examples include the time it takes to manufacture

the organization’s good or deliver a service. The time it takes to create a new product and bring it to

market is another example of this type of measure.

Organizations such as Starbucks realize the importance of such efficiency measures for the long-term

success of its organization, and Starbucks carefully examines its processes with the goal of decreasing

order fulfillment time. In one recent example, Starbucks efficiency experts challenged their employees to

assemble a Mr. Potato Head to understand how work could be done more quickly. [4] The aim of this

exercise was to help Starbucks employees in general match the speed of the firm’s high performers, who

boast an average time per order of twenty-five seconds.

Learning and Growth Measures

Learning and growth measures of performance relate to the future. Such measures provide insight to tell

the organization, “Can we continue to improve and create value?” Learning and growth measures focus on

innovation and proceed with an understanding that strategies change over time. Consequently,

developing new ways to add value will be needed as the organization continues to adapt to an evolving

environment. An example of a learning and growth measure is the number of new skills learned by

employees every year.

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One way Starbucks encourages its employees to learn skills that may benefit both the firm and individuals

in the future is through its tuition reimbursement program. Employees who have worked with Starbucks

for more than a year are eligible. Starbucks hopes that the knowledge acquired while earning a college

degree might provide employees with the skills needed to develop innovations that will benefit the

company in the future. Another benefit of this program is that it helps Starbucks reward and retain high-

achieving employees.

Measuring Performance Using the Triple Bottom Line

Ralph Waldo Emerson once noted, “Doing well is the result of doing good. That’s what capitalism is all

about.” While the balanced scorecard provides a popular framework to help executives understand an

organization’s performance, other frameworks highlight areas such as social responsibility. One such

framework, the triple bottom line, emphasizes the three Ps of people (making sure that the actions of the

organization are socially responsible), the planet (making sure organizations act in a way that promotes

environmental sustainability), and traditional organization profits. This notion was introduced in the

early 1980s but did not attract much attention until the late 1990s. The triple bottom line emphasizes the three Ps of people (social concerns), planet (environmental concerns), and profits (economic concerns). In the case of Starbucks, the firm has made clear the importance it attaches to the planet by creating an environmental mission statement (“Starbucks is committed to a role of environmental leadership in all facets of our business”) in addition to its overall mission.[5]In terms of the “people” dimension of the triple bottom line, Starbucks strives to purchase coffee beans harvested by farmers who work under humane conditions and are paid reasonable wages. The firm works to be profitable as well, of course.

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K E Y T A K E A W A Y

Organizational performance is a multidimensional concept, and wise managers rely on multiple measures

of performance when gauging the success or failure of their organizations. The balanced scorecard

provides a tool to help executives gain a general understanding of their organization’s current level of

achievement across a set of four important dimensions. The triple bottom line provides another tool to

help executives focus on performance targets beyond profits alone; this approach stresses the

importance of social and environmental outcomes.

E X E R C I S E S

1. How might you apply the balanced scorecard framework to measure performance of your college or

university?

2. Identify a measurable example of each of the balanced scorecard dimensions other than the examples

offered in this section.

3. Identify a mission statement from an organization that emphasizes each of the elements of the triple

bottom line.

[1] Short, J. C., & Palmer, T. B. 2003. Organizational performance referents: An empirical examination of their

content and influences. Organizational Behavior and Human Decision Processes, 90, 209–224.

[2] Kaplan, R. S., & Norton, D. 1992, February. The balanced scorecard: Measures that drive performance. Harvard

Business Review, 70–79.

[3] Miller, C. 2010, June 15. Aiming at rivals, Starbucks will offer free Wi-Fi. New York Times. Section B, p. 1.

[4] Jargon, J. 2009, August 4. Latest Starbucks buzzword: “Lean” Japanese techniques. Wall Street Journal, p. A1.

[5] Our Starbucks mission statement. Retrieved on March 31, 2011, fromhttp://www.starbucks.com/about-

us/company-information/mission-statement. Accessed March 31, 2011.

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2.3 The CEO as Celebrity

L E A R N I N G O B J E C T I V E S

1. Understand the benefits and costs of CEO celebrity status.

2. List and define the four types of CEOs based on differences in fame and reputation.

3. Be able to offer an example of each of the four types of CEOs

Benefits and Costs of CEO Celebrity

The nice thing about being a celebrity is that when you bore people, they think it’s their fault.

Henry Kissinger, former US Secretary of State

The word celebrity quickly brings to mind actors, sports stars, and musicians. Some CEOs, such as Bill

Gates, Oprah Winfrey, Martha Stewart, and Donald Trump, also achieve celebrity status. Celebrity CEOs

are not a new phenomenon. In the early twentieth century, industrial barons such as Henry Ford, John D.

Rockefeller, and Cornelius Vanderbilt were household names. However, in the current era of mass and

instant media, celebrity CEOs have become more prevalent and visible (Figure 2.7 "CEO"). [1]

Cornelius Vanderbilt was one of the earliest celebrity CEOs; Vanderbilt University serves as his

legacy.

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Image courtesy of Mathew Brady and Michel Vuijlsteke,

http://en.wikipedia.org/wiki/File:Cornelius_Vanderbilt_Daguerrotype2.jpg.

Both benefits and costs are associated with CEO celebrity. As the quote from Henry Kissinger suggests,

celebrity confers a mystique and reverence that can be leveraged in a variety of ways. CEO celebrity can

serve as an intangible asset for the CEO’s firm and may increase opportunities available to the firm.

Hiring or developing a celebrity CEO may increase stock price, enhance a firm’s image, and improve the

morale of employees and other stakeholders. However, employing a celebrity CEO also entails risks for an

organization. Increased attention to the firm via the celebrity CEO means any gaps between actual and

expected firm performance are magnified. Further, if a celebrity CEO acts in an unethical or illegal

manner, chances are that the CEO’s firm will receive much more media attention than will other firms

with similar problems. [2]

There are also personal benefits and risks associated with celebrity for the CEO. Celebrity CEOs tend to

receive higher compensation and job perks than their colleagues. Celebrity CEOs are likely to enjoy

increased prestige power, which facilitates invitations to serve on the boards of directors of other firms

and creates opportunities to network with other “managerial elites.” Celebrity also can provide CEOs with

a “benefit of the doubt” effect that protects against quick sanctions for downturns in firm performance

and stock price. However, celebrity also creates potential costs for individuals. Celebrity CEOs face larger

and more lasting reputation erosion if their job performance and behavior is inconsistent with their

celebrity image. Celebrity CEOs face increased personal media scrutiny, and their friends and family must

often endure increased attention into their personal and public lives. Accordingly, wise CEOs will attempt

to understand and manage their celebrity status. [3]

Types of CEOs

Icons are CEOs possessing both fame and strong reputations. The icon CEO combines style and substance

in the execution of his or her job responsibilities. Mary Kay Ash, Richard Branson, Bill Gates, and Warren

Buffett are good examples of icons. The late Mary Kay Ash founded Mary Kay Cosmetics Corporation. The

firm’s great success and Ash’s unconventional motivational methods, such as rewarding sales

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representatives with pink Cadillacs, made her famous. Partly because she emphasized helping other

women succeed and ethical business practices, Mary Kay Ash also had a very positive reputation. Richard

Branson has created an empire with more than four hundred companies, including Virgin Atlantic

Airways and Virgin Records. Branson’s celebrity status led him to star in his own reality-based show. He

has also appeared on television series such as Baywatch and Friends, in addition to several cameo

appearances in major motion pictures. Bill Gates, founder and former CEO of Microsoft, also has fame

and a largely positive reputation. Gates is a proverbial “household name” in the tradition of Ford,

Rockefeller, and Vanderbilt. He also is routinely listed among Time magazine’s “100 Most Influential

People” and has received “rock star” receptions in India and Vietnam in recent years.

Former Microsoft CEO Bill Gates exemplifies a CEO who has reached icon

status.

Image courtesy of World Economic Forum,

http://en.wikipedia.org/wiki/File:Bill_Gates_in_WEF_,2007.jpg.

Warren Buffett is perhaps the best-known executive in the United States. As CEO of Berkshire Hathaway,

he has accumulated wealth estimated at $62 billion and was the richest person in the world as of March

2008. Buffett’s business insights command a level of respect that is perhaps unrivaled. Many in the

investment and policymaking communities pay careful attention to his investment choices and his

commentary on economic conditions. Despite Buffett’s immense wealth and success, his reputation

centers on humility and generosity. Buffett avoids the glitz of Wall Street and has lived for fifty years in a

house he bought in Omaha, Nebraska, for $31,000. Meanwhile, his 2006 donation of approximately $30

billion to the Bill and Melinda Gates Foundation was the largest charitable gift in history.

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CEOs who display high levels of relative fame but low levels of reputation are in the group called

scoundrels. These CEOs are well known but vilified. The late Leona Helmsley was a prototypical

scoundrel. Leona Helmsley’s life was a classic rags-to-riches story. Born to immigrant parents, Helmsley

became a billionaire through her work as the head of an extensive hotel and real estate empire. While

certainly famous, her reputation was anything but positive, as reflected by her nickname: the Queen of

Mean. During Helmsley’s trial for tax fraud, her housekeeper quoted her as proclaiming, “We don’t pay

taxes. Only the little people pay taxes.” Following twenty-one months in jail, Helmsley was required to

perform 750 hours of community service. One hundred fifty hours were added to this sentence after it was

discovered that employees had performed some of her service hours. Helmsley’s apparent arrogance,

combined with her cruelty to employees and her reputation as the ultimate workplace bully, cemented her

position as a scoundrel.

The corporate governance scandals of the early 2000s revealed several CEOs as scoundrels. Perhaps the

best known were Kenneth Lay and Dennis Kozlowski. Both men rose to prominence as their firms’ success

and stock prices soared but were undone by dubious activities. Lay was once revered as the son of a poor

minister who founded Enron and built it into a giant in the energy business. In 2001, however, he became

the face of corporate abuses in the United States after Enron’s collapse led to scenes, captured on

television, of employees left jobless and with retirement accounts full of worthless Enron stock. Lay was

convicted of fraud in 2006 but died before sentencing.

Also born to a poor family, Kozlowski started at Tyco as an accountant and worked his way up to the

executive suite. In May 2001, a BusinessWeek cover story lauded Kozlowski as “the most aggressive CEO”

in the country and detailed his strategy for building Tyco into the next General Electric by using

acquisitions to gain the first or second position in all the industries in which it competed. By 2002,

Kozlowski’s reputation was in jeopardy. He was indicted for avoiding more than $1 million in sales taxes

on art purchases. Media stories described in detail a $2 million birthday party Kozlowski threw for his

wife (billing half of it to Tyco as a company function), a $19 million apartment Tyco purchased for him,

and $11 million worth of furnishings for the apartment (including an infamous $6,000 shower curtain).

Accusations that Kozlowski and another Tyco executive stole hundreds of millions of dollars from the firm

ultimately led to a prison sentence of eight to twenty-five years.

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Hidden gems are CEOs who lack fame but possess positive reputations. These CEOs toil in relative

obscurity while leading their firms to success. Their skill as executives is known mainly by those in their

own firm and by their competitors. In many cases, the firm has some renown due to its success, but the

CEO stays unknown. For example, consider the case of Anne Mulcahy. Mulcahy, CEO of Xerox, started

her career at Xerox as a copier salesperson. Despite building an excellent reputation by rescuing Xerox

from near bankruptcy, Mulcahy eschews fame and publicity. While being known for successfully leading

Xerox by example and being willing to fly anywhere to meet a customer, she avoids stock analysts and

reporters.

Silent killers are the fourth and final group of CEOs. These CEOs are overlooked and ignored sources of

harm to their firms. While scoundrels are closely monitored and scrutinized by the media, it may be too

late before the poor ethics or incompetence of the silent killers is detected. In this sense, silent killers are

sometimes worse than scoundrels. One example of a silent killer is Harding Lawrence, former CEO of

defunct Braniff International. Lawrence initiated a massive expansion of the airline following industry

deregulation in the late 1970s. The result was a bloated firm, ill-equipped to survive the extremely

competitive setting that evolved in the early 1980s. Howard Putnam, the CEO of a small regional carrier

named Southwest Airlines, was hired in a failed effort to save the company. By the time Braniff went

bankrupt, Putnam was left to explain its demise, and the name of the main culprit was all but forgotten.

Ironically, had Putnam declined the opportunity to try to save Braniff, perhaps he and not Herb Kelleher

would have become an icon at the helm of Southwest.

Strategy at the Movies

Iron Man

Has Tony Stark gone crazy? This was the question that many stakeholders of Stark Industries were asking

themselves in the 2008 blockbuster Iron Man. Tony Stark, CEO of Stark Industries, stunned his

shareholders, employees, and the world when he announced that he was changing Stark Industries’

mission from being one of the world’s leading weapons manufacturers to being a socially responsible,

clean energy producer. Following his announcement, Stark faced fierce opposition from his board of

directors, employees, the media, and clients such as the US military. The changes at Stark Industries

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attracted tremendous attention in part because of the glamorous Stark’s status as a celebrity CEO.

Initially, Stark is seen by the public as a scoundrel that pays little attention to the social impact his

company makes. After shifting the direction of Stark Industries, however, Stark is viewed as an icon that

is just as attentive to the social performance of the company as he is to its financial performance. Iron

Man illustrates that while changing elements such as firm mission and CEO status is difficult, it is not

impossible.

Iron Man: The Greatest Creation of Fictional Celebrity CEO Tony Stark

Image courtesy of Pop Culture Geek, http://www.flickr.com/photos/popculturegeek/4858995531.

Celebrity Rehabilitation

Anything I say or do is now at risk of showing up on the front page of a national daily newspaper and

therefore, I need to be much more conscious about the implications of everything that I say or do in all

situations.

John Mackey, CEO of Whole Foods Market

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Achieving the level of success that brings about celebrity is seldom a completely smooth process. Even

well-regarded celebrity CEOs seldom have totally untarnished reputations. Bill Gates has been portrayed

as a ruthless and devious genius, for example, while General Electric CEO Jack Welch was attacked in

media outlets for an extramarital affair.

One of the more interesting recent cases of a tarnished reputation centers on John Mackey, founder and

CEO of Whole Foods Market. His strategy of offering organic food and high levels of service allowed

Whole Foods to carve out a profitable and growing niche in an industry whose overall margins have been

squeezed as Walmart’s Supercenters have gained market share. Under Mackey’s leadership, Whole Food’s

stock price tripled from 2001 to 2006. Mackey’s efforts to make food supplies healthier and his teamwork-

centered management approach attracted publicity, and he appeared headed for icon status.

But in 2007 Mackey and Whole Foods were embarrassed by the revelation that Mackey had been

anonymously posting negative information about a rival, Wild Oats, online. Through his online persona

“rahodeb” (a scrambling of his wife’s name), Mackey asserted that Wild Oats’ stock was overpriced and

that the firm was headed toward bankruptcy. This was viewed by some observers as a possible effort to

manipulate Wild Oats’ stock price prior to a proposed acquisition by Whole Foods. Meanwhile, in e-mails

to other Whole Foods executives, Mackey noted that the acquisition of Wild Oats could allow them to

avoid “nasty price wars.” This caught the eye of Federal Trade Commission (FTC) regulators who were

concerned about the antitrust implications of the acquisition.

Whole Foods CEO John Mackey’s celebrity status was amplified when it was revealed that he had posted negative

information online about competitor Wild Oats.

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Image courtesy of Joe M500, http://en.wikipedia.org/wiki/File:John_Mackey,_of_Whole_Foods_in_2009.jpg.

What should a CEO do when his or her reputation takes a hit? As the old saying goes, honesty is the best

policy. An example is offered by David Neeleman, founder and CEO of JetBlue. The reputations of JetBlue

and Neeleman took a severe blow after a widely reported February 2007 debacle in which travelers were

stranded in airplanes for excessive periods of time during a busy holiday weekend. Neeleman took a giant

step toward restoring both his and JetBlue’s reputation by issuing a public, heartfelt apology. He not only

issued a written apology to customers but also bought full-page advertisements in newspapers, posted a

video apology online, and created a new “bill of rights” for JetBlue customers.

Mackey apologized for his actions via his blog in 2008. As part of this apology, Mackey acknowledged that

he had failed to recognize how expectations change when one becomes a celebrity. Mackey noted that

when Whole Foods was a smaller company, “I was seldom interviewed and few people knew or cared who

I was. I wasn’t a public figure and had no desire to become one.” As his company grew, however, Mackey

became subject to more scrutiny. As Mackey put it, “At some point in the past 10 years I went from being a

relatively unknown person to becoming a public figure. I regret not having the wisdom to recognize this

fact until very recently.”[4] A big part of managing celebrity status is realizing that one is in fact a celebrity.

K E Y T A K E A W A Y

The media exposure common to modern CEOs provides the opportunity for such top executives to reach

celebrity status. While this status can provide positive benefits to their firms such as increased

performance, CEOs should be aware of and manage the potential for increased scrutiny associated with

this status.

E X E R C I S E S

1. Can you identify another example of a celebrity CEO, such as Cornelius Vanderbilt, that existed prior to

the 1900s?

2. Identify examples of icons, scoundrels, hidden gems, and silent killers other than the examples offered in

this section.

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3. Would you enjoy the media attention associated with CEO celebrity, or would you prefer to hide from the

limelight? Does your answer have implications for your future career choices?

[1] This section of the chapter is adapted from Ketchen, D., Adams, G., & Shook, C. 2008. Understanding and

managing CEO celebrity. Business Horizons, 51(6), 529–534.

[2] Ranft, A. L., Zinko, R., Ferris, G. R., & Buckley, M. R. 2006. Marketing the image of management: The costs and

benefits of CEO reputation. Organizational Dynamics, 35(3), 279–290.

[3] Wade, J. B., Porac, J. F., Pollock, T. G., & Graffin, S. D. 2008. Star CEOs: Benefit or burden? Organizational

Dynamics, 37(2), 203–210.

[4] John Mackey’s blog. 2008, May 21. Re: Apology. Retrieved

fromhttp://www2.wholefoodsmarket.com/blogs/jmackey/2008/05/21/back-to-blogging/#more-26.

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2.4 Entrepreneurial Orientation L E A R N I N G O B J E C T I V E S

1. Understand how thinking and acting entrepreneurially can help organizations and individuals.

2. List and define the five dimensions of an entrepreneurial orientation.

The Value of Thinking and Acting Entrepreneurially

When asked to think of an entrepreneur, people typically offer examples such as Howard Schultz, Estée

Lauder, and Michael Dell—individuals who have started their own successful businesses from the bottom

up that generated a lasting impact on society. But entrepreneurial thinking and doing are not limited to

those who begin in their garage with a new idea, financed by family members or personal savings. Some

people in large organizations are filled with passion for a new idea, spend their time championing a new

product or service, work with key players in the organization to build a constituency, and then find ways

to acquire the needed resources to bring the idea to fruition. Thinking and behaving entrepreneurially can

help a person’s career too. Some enterprising individuals successfully navigate through the environments

of their respective organizations and maximize their own career prospects by identifying and seizing new

opportunities.[1]

As a college student, Michael Dell demonstrated an entrepreneurial

orientation by starting a computer-upgrading business in his dorm room.

He later founded Dell Inc.

Image courtesy of Ilan Costica,

http://en.wikipedia.org/wiki/File:Michael_Dell_at_Oracle_OpenWorld.J

PG.

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In the 1730s, Richard Cantillon used the French term entrepreneur, or literally “undertaker,” to refer to

those who undertake self-employment while also accepting an uncertain return. In subsequent years,

entrepreneurs have also been referred to as innovators of new ideas (Thomas Edison), individuals who

find and promote new combinations of factors of production (Bill Gates’ bundling of Microsoft’s

products), and those who exploit opportunistic ideas to expand small enterprises (Mark Zuckerberg at

Facebook). The common elements of these conceptions of entrepreneurs are that they do something new

and that some individuals can make something out of opportunities that others cannot.

Entrepreneurial orientation (EO) is a key concept when executives are crafting strategies in the hopes of

doing something new and exploiting opportunities that other organizations cannot exploit. EO refers to

the processes, practices, and decision-making styles of organizations that act entrepreneurially. [2] Any

organization’s level of EO can be understood by examining how it stacks up relative to five dimensions: (1)

autonomy, (2) competitive aggressiveness, (3) innovativeness, (4) proactiveness, (5) and risk taking.

These dimensions are also relevant to individuals.

Autonomy

Autonomy refers to whether an individual or team of individuals within an organization has the freedom

to develop an entrepreneurial idea and then see it through to completion. In an organization that offers

high autonomy, people are offered the independence required to bring a new idea to fruition, unfettered

by the shackles of corporate bureaucracy. When individuals and teams are unhindered by organizational

traditions and norms, they are able to more effectively investigate and champion new ideas.

Some large organizations promote autonomy by empowering a division to make its own decisions, set its

own objectives, and manage its own budgets. One example is Sony’s PlayStation group, which was created

by chief operating officer (COO) Ken Kutaragi, largely independent of the Sony bureaucracy. In time, the

PlayStation business was responsible for nearly all Sony’s net profit. Because of the success generated by

the autonomous PlayStation group, Kutaragi later was tapped to transform Sony’s core consumer

electronics business into a PlayStation clone. In some cases, an autonomous unit eventually becomes

completely distinct from the parent company, such as when Motorola spun off its successful

semiconductor business to create Freescale.

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Competitive Aggressiveness

Competitive aggressiveness is the tendency to intensely and directly challenge competitors rather than

trying to avoid them. Aggressive moves can include price-cutting and increasing spending on marketing,

quality, and production capacity. An example of competitive aggressiveness can be found in Ben & Jerry’s

marketing campaigns in the mid-1980s, when Pillsbury’s Häagen-Dazs attempted to limit distribution of

Ben & Jerry’s products. In response, Ben & Jerry’s launched their “What’s the Doughboy Afraid Of?”

advertising campaign to challenge Pillsbury’s actions. This marketing action was coupled with a series of

lawsuits—Ben & Jerry’s was competitively aggressive in both the marketplace and the courtroom.

Although aggressive moves helped Ben & Jerry’s, too much aggressiveness can undermine an

organization’s success. A small firm that attacks larger rivals, for example, may find itself on the losing

end of a price war. Establishing a reputation for competitive aggressiveness can damage a firm’s chances

of being invited to join collaborative efforts such as joint ventures and alliances. In some industries, such

as the biotech industry, collaboration is vital because no single firm has the knowledge and resources

needed to develop and deliver new products. Executives thus must be wary of taking competitive actions

that destroy opportunities for future collaborating.

Innovativeness

Innovativeness is the tendency to pursue creativity and experimentation. Some innovations build on

existing skills to create incremental improvements, while more radical innovations require brand-new

skills and may make existing skills obsolete. Either way, innovativeness is aimed at developing new

products, services, and processes. Those organizations that are successful in their innovation efforts tend

to enjoy stronger performance than those that do not.

Known for efficient service, FedEx has introduced its Smart Package, which allows both shippers and

recipients to monitor package location, temperature, and humidity. This type of innovation is a welcome

addition to FedEx’s lineup for those in the business of shipping delicate goods, such as human organs.

How do firms generate these types of new ideas that meet customers’ complex needs? Perennial

innovators 3M and Google have found a few possible answers. 3M sends nine thousand of its technical

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personnel in thirty-four countries into customers’ workplaces to experience firsthand the kinds of

problems customers encounter each day. Google’s two most popular features of its Gmail, thread sorting

and unlimited e-mail archiving, were first suggested by an engineer who was fed up with his own e-mail

woes. Both firms allow employees to use a portion of their work time on projects of their own choosing

with the goal of creating new innovations for the company. This latter example illustrates how multiple

EO dimensions—in this case, autonomy and innovativeness—can reinforce one another.

Ben & Jerry’s displays innovativeness by developing a series of offbeat and creative flavors over time.

Image courtesy of theimpulsivebuy,

http://www.flickr.com/photos/theimpulsivebuy/5613901887/sizes/m/in/photostream.

Proactiveness

Proactiveness is the tendency to anticipate and act on future needs rather than reacting to events after

they unfold. A proactive organization is one that adopts an opportunity-seeking perspective. Such

organizations act in advance of shifting market demand and are often either the first to enter new markets

or “fast followers” that improve on the initial efforts of first movers.

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Consider Proactive Communications, an aptly named small firm in Killeen, Texas. From its beginnings in

2001, this firm has provided communications in hostile environments, such as Iraq and areas impacted by

Hurricane Katrina. Being proactive in this case means being willing to don a military helmet or sleep

outdoors—activities often avoided by other telecommunications firms. By embracing opportunities that

others fear, Proactive’s executives have carved out a lucrative niche in a world that is technologically,

environmentally, and politically turbulent. [3]

Risk Taking

Risk taking refers to the tendency to engage in bold rather than cautious actions. Starbucks, for example,

made a risky move in 2009 when it introduced a new instant coffee called VIA Ready Brew. Instant coffee

has long been viewed by many coffee drinkers as a bland drink, but Starbucks decided that the

opportunity to distribute its product in a different format was worth the risk of associating its brand name

with instant coffee.

Although a common belief about entrepreneurs is that they are chronic risk takers, research suggests that

entrepreneurs do not perceive their actions as risky, and most take action only after using planning and

forecasting to reduce uncertainty. [4] But uncertainty seldom can be fully eliminated. A few years ago,

Jeroen van der Veer, CEO of Royal Dutch Shell PLC, entered a risky energy deal in Russia’s Far East. At

the time, van der Veer conceded that it was too early to know whether the move would be

successful. [5] Just six months later, however, customers in Japan, Korea, and the United States had

purchased all the natural gas expected to be produced there for the next twenty years. If political

instabilities in Russia and challenges in pipeline construction do not dampen returns, Shell stands to post

a hefty profit from its 27.5 percent stake in the venture.

Building an Entrepreneurial Orientation

Steps can be taken by executives to develop a stronger entrepreneurial orientation throughout an

organization and by individuals to become more entrepreneurial themselves. For executives, it is

important to design organizational systems and policies to reflect the five dimensions of EO. As an

example, how an organization’s compensation systems encourage or discourage these dimensions should

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be considered. Is taking sensible risks rewarded through raises and bonuses, regardless of whether the

risks pay off, for example, or does the compensation system penalize risk taking? Other organizational

characteristics such as corporate debt level may influence EO. Do corporate debt levels help or impede

innovativeness? Is debt structured in such a way as to encourage risk taking? These are key questions for

executives to consider.

Examination of some performance measures can assist executives in assessing EO within their

organizations. To understand how the organization develops and reinforces autonomy, for example, top

executives can administer employee satisfaction surveys and monitor employee turnover rates.

Organizations that effectively develop autonomy should foster a work environment with high levels of

employee satisfaction and low levels of turnover. Innovativeness can be gauged by considering how many

new products or services the organization has developed in the last year and how many patents the firm

has obtained.

Similarly, individuals should consider whether their attitudes and behaviors are consistent with the five

dimensions of EO. Is an employee making decisions that focus on competitors? Does the employee

provide executives with new ideas for products or processes that might create value for the organization?

Is the employee making proactive as opposed to reactive decisions? Each of these questions will aid

employees in understanding how they can help to support EO within their organizations.

K E Y T A K E A W A Y

Building an entrepreneurial orientation can be valuable to organizations and individuals alike in

identifying and seizing new opportunities. Entrepreneurial orientation consists of five dimensions: (1)

autonomy, (2) competitive aggressiveness, (3) innovativeness, (4) proactiveness, and (5) risk taking.

E X E R C I S E S

1. Can you name three firms that have suffered because of lack of an entrepreneurial orientation?

2. Identify examples of each dimension of entrepreneurial orientation other than the examples offered in

this section.

3. How does developing an entrepreneurial orientation have implications for your future career choices?

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4. How could you apply the dimensions of entrepreneurial orientation to a job search?

[1] This section is adapted from Certo, S. T., Moss, T. W., & Short, J. C. 2009. Entrepreneurial orientation: An

applied perspective. Business Horizons, 52, 319–324.

[2] Lumpkin, G. T., & Dess, G. G. 1996. Clarifying the entrepreneurial orientation construct and linking it to

performance. Academy of Management Review, 21, 135–172.

[3] Choi, A. S. 2008, April 16. PCI builds telecommunications in Iraq. Bloomberg Businessweek. Retrieved

fromhttp://www.businessweek.com/magazine/content/08_64/s0804065916656.htm.

[4] Simon, M., Houghton, S. M., & Aquino, K. 2000. Cognitive biases, risk perception, and venture formation: How

individuals decide to start companies. Journal of Business Venturing, 14, 113–134.

[5] Certo, S. T., Connelly, B., & Tihanyi, L. 2008. Managers and their not-so-rational decisions. Business

Horizons, 51(2), 113–119.

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2.5 Conclusion

This chapter explains several challenges that executives face in attempting to lead their organizations

strategically. Executives must ensure that their organizations have visions, missions, and goals in

place that help move these organizations forward. Measures and referents for assessing performance

must be thoughtfully chosen. Some executives become celebrities, thereby creating certain

advantages and disadvantages for themselves and for their firms. Finally, executives must monitor

the degree of entrepreneurial orientation present within their organizations and make adjustments

when necessary. When executives succeed at leading strategically, an organization has an excellent

chance of success.

E X E R C I S E S

1. Divide your class into four or eight groups, depending on the size of the class. Assign each group to

develop arguments that one of the key issues discussed in this chapter (vision, mission, goals; assessing

organizational performance; CEO celebrity; entrepreneurial orientation) is the most important within

organizations. Have each group present their case, and then have the class vote individually for the

winner. Which issue won and why?

2. This chapter discussed Howard Schultz and Starbucks on several occasions. Based on your reading of the

chapter, how well has Schultz done in dealing with setting a vision, mission, and goals, assessing

organizational performance, CEO celebrity, and entrepreneurial orientation?

3. Write a vision and mission for an organization or firm that you are currently associated with. How could

you use the balanced scorecard to assess how well that organization is fulfilling the mission you wrote?

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Chapter 3

Evaluating the External Environment

L E A R N I N G O B J E C T I V E S

After reading this chapter, you should be able to understand and articulate answers to the following

questions:

1. What is the general environment and why is it important to organizations?

2. What are the features of Porter’s five forces industry analysis?

3. What are strategic groups and how are they useful to evaluating the environment?

Subway Is on a Roll

As shown in the highlighted countries, Subway is well on its way to building a worldwide sandwich

empire.

Image courtesy of Nomi887,http://en.wikipedia.org/wiki/File:Subway_world_map1edit.png.

Many observers were stunned in March 2011 when news broke that Subway had surpassed McDonald’s as

the biggest restaurant chain in the world. At the time of the announcement, Subway had 33,749 units

under its banner while McDonald’s had 32,737. [1] Despite its meteoric growth, many opportunities

remained. In China, for example, Subway had fewer than two hundred stores. In contrast, China hosts

Chapter 3 from Mastering Strategic Management was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested

by the work’s original creator or licensee. © 2014, The Saylor Foundation.

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Chapter 4

Managing Firm Resources

L E A R N I N G O B J E C T I V E S

After reading this chapter, you should be able to understand and articulate answers to the following

questions:

1. What is resource-based theory, and why is it important to organizations?

2. In what ways can intellectual property serve as a value-added resource for organizations?

3. How should executives use the value chain to maximize the performance of their organizations?

4. What is SWOT analysis and how can it help an organization?

Southwest Airlines: Let Your LUV Flow

Southwest Airlines’ acquisition of AirTran in 2011 may lead the firm into stormy skies.

Chapter 4 from Mastering Strategic Management was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested

by the work’s original creator or licensee. © 2014, The Saylor Foundation.

Saylor URL: http://www.saylor.org/books Saylor.org 102

Image courtesy of Stuart Seeger,http://en.wikipedia.org/wiki/File:Southwest_737_At_Burbank.jpg

In 1971, an upstart firm named Southwest Airlines opened for business by offering flights between

Houston, San Antonio, and its headquarters at Love Field in Dallas. From its initial fleet of three airplanes

and three destinations, Southwest has grown to operate hundreds of airplanes in scores of cities. Despite

competing in an industry that is infamous for bankruptcies and massive financial losses, Southwest

marked its thirty-eighth profitable year in a row in 2010.

Why has Southwest succeeded while many other airlines have failed? Historically, the firm has differed

from its competitors in a variety of important ways. Most large airlines use a “hub and spoke” system.

This type of system routes travelers through a large hub airport on their way from one city to another.

Many Delta passengers, for example, end a flight in Atlanta and then take a connecting flight to their

actual destination. The inability to travel directly between most pairs of cities adds hours to a traveler’s

itinerary and increases the chances of luggage being lost. In contrast, Southwest does not have a hub

airport; preferring instead to connect cities directly. This helps make flying on Southwest attractive to

many travelers.

Southwest has also been more efficient than its rivals. While most airlines use a variety of different

airplanes, Southwest operates only one type of jet: the Boeing 737. This means that Southwest can service

its fleet much more efficiently than can other airlines. Southwest mechanics need only the know-how to

fix one type of airplane, for example, while their counterparts with other firms need a working knowledge

of multiple planes. Southwest also gains efficiency by not offering seat assignments in advance, unlike its

competitors. This makes the boarding process move more quickly, meaning that Southwest’s jets spend

more time in the air transporting customers (and making money) and less time at the gate relative to its

rivals’ planes.

Organizational culture is the dimension along which Southwest perhaps has differed most from its rivals.

The airline industry as a whole suffers from a reputation for mediocre (or worse) service and indifferent

(sometimes even surly) employees. In contrast, Southwest enjoys strong loyalty and a sense of teamwork

among its employees.

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One tangible indicator of this culture is Southwest’s stock ticker symbol. Most companies choose stock

ticker symbols that evoke their names. Ford’s ticker symbol is F, for example, and Walmart’s symbol is

WMT. When Southwest became a publicly traded company in 1977, executives chose LUV as its ticker

symbol. LUV pays a bit of homage to the firm’s humble beginnings at Love Field. More important,

however, LUV represents the love that executives have created among employees, between employees and

the company, and between customers and the company. This “LUV affair” has long been and remains a

huge success. As recently as March 2011, for example, Southwest was ranked fourth

on Fortune magazine’s World’s Most Admired Company list.

In September 2010, Southwest surprised many observers when it announced that it was acquiring

AirTran Airways for $1.4 billion. Southwest and AirTran both emphasized low fares, but they differed in

many ways. AirTran routed most of its passengers through a hub-and-spoke system, and it relied on a

different plane than Southwest, the Boeing 717. The acquisition of AirTran thus raised important

questions about Southwest’s future. [1] How would AirTran’s hub-and-spoke system be integrated with

Southwest’s nonhub approach? Could the airlines’ respective fleets of 737s and 717s be joined without

losing efficiency? Perhaps most important, could Southwest maintain its legendary organizational culture

while taking over a sizable rival and integrating AirTran’s thousands of employees? When the acquisition

was finalized on May 2, 2011, it remained unclear whether Southwest was flying off course or whether

Southwest’s “LUV story” would continue for many years.

[1] Schlangenstein, M., & Hughes, J. 2010, September 28. Southwest risks keep-it-simple focus to spur growth.

Retrieved from http://www.washingtonpost.com/wp-dyn/content/article/2010/09/28/AR2010092801578.html

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4.1 Resource-Based Theory

L E A R N I N G O B J E C T I V E S

1. Define the four characteristics of resources that lead to sustained competitive advantage as articulated by

the resource-based theory of the firm.

2. Understand the difference between resources and capabilities.

3. Be able to explain the difference between tangible and intangible resources.

4. Know the elements of the marketing mix.

Four Characteristics of Strategic Resources

Southwest Airlines provides an illustration of resource-based theory in action. Resource-

based theory contends that the possession of strategic resources provides an organization with a golden

opportunity to develop competitive advantages over its rivals. These competitive advantages in turn

can help the organization enjoy strong profits.[1]

A strategic resource is an asset that is valuable, rare, difficult to imitate, and nonsubstitutable. [2] A

resource is valuable to the extent that it helps a firm create strategies that capitalize on opportunities and

ward off threats. Southwest Airlines’ culture fits this standard well. Most airlines struggle to be profitable,

but Southwest makes money virtually every year. One key reason is a legendary organizational culture

that inspires employees to do their very best. This culture is also rare in that strikes, layoffs, and poor

morale are common within the airline industry.

Competitors have a hard time duplicating resources that are difficult to imitate. Some difficult to imitate

resources are protected by various legal means, including trademarks, patents, and copyrights. Other

resources are hard to copy because they evolve over time and they reflect unique aspects of the firm.

Southwest’s culture arose from its very humble beginnings. The airline had so little money that at times it

had to temporarily “borrow” luggage carts from other airlines and put magnets with the Southwest logo

on top of the rivals’ logo. Southwest is a “rags to riches” story that has evolved across several decades.

Other airlines could not replicate Southwest’s culture, regardless of how hard they might try, because of

Southwest’s unusual history.

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A resource is nonsubstitutable when competitors cannot find alternative ways to gain the benefits that a

resource provides. A key benefit of Southwest’s culture is that it leads employees to treat customers well,

which in turn creates loyalty to Southwest among passengers. Executives at other airlines would love to

attract the customer loyalty that Southwest enjoys, but they have yet to find ways to inspire the kind of

customer service that the Southwest culture encourages.

Southwest Airlines’ unique culture is reflected in the customization of their aircraft over the years, such as the “Lone Star

One” design.

Image courtesy of planephotoman,http://en.wikipedia.org/wiki/File:Southwest_737_Lonestar_One.jpg.

Ideally, a firm will have a culture that embraces the four qualities. If so, these resources can provide

not only a competitive advantage but also a sustained competitive advantage—one that

will endure over time and help the firm stay successful far into the future. Resources that do not

have all four qualities can still be very useful, but they are unlikely to provide long-term advantages.

A resource that is valuable and rare but that can be imitated, for example, might provide an edge in the

short term, but competitors can overcome such an advantage eventually.

Resource-based theory also stresses the merit of an old saying: the whole is greater than the sum of its

parts. Specifically, it is also important to recognize that strategic resources can be created by taking

several strategies and resources that each could be copied and bundling them together in a way that

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cannot be copied. For example, Southwest’s culture is complemented by approaches that individually

could be copied—the airline’s emphasis on direct flights, its reliance on one type of plane, and its unique

system for passenger boarding—to create a unique business model whose performance is without peer in

the industry.

Resource-based theory can be confusing because the term resources is used in many different ways within

everyday common language. It is important to distinguish strategic resources from other resources. To

most individuals, cash is an important resource. Tangible goods such as one’s car and home are also vital

resources. When analyzing organizations, however, common resources such as cash and vehicles are not

considered to be strategic resources. Resources such as cash and vehicles are valuable, of course, but an

organization’s competitors can readily acquire them. Thus an organization cannot hope to create an

enduring competitive advantage around common resources.

On occasion, events in the environment can turn a common resource into a strategic resource. Consider,

for example, a very generic commodity: water. Humans simply cannot live without water, so water has

inherent value. Also, water cannot be imitated (at least not on a large scale), and no other substance can

substitute for the life-sustaining properties of water. Despite having three of the four properties of

strategic resources, water in the United States has remained cheap. Yet this may be changing. Major cities

in hot climates such as Las Vegas, Los Angeles, and Atlanta are confronted by dramatically shrinking

water supplies. As water becomes more and more rare, landowners in Maine stand to benefit. Maine has

been described as “the Saudi Arabia of water” because its borders contain so much drinkable water. It is

not hard to imagine a day when companies in Maine make huge profits by sending giant trucks filled with

water south and west or even by building water pipelines to service arid regions.

From Resources to Capabilities

The tangibility of a firm’s resources is an important consideration within resource-based

theory. Tangible resources are resources that can be readily seen, touched, and quantified. Physical assets

such as a firm’s property, plant, and equipment, as well as cash, are considered to be tangible resources.

In contrast, intangible resources are quite difficult to see, to touch, or to quantify. Intangible resources

include, for example, the knowledge and skills of employees, a firm’s reputation, and a firm’s culture. In

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comparing the two types of resources, intangible resources are more likely to meet the criteria for

strategic resources (i.e., valuable, rare, difficult to imitate, and nonsubstitutable) than are tangible

resources. Executives who wish to achieve long-term competitive advantages should therefore place a

premium on trying to nurture and develop their firms’ intangible resources.

Capabilities are another key concept within resource-based theory. A good and easy-to-remember way to

distinguish resources and capabilities is this: resources refer to what an organization owns, capabilities

refer to what the organization can do. Capabilities tend to arise over time as a firm takes actions that build on

its strategic resources. Southwest Airlines, for example, has developed the capability of providing excellent

customer service by building on its strong organizational culture. Capabilities are important in part because

they are how organizations capture the potential value that resources offer. Customers do not simply

send money to an organization because it owns strategic resources. Instead, capabilitiesare needed to bundle,

to manage, and otherwise to exploit resources in a manner that provides value added to customers

and creates advantages over competitors.

Some firms develop a dynamic capability. This means that a firm has a unique capability of creating new

capabilities. Said differently, a firm that enjoys a dynamic capability is skilled at continually updating its

array of capabilities to keep pace with changes in its environment. General Electric, for example, buys and

sells firms to maintain its market leadership over time, while Coca-Cola has an uncanny knack for

building new brands and products as the soft-drink market evolves. Not surprisingly, both of these firms

rank among the top thirteen among the “World’s Most Admired Companies” for 2011.

Strategy at the Movies

That Thing You Do!

How can the members of an organization reach success “doing that thing they do”? According to resource-

based theory, one possible road to riches is creating—on purpose or by accident—a unique combination of

resources. In the 1996 movie That Thing You Do!, unwittingly assembling a unique bundle of resources

leads a 1960s band called The Wonders to rise from small-town obscurity to the top of the music charts.

One resource is lead singer Jimmy Mattingly, who possesses immense musical talent. Another is guitarist

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Lenny Haise, whose fun attitude reigns in the enigmatic Mattingly. Although not a formal band member,

Mattingly’s girlfriend Faye provides emotional support to the group and even suggests the group’s name.

When the band’s usual drummer has to miss a gig due to injury, the door is opened for charismatic

drummer Guy Patterson, whose energy proves to be the final piece of the puzzle for The Wonders.

Despite Mattingly’s objections, Guy spontaneously adds an up-tempo beat to a sleepy ballad called “That

Thing You Do!” during a local talent contest. When the talent show audience goes crazy in response, it

marks the beginning of a meteoric rise for both the song and the band. Before long, The Wonders perform

on television and “That Thing You Do!” is a top-ten hit record. The band’s magic vanishes as quickly as it

appeared, however. After their bass player joins the Marines, Lenny elopes on a whim, and Jimmy’s diva

attitude runs amok, the band is finished and Guy is left to “wonder” what might have been. That Thing

You Do! illustrates that while bundling resources in a unique way can create immense success, preserving

and managing these resources over time can be very difficult.

Liv Tyler plays Faye Dolan, the love interest of drummer Guy Patterson, in That Thing You Do!

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Image courtesy of Daniel Dormann,http://en.wikipedia.org/wiki/File:LivTylerJune08.jpg.

Is Resource-Based Theory Old News?

Resource-based theory has evolved in recent years to provide a way to understand how strategic resources

and capabilities allow firms to enjoy excellent performance. But more than one wry observer has

wondered aloud, “Is resource-based theory just old wine in a new bottle?” This is a question worth

considering because the role of resources in shaping success and failure has been discussed for many

centuries.

Aesop was a Greek storyteller who lived approximately 2,500 years ago. Aesop is known in particular for

having created a series of fables—stories that appear on the surface to be simply children’s tales but that

offer deep lessons for everyone. One of Aesop’s fables focuses on an ass (donkey) and some grasshoppers.

When the ass tries to duplicate the sweet singing of the grasshoppers by copying their diet, he soon dies of

starvation. Attempting to replicate the grasshoppers’ unique singing capability proved to be a fatal

mistake. The fable illustrates a central point of resource-based theory: it is an array of resources and

capabilities that fuels enduring success, not any one resource alone.

In a far more recent example, sociologist Philip Selznick developed the concept

of distinctive competence through a series of books in the 1940s and 1950s.[3] A distinctive competence is

a set of activities that an organization performs especially well. Southwest Airlines, for example, appears

to have a distinctive competency in operations, as evidenced by how quickly it moves its flights in and out

of airports. Further, Selznick suggested that possessing a distinctive competency creates a competitive

advantage for a firm. Certainly, there is plenty of overlap between the concept of distinctive competency,

on the one hand, and capabilities, on the other.

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So is resource-based theory in fact old wine in a new bottle? Not really. Resource-based theory builds on

past ideas about resources, but it represents a big improvement on past ideas in at least two ways. First,

resource-based theory offers a complete framework for analyzing organizations, not just snippets of

valuable wisdom like Aesop and Selznick provided. Second, the ideas offered by resource-based theory

have been developed and refined through scores of research studies involving thousands of organizations.

In other words, there is solid evidence backing it up.

The Marketing Mix

Leveraging resources and capabilities to create desirable products and services is important, but

customers must still be convinced to purchase these goods and services. The marketing mix—also known

as the four Ps of marketing—provides important insights into how to make this happen. A master of the

marketing mix was circus impresario P. T. Barnum, who is famous in part for his claim that “there’s a

sucker born every minute.” The real purpose of the marketing mix is not to trick customers but rather to

provide a strong alignment among the four Ps (product, price, place, and promotion) to offer customers a

coherent and persuasive message.

A firm’s product is what it sells to customers. Southwest Airlines sells, of course, airplane flights. The

airline tries to set its flights apart from those of airlines by making flying fun. This can include, for

example, flight attendants offering preflight instructions as a rap. The price of a good or service should

provide a good match with the value offered. Throughout its history, Southwest has usually charged lower

airfares than its rivals. Place can refer to a physical purchase point as well as a distribution channel.

Southwest has generally operated in cities that are not served by many airlines and in secondary airports

in major cities. This has allowed the firm to get favorable lease rates at airports and has helped it create

customer loyalty among passengers who are thankful to have access to good air travel.

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Finally, promotion consists of the communications used to market a product, including advertising, public

relations, and other forms of direct and indirect selling. Southwest is known for its clever advertising. In a

recent television advertising campaign, for example, Southwest lampooned the baggage fees charged by

most other airlines while highlighting its more customer-friendly approach to checked luggage. Given the

consistent theme of providing a good value plus an element of fun to passengers that is developed across

the elements of the marketing mix, it is no surprise that Southwest has been so successful within a very

challenging industry.

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Few executives in history have had the marketing savvy of P. T. Barnum.

Image courtesy of The Strobridge Litho. Co., Cincinnati & New York,

http://en.wikipedia.org/wiki/File:Barnum_%26_Bailey_clowns_and_geese2.jpg.

K E Y T A K E A W A Y

x Resource-based theory suggests that resources that are valuable, rare, difficult to imitate, and

nonsubstitutable best position a firm for long-term success. These strategic resources can provide the

foundation to develop firm capabilities that can lead to superior performance over time. Capabilities are

needed to bundle, to manage, and otherwise to exploit resources in a manner that provides value added

to customers and creates advantages over competitors.

E X E R C I S E S

1. Does your favorite restaurant have the four qualities of resources that lead to success as articulated by

resource-based theory?

2. If you were hired by your college or university to market your athletic department, what element of the

marketing mix would you focus on first and why?

3. What other classic stories or fables could be applied to discuss the importance of firm resources and

superior performance?

[1] Barney, J. B. 1991. Firm resources and sustained competitive advantage. Journal of Management, 17, 99–120;

Wernerfelt, B. 1984. A resource-based view of the firm. Strategic Management Journal, 5, 171–180.

[2] Barney, J. B. 1991. Firm resources and sustained competitive advantage. Journal of Management, 17, 99–120;

Chi, T. 1994. Trading in strategic resources: Necessary conditions, transaction cost problems, and choice of

exchange structure. Strategic Management Journal, 15(4), 271–290.

[3] Selznick, P. 1957. Leadership in administration. New York: Harper; Selznick, P. 1952. The organizational weapon.

New York, NY: McGraw-Hill; Selznick, P. 1949. TVA and the grass roots. Berkeley, CA: University of California Press.

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4.2 Intellectual Property

L E A R N I N G O B J E C T I V E S

1. Define the four major types of intellectual property.

2. Be able to provide examples of each intellectual property type.

3. Understand how intellectual property can be a valuable resource for firms.

Defining Intellectual Property

The inability of competitors to imitate a strategic resource is a key to leveraging the resource to achieve

long–term competitive advantages. Companies are clever, and effective imitation is often very possible.

But resources that involve intellectual property reduce or even eliminate this risk. As a result, developing

intellectual property is important to many organizations.

Intellectual property refers to creations of the mind, such as inventions, artistic products, and symbols.

The four main types of intellectual property are patents, trademarks, copyrights, and trade secrets.

If a piece of intellectual property is also valuable, rare, and nonsubstitutable, it constitutes

a strategic resource. Even if a piece of intellectual property does not meet all four criteria for serving as a

strategic resource, it can be bundled with other resources and activities to create a resource.

A variety of formal and informal methods are available to protect a firm’s intellectual property from

imitation by rivals. Some forms of intellectual property are best protected by legal means, while defending

others depends on surrounding them in secrecy. This can be contrasted with Southwest Airlines’ well-

known culture, which rivals are free to attempt to copy if they wish. Southwest’s culture thus is not

intellectual property, although some of its complements such as Southwest’s logo and unique color

schemes are.

Patents

Patents are legal decrees that protect inventions from direct imitation for a limited period of time.

Obtaining a patent involves navigating a challenging process. To earn a patent from the US

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Patent and Trademark Office, an inventor must demonstrate than an invention is new, nonobvious, and

useful. If the owner of a patent believes that a company or person has infringed on the patent, the owner

can sue for damages. In 2011, for example, a private company named EBSCO alleged that retailer Bass Pro

Shops sold a product that violated EBSCO’s patent on a deer-hunting stand that helps prevent hunters

from falling out of trees. Rather than endure a costly legal fight, the two sides agreed to settle EBSCO’s

complaint out of court.

Patenting an invention is important because patents can fuel enormous profits. Imagine, for example, the

potential for lost profits if the Slinky had not been patented. Shipyard engineer Richard James came up

with the idea for the Slinky by accident in 1943 while he was trying to create springs for use in ship

instruments. When James accidentally tipped over one of his springs, he noticed that it moved downhill in

a captivating way. James spent his free time perfecting the Slinky and then applied for a patent in 1946.

To date, more than three hundred million Slinkys have been sold by the company that Richard James and

his wife Betty created.

Patenting inventions such as the Slinky helps ensure that the invention is protected from imitation.

Image courtesy of Roger McLassus,http://upload.wikimedia.org/wikipedia/commons/f/f3/2006-

02-04_Metal_spiral.jpg.

Trademarks

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Trademarks are phrases, pictures, names, or symbols used to identify a particular organization.

Trademarks are important because they help an organization stand out and build an identity in the

marketplace. Some trademarks are so iconic that almost all consumers recognize them, including

McDonald’s golden arches, the Nike swoosh, and Apple’s outline of an apple.

Other trademarks help rising companies carve out a unique niche for themselves. For example, French

shoe designer Christian Louboutin has trademarked the signature red sole of his designer shoes. Because

these shoes sell for many hundreds of dollars via upscale retailers such as Neiman Marcus and Saks Fifth

Avenue, competitors would love to copy their look. Thus legally protecting the distinctive red sole from

imitation helps preserve Louboutin’s profits.

Fashionistas instantly recognize the trademark red sole of Christian Louboutin’s high-end shoes.

Image courtesy of

Arroser,http://wikimediafoundation.org/wiki/File:Louboutin_altadama140.jpg.

Trademarks are important to colleges and universities. Schools earn tremendous sums of money through

royalties on T-shirts, sweatshirts, hats, backpacks, and other consumer goods sporting their names and

logos. On any given day, there are probably several students in your class wearing one or more pieces of

clothing featuring your school’s insignia; your school benefits every time items like this are sold.

Schools’ trademarks are easy to counterfeit, however, and the sales of counterfeit goods take money away

from colleges and universities. Not surprisingly, many schools fight to protect their trademarks. In

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October 2009, for example, the University of Oklahoma announced that it was teaming with law

enforcement officials to combat the sale of counterfeit goods around its campus. [1] This initiative and

similar ones at other colleges and universities are designed to ensure that schools receive their fair share

of the sales that their names and logos generate.

Figure 4.7 Trademarks

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Images courtesy of unknown author, http://en.wikipedia.org/wiki/File:Aspirine-1923.jpg (bottom

left); Wilinckx, http://en.wikipedia.org/wiki/File:Trademark-symbool.png (top left); Hult Ketchen

International Group, LLC (top right); Helix84,

http://en.wikipedia.org/wiki/File:Burrbery_check.gif

Copyrights

Copyrights provide exclusive rights to the creators of original artistic works such as books, movies, songs,

and screenplays. Sometimes copyrights are sold and licensed. In the late 1960s,

Buick thought it had an agreement in place to license the number one hit “Light My Fire” for a television

advertisement from The Doors until the band’s volatile lead singer Jim Morrison loudly protested what he

saw as mistreating a work of art. Classic rock by The Beatles has been used in television ads in recent

years. After the late pop star Michael Jackson bought the rights to the band’s music catalog, he licensed

songs to Target and other companies. Some devoted music fans consider such ads to be abominations,

perhaps proving the merit of Morrison’s protest decades ago.

He looks calm here, but the licensing of a copyrighted song for a car commercial enraged rock legend Jim Morrison.

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Image courtesy of Polfoto/Jan Persson,

http://upload.wikimedia.org/wikipedia/commons/1/15/The_Doors_in_Copenhagen_1968.jpg.

Over time, piracy has become a huge issue for the owners of copyrighted works. In China, millions of

pirated DVDs are sold each year, and music piracy is estimated to account for at least 95 percent of music

sales. This piracy deprives movie studios, record labels, and artists of millions of dollars in royalties. In

response to the damage piracy has caused, the US government has pressed its Chinese counterpart and

other national governments to better enforce copyrights.

Trade Secrets

Trade secrets refer to formulas, practices, and designs that are central to a firm’s business and that remain

unknown to competitors. Trade secrets are protected by laws on theft, but once a secret is revealed,

it cannot be a secret any longer. This leads firms to rely mainly on silence and privacy rather than the

legal system to protect trade secrets.

Some trade secrets have become legendary, perhaps because a mystique arises around the unknown. One

famous example is the blend of eleven herbs and spices used in Kentucky Fried Chicken’s original recipe

chicken. KFC protects this secret by having multiple suppliers each produce a portion of the herb and

spice blend; no one supplier knows the full recipe. The formulation of Coca-Cola is also shrouded in

mystery. In 2006, Pepsi was approached by shady individuals who were offering a chance to buy a stolen

copy of Coca-Cola’s secret recipe. Pepsi wisely refused. An FBI sting was used to bring the thieves to

justice. The soft-drink industry has other secrets too. Dr Pepper’s recipe remains unknown outside the

company. Although Coke’s formula has been the subject of greater speculation, Dr Pepper is actually the

original secret soft drink; it was created a year before Coca-Cola.

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The recipe for Dr Pepper is a secret dating back to the 1880s.

Image courtesy of anyjazz65,

http://www.flickr.com/photos/49024304@N00/4262262427/sizes/l/in/photostream.

K E Y T A K E A W A Y

x Intellectual property can serve as a strategic resource for organizations. While some sources of

intellectual property such as patents, trademarks, and copyrights can receive special legal protection,

trade secrets provide competitive advantages by simply staying hidden from competitors.

E X E R C I S E S

1. What designs for your college or university are protected by trademarks?

2. What type of intellectual property provides the most protection for firms?

3. Why would a firm protect a resource through trade secret rather than by a formal patent?

[1] Ward, C. 2009, October 8. OU works to prevent trademark infringement. The Oklahoma Daily. Retrieved

from http://www.oudaily.com/news/2009/oct/08/ou-works-prevent-trademark-infringement

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4.3 Value Chain

L E A R N I N G O B J E C T I V E S

1. Define the primary activities of the value chain.

2. Know the different support activities within the value chain.

3. Be able to apply the value chain to an organization of your choosing.

4. Understand the difference between a value chain and supply chain.

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Image courtesy of Carol M. Highsmith,

http://commons.wikimedia.org/wiki/File:Randy%27s_donuts1_edit1.jpg.

Elements of the Value Chain

When executives choose strategies, an organization’s resources and capabilities should be examined

alongside consideration of its value chain. A value chain charts the path by which products and services

are created and eventually sold to customers. [1] The term value chain reflects the fact that, as each step of

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this path is completed, the product becomes more valuable than it was at the previous step.

Within the lumber business, for example, value is added when a tree is transformed into usable

wooden boards; the boards created from a tree can be sold for more money than the price of the tree.

Adapted from Porter, M. (1985). Competitive Advantage. New York: Free Press. Exhibit is Creative Commons licensed at http://en.wikipedia.org/wiki/Image:ValueChain.PNG.”

Value chains include both primary and secondary activities. Primary activities are actions that are directly

involved in creating and distributing goods and services. Consider a simple illustrative example: doughnut

shops. Doughnut shops transform basic commodity products such as flour, sugar, butter, and grease into

delectable treats. Value is added through this process because consumers are willing to pay much more for

doughnuts than they would be willing to pay for the underlying ingredients.

There are five primary activities. Inbound logistics refers to the arrival of raw materials. Although

doughnuts are seen by most consumers as notoriously unhealthy, the Doughnut Plant in New York City

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has carved out a unique niche for itself by obtaining organic ingredients from a local farmer’s

market.Operations refers to the actual production process, while outbound logistics tracks the movement

of a finished product to customers. One of Southwest Airlines’ unique capabilities is moving passengers

more quickly than its rivals. This advantage in operations is based in part on Southwest’s reliance on one

type of airplane (which speeds maintenance) and its avoidance of advance seat assignments (which

accelerates the passenger boarding process).

Attracting potential customers and convincing them to make purchases is the domain

of marketing and sales. For example, people cannot help but notice Randy’s Donuts in Inglewood,

California, because the building has a giant doughnut on top of it. Finally, service refers to the extent to

which a firm provides assistance to their customers. Voodoo Donuts in Portland, Oregon, has developed a

clever website (voodoodoughnut.com) that helps customers understand their uniquely named products,

such as the Voodoo Doll, the Texas Challenge, the Memphis Mafia, and the Dirty Snowball.

Secondary activities are not directly involved in the evolution of a product but instead provide important

underlying support for primary activities. Firm infrastructure refers to how the firm is organized and led

by executives. The effects of this organizing and leadership can be profound. For example, Ron Joyce’s

leadership of Canadian doughnut shop chain Tim Hortons was so successful that Canadians consume

more doughnuts per person than all other countries. In terms of resource-based theory, Joyce’s leadership

was clearly a valuable and rare resource that helped his firm prosper.

Also important is human resource management, which involves the recruitment, training, and

compensation of employees. A recent research study used data from more than twelve thousand

organizations to demonstrate that the knowledge, skills, and abilities of a firm’s employees can act as a

strategic resource and strongly influence the firm’s performance. [2] Certainly, the unique level of

dedication demonstrated by employees at Southwest Airlines has contributed to that firm’s excellent

performance over several decades.

Technology refers to the use of computerization and telecommunications to support primary activities.

Although doughnut making is not a high-tech business, technology plays a variety of roles for doughnut

shops, such as allowing customers to use credit cards. Procurement is the process of negotiating for and

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purchasing raw materials. Large doughnut chains such as Dunkin’ Donuts and Krispy Kreme can gain cost

advantages over their smaller rivals by purchasing flour, sugar, and other ingredients in bulk. Meanwhile,

Southwest Airlines has gained an advantage over its rivals by using futures contracts within its

procurement process to minimize the effects of rising fuel prices.

From the Value Chain to Best Value Supply Chains

“Time is money!” warns a famous saying. This simple yet profound statement suggests that organizations

that quickly complete their work will enjoy greater profits, while slower-moving firms will suffer. The

belief that time is money has encouraged the modern emphasis on supply chain management. A

supply chain is a system of people, activities, information, and resources involved in creating a product

and moving it to the customer. A supply chain is a broader concept than a value chain; the latter refers to

activities within one firm, while the former captures the entire process of creating and distributing a

product, often across several firms.

Competition in the twenty-first century requires an approach that considers the supply chain concept in

tandem with the value-creation process within a firm: best value supply chains. These chains do not fixate

on speed or on any other single metric. Instead, relative to their peers, best value supply chains focus on

the total value added to the customer.

Creating best value supply chains requires four components. The first is

strategic supply chain management—the use of supply chains as a means to create competitive advantages

and enhance firm performance. Such an approach contradicts the popular wisdom centered on the need

to maximize speed. Instead, there is recognition that the fastest chain may not satisfy customers’ needs.

Best value supply chains strive to excel along four measures. Speed (or “cycle time”) is the time duration

from initiation to completion of the production and distribution process. Quality refers to the relative

reliability of supply chain activities. Supply chains’ efforts at managing cost involve enhancing value by

either reducing expenses or increasing customer benefits for the same cost level. Flexibility refers to a

supply chain’s responsiveness to changes in customers’ needs. Through balancing these four metrics, best

value supply chains attempt to provide the highest level of total value added.

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The value of strategic supply chain management is reflected in how firms such as Walmart have used their

supply chains as competitive weapons to gain advantages over peers. Walmart excels in terms of speed

and cost by locating all domestic stores within one day’s drive of a warehouse while owning a trucking

fleet. This creates distribution speed and economies of scale that competitors simply cannot match. When

Kmart’s executives decided in the late 1990s to compete head-to-head with Walmart on price, Walmart’s

sophisticated logistics system enabled it to easily withstand the price war. Unable to match its rival’s

speed and costs, Kmart soon plunged into bankruptcy. Walmart’s supply chains also possess strong

quality and flexibility. When Hurricane Katrina devastated the Gulf Coast in 2005, Walmart used not only

its warehouses and trucks but also its satellite technology, radio frequency identification (RFID), and

global positioning systems to quickly divert assets to affected areas. The result was that Walmart emerged

as the first responder in many towns and provided essentials such as drinking water faster than local and

federal governments could.

Meanwhile, failing to manage a supply chain effectively causes serious harm. For example, in 2003

Motorola was unable to meet demand for its new camera phones because it did not have enough lenses

available. Also, firms whose supply chains were centered in the Port of Los Angeles collectively lost more

than $2 billion a day during a 2002 workers’ strike. In terms of stock price, firms’ market value erodes by

an average of 10 percent following the announcement of a major supply chain problem.

The second component is agility, the supply chain’s relative capacity to act rapidly in response to dramatic

changes in supply and demand. [3] Agility can be achieved using buffers. Excess capacity, inventory, and

management information systems all provide buffers that better enable a best value supply chain to

service and to be more responsive to its customers. Rapid improvements and decreased costs in deploying

information systems have enabled supply chains in recent years to reduce inventory as a buffer. Much

popular thinking depicts inventory reduction as a goal in and of itself. However, this cannot occur without

corresponding increases in buffer capacity elsewhere in the chain, or performance will suffer. A best value

supply chain seeks to optimize the total costs of all buffers used. The costs of deploying each buffer differs

across industries; therefore, no solution that works for one company can be directly applied to another in

a different industry without adaptation.

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Agility in a supply chain can also be improved and achieved by colocating with the customer. This

arrangement creates an information flow that cannot be duplicated through other methods. Daily face-to-

face contact for supply chain personnel enables quicker response times to customer demands due to the

speed at which information can travel back and forth between the parties. Again, this buffer of increased

and improved information flows comes at an expense, so executives seeking to build a best value supply

chain will investigate the opportunity and determine whether this action optimizes total costs.

Adaptability refers to a willingness and capacity to reshape supply chains when necessary. Generally,

creating one supply chain for a customer is desired because this helps minimize costs. Adaptable firms

realize that this is not always a best value solution, however. For example, in the defense industry, the US

Army requires one class of weapon simulators to be repaired within eight hours, while another class of

items can be repaired and returned within one month. To service these varying requirements efficiently

and effectively, Computer Science Corporation (the firm whose supply chains maintain the equipment)

must devise adaptable supply chains. In this case, spare parts inventory is positioned in proximity to the

class of simulators requiring quick turnaround, while the less-time-sensitive devices are sent to a

centralized repair facility. This supply chain configuration allows Computer Science Corporation to satisfy

customer demands while avoiding the excess costs that would be involved in localizing all repair activities.

In situations in which the interests of one firm in the chain and the chain as a whole conflict, most

executives will choose an option that benefits their firm. This creates a need for alignment among chain

members. Alignment refers to creating consistency in the interests of all participants in a supply chain. In

many situations, this can be accomplished through carefully writing incentives into contracts.

Collaborative forecasting with suppliers and customers can also help build alignment. Taking the time to

sit together with participants in the supply chain to agree on anticipated business levels permits shared

understanding and rapid information transfers between parties. This is particularly valuable when

customer demand is uncertain, such as in the retail industry. [4]

K E Y T A K E A W A Y

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x The value chain provides a useful tool for managers to examine systematically where value may be added

to their organizations. This tool is useful in that it examines key elements in the production of a good or

service, as well as areas in which value may be added in support of those primary activities.

E X E R C I S E S

1. If you were hired as a consultant for your university, what specific element of the value chain would you

seek to improve first?

2. What local business in your town could be improved most dramatically by applying the value chain?

Would improvements of primary or support activities help to improve this firm most? Could knowledge of

strategic supply chain management add further value to this firm?

[1] Porter, M. E. 1985. Competitive advantage: Creating and sustaining superior performance. New York, NY: Free

Press.

[2] Crook, T. R., Todd, S. Y., Combs, J. G., Woehr, D. J., & Ketchen, D. J. 2011. Does human capital matter? A meta-

analysis of the relationship between human capital and firm performance. Journal of Applied Psychology, 96(3),

443–456.

[3] Lee, H. L. 2004, October. The triple-A supply chain. Harvard Business Review, 83, 102–112.

[4] This section of the chapter is adapted from Ketchen, D. J., Rebarick, W., Hult, G. T., & Meyer, D. 2008. Best

value supply chains: A key competitive weapon for the 21st century. Business Horizons, 51, 235–243.

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4.4 Beyond Resource-Based Theory: Other Views on Firm Performance

L E A R N I N G O B J E C T I V E S

1. Be able to discuss other theories about firm success and failure beyond resource-based theory.

2. Be able to apply different theories to help explain competition in different industries.

Although resource-based theory stands as perhaps the most popular explanation of why some

organizations prosper while others do not, several other theories are popular. Enactment treats

executives as the masters of their domains. Enactment contends that an organization can, at least in

part, create an environment for itself that is beneficial to the organization. This is accomplished by

putting strategies in place that reshape competitive conditions in a favorable way.

By the 1990s, Microsoft had been so successful at reshaping the software industry to its benefit that

the firm was the subject of a lengthy antitrust investigation by the federal government. More

recently, Apple has been able to reshape its environment by introducing products such as the iPhone

and the iPad that transcend the traditional boundaries between the cell phone, digital camera, music

player, and computer businesses. No airline has ever been able to enact the environment, however,

perhaps because the airline industry is so fragmented.

Environmental determinism offers a completely opposite view from enactment on why some firms

succeed and others fail. Environmental determinism views organizations much like biological

theories view animals—organizations (and animals) are very limited in their ability to adapt to the

conditions around them. Thus just as harsh environmental changes are believed to have made

dinosaurs extinct, changes in the business environment can destroy organizations regardless of how

clever and insightful executives are.

Until 1978, the federal government regulated the airline industry by dictating what routes each

airline would fly and what prices it would charge. Once these controls were removed, airlines were

subjected to a series of negative environmental trends, including recession, overcapacity in the

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industry, new entrants, fierce price competition, and fuel shortages. Perhaps not surprisingly, dozens

of airlines have been crushed by these conditions.

An old saying notes that “imitation is the sincerest form of flattery.” This flattery is the focus

of institutional theory. In particular, institutional theory centers on the extent to which firms copy one

another’s strategies. Consider, for example, fast-food hamburger restaurants. Innovations such as

dollar menus and drive-through windows tend to be introduced by one firm and then duplicated by

the others.

Airlines also seem to follow a “monkey see, monkey do” mentality. To build passenger loyalty,

American Airlines introduced a frequent flyer program called AAdvantage in 1981. After flying a

certain number of miles on American flights, AAdvantage members were rewarded with a free flight.

The idea was to make passengers less likely to shop around for the cheapest ticket. Ironically,

AAdvantage turned out to be not much of an advantage at all. Many of American’s rivals quickly

developed their own frequent-flyer programs, and today most airlines reward frequent passengers.

In recent years, ideas such as charging passengers to check their luggage and eliminating free food

on flights have been copied by one airline after another.

Transaction cost economics is a theory that centers on just one element of business activity: whether it

is cheaper for a firm to make or to buy the products that it needs. This is an important element,

however, because choosing the more efficient option can enhance a firm’s profits. Automakers such

as Ford and General Motors face a wide variety of make-or-buy decisions because so many different

parts are needed to build cars and trucks. Sometimes Ford and GM make these products, and other

times they purchase them from outside suppliers. These firms’ financial situations are improved

when these decisions are made wisely and harmed when they are made poorly.

In contrast, airlines always buy (or rent) their airplanes. Large planes are generally bought from

Boeing or Airbus, while modest-sized airliners are purchased from companies such as Brazil’s

Embraer. It would be simply too costly for an airline to pursue a backward integration strategy and

enter the airplane manufacturing business. Insights such as these are powerful enough that the

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creator of transaction cost economics, Professor Oliver Williamson, was awarded a Nobel Prize in

Economic Sciences in 2009.

Each of these theories—enactment, environmental determinism, institutional theory, and

transaction cost economics—is useful for understanding some situations and some important

business decisions. Thus executives should keep these perspectives in mind as they attempt to lead

their firms to greater levels of success. However, one important advantage that resource-based

theory offers over the alternatives is that only resource-based theory does a good job of explaining

firm performance across a wide variety of contexts. Thus resource-based theory offers the point of

view of business that has the strongest value for most executives.

K E Y T A K E A W A Y

x Although resource-based theory is the dominant perspective to predict performance in the strategic

management field, other theories exist to explain firm behavior. In some industries, explanations

provided by these theories can be very convincing.

E X E R C I S E S

1. What theory of the firm do you think best explains competition in the fast-food industry?

2. What is an example of an industry in which institutional theory seems to explain the behavior of firms?

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4.5 SWOT Analysis

L E A R N I N G O B J E C T I V E S

1. Understand what SWOT analysis is.

2. Learn how SWOT analysis can help organizations and individuals, and its limitations.

Five forces analysis examines the situation faced by the competitors in an industry. Strategic groups

analysis narrows the focus by centering on subsets of these competitors whose strategies are

similar. SWOT analysis takes an even narrower focus by centering on an individual firm. Specifically,

SWOT analysis is a tool that considers a firm’s strengths and weaknesses along with the

opportunities and threats that exist in the firm’s environment.

Executives using SWOT analysis compare these internal and external factors to generate ideas about

how their firm might become more successful. In general, it is wise to focus on ideas that allow a firm

to leverage its strengths, steer clear of or resolve its weaknesses, capitalize on opportunities, and

protect itself against threats. For example, untapped overseas markets have presented potentially

lucrative opportunities to Subway and other restaurant chains such as McDonald’s and Kentucky

Fried Chicken. Meanwhile, Subway’s strengths include a well-established brand name and a simple

business format that can easily be adapted to other cultures. In considering the opportunities offered

by overseas markets and Subway’s strengths, it is not surprising that entering and expanding in

different countries has been a key element of Subway’s strategy in recent years. Indeed, Subway

currently has operations in nearly 100 nations.

SWOT analysis is helpful to executives, and it is used within most organizations. Important cautions

need to be offered about SWOT analysis, however. First, in laying out each of the four elements of

SWOT, internal and external factors should not be confused with each other. It is important not to

list strengths as opportunities, for example, if executives are to succeed at matching internal and

external concerns during the idea generation process. Second, opportunities should not be confused

with strategic moves designed to capitalize on these opportunities. In the case of Subway, it would be

a mistake to list “entering new countries” as an opportunity. Instead, untapped markets are the

opportunity presented to Subway, and entering those markets is a way for Subway to exploit the

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opportunity. Finally, and perhaps most important, the results of SWOT analysis should not be

overemphasized. SWOT analysis is a relatively simple tool for understanding a firm’s situation. As a

result, SWOT is best viewed as a brainstorming technique for generating creative ideas, not as a

rigorous method for selecting strategies. Thus the ideas produced by SWOT analysis offer a starting

point for executives’ efforts to craft strategies for their organization, not an ending point.

In addition to organizations, individuals can benefit from applying SWOT analysis to their personal

situation. A college student who is approaching graduation, for example, could lay out her main

strengths and weaknesses and the opportunities and threats presented by the environment. Suppose,

for instance, that this person enjoys and is good at helping others (a strength) but also has a rather

short attention span (a weakness). Meanwhile, opportunities to work at a rehabilitation center or to

pursue an advanced degree are available. Our hypothetical student might be wise to pursue a job at

the rehabilitation center (where her strength at helping others would be a powerful asset) rather than

entering graduate school (where a lot of reading is required and her short attention span could

undermine her studies).

K E Y T A K E A W A Y

x Executives using SWOT analysis compare internal strengths and weaknesses with external opportunities

and threats to generate ideas about how their firm might become more successful. Ideas that allow a firm

to leverage its strengths, steer clear of or resolve its weaknesses, capitalize on opportunities, and protect

itself against threats are particularly helpful.

E X E R C I S E S

1. What do each of the letters in SWOT represent?

2. What are your key strengths, and how might you build your own personal strategies for success around

them?

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4.6 Conclusion

This chapter explains key issues that executives face in managing resources to keep their firms

competitive. Resource-based theory argues that firms will perform better when they assemble

resources that are valuable, rare, difficult to imitate, and nonsubstitutable. When executives can

successfully bundle organizational resources into unique capabilities, the firm is more likely to enjoy

lasting success. Different forms of intellectual property—which include patents, trademarks,

copyrights, and trade secrets—may also serve as strategic resources for firms. Examining a firm’s

resources can be aided by the value chain, a tool that systematically examines primary and secondary

activities in the creation of a good or service and by a knowledge of supply chain management that

examines the value added of multiple firms working together. While resource-based theory provides

a dominant view for examining the determinants of firm success, other perspectives provide insight

for understanding specific behaviors of firms within an industry. Finally, SWOT analysis is a simple

but powerful technique for examining the interactions between factors internal and external to the

firm.

E X E R C I S E S

1. Divide your class into four or eight groups, depending on the size of the class. Each group should search

for a patent tied to a successful product, as well as a patent associated with a product that was not a

commercial hit. Were there resources tied to the successful organization that the poor performer did not

seem to attain?

2. This chapter discussed Southwest Airlines. Based on your reading of the chapter, how well has Southwest

done in bundling together the resources recommended by resource-based theory? What theoretical

perspective best explains the competitive actions of most firms in the airline industry?

3. Conduct a SWOT analysis of your college or university. Based on your analysis, what one strategic move

should your school make first, and why?

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Chapter 4

Managing Firm Resources

L E A R N I N G O B J E C T I V E S

After reading this chapter, you should be able to understand and articulate answers to the following

questions:

1. What is resource-based theory, and why is it important to organizations?

2. In what ways can intellectual property serve as a value-added resource for organizations?

3. How should executives use the value chain to maximize the performance of their organizations?

4. What is SWOT analysis and how can it help an organization?

Southwest Airlines: Let Your LUV Flow

Southwest Airlines’ acquisition of AirTran in 2011 may lead the firm into stormy skies.

Chapter 4 from Mastering Strategic Management was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested

by the work’s original creator or licensee. © 2014, The Saylor Foundation.

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Image courtesy of Stuart Seeger,http://en.wikipedia.org/wiki/File:Southwest_737_At_Burbank.jpg

In 1971, an upstart firm named Southwest Airlines opened for business by offering flights between

Houston, San Antonio, and its headquarters at Love Field in Dallas. From its initial fleet of three airplanes

and three destinations, Southwest has grown to operate hundreds of airplanes in scores of cities. Despite

competing in an industry that is infamous for bankruptcies and massive financial losses, Southwest

marked its thirty-eighth profitable year in a row in 2010.

Why has Southwest succeeded while many other airlines have failed? Historically, the firm has differed

from its competitors in a variety of important ways. Most large airlines use a “hub and spoke” system.

This type of system routes travelers through a large hub airport on their way from one city to another.

Many Delta passengers, for example, end a flight in Atlanta and then take a connecting flight to their

actual destination. The inability to travel directly between most pairs of cities adds hours to a traveler’s

itinerary and increases the chances of luggage being lost. In contrast, Southwest does not have a hub

airport; preferring instead to connect cities directly. This helps make flying on Southwest attractive to

many travelers.

Southwest has also been more efficient than its rivals. While most airlines use a variety of different

airplanes, Southwest operates only one type of jet: the Boeing 737. This means that Southwest can service

its fleet much more efficiently than can other airlines. Southwest mechanics need only the know-how to

fix one type of airplane, for example, while their counterparts with other firms need a working knowledge

of multiple planes. Southwest also gains efficiency by not offering seat assignments in advance, unlike its

competitors. This makes the boarding process move more quickly, meaning that Southwest’s jets spend

more time in the air transporting customers (and making money) and less time at the gate relative to its

rivals’ planes.

Organizational culture is the dimension along which Southwest perhaps has differed most from its rivals.

The airline industry as a whole suffers from a reputation for mediocre (or worse) service and indifferent

(sometimes even surly) employees. In contrast, Southwest enjoys strong loyalty and a sense of teamwork

among its employees.

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One tangible indicator of this culture is Southwest’s stock ticker symbol. Most companies choose stock

ticker symbols that evoke their names. Ford’s ticker symbol is F, for example, and Walmart’s symbol is

WMT. When Southwest became a publicly traded company in 1977, executives chose LUV as its ticker

symbol. LUV pays a bit of homage to the firm’s humble beginnings at Love Field. More important,

however, LUV represents the love that executives have created among employees, between employees and

the company, and between customers and the company. This “LUV affair” has long been and remains a

huge success. As recently as March 2011, for example, Southwest was ranked fourth

on Fortune magazine’s World’s Most Admired Company list.

In September 2010, Southwest surprised many observers when it announced that it was acquiring

AirTran Airways for $1.4 billion. Southwest and AirTran both emphasized low fares, but they differed in

many ways. AirTran routed most of its passengers through a hub-and-spoke system, and it relied on a

different plane than Southwest, the Boeing 717. The acquisition of AirTran thus raised important

questions about Southwest’s future. [1] How would AirTran’s hub-and-spoke system be integrated with

Southwest’s nonhub approach? Could the airlines’ respective fleets of 737s and 717s be joined without

losing efficiency? Perhaps most important, could Southwest maintain its legendary organizational culture

while taking over a sizable rival and integrating AirTran’s thousands of employees? When the acquisition

was finalized on May 2, 2011, it remained unclear whether Southwest was flying off course or whether

Southwest’s “LUV story” would continue for many years.

[1] Schlangenstein, M., & Hughes, J. 2010, September 28. Southwest risks keep-it-simple focus to spur growth.

Retrieved from http://www.washingtonpost.com/wp-dyn/content/article/2010/09/28/AR2010092801578.html

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4.1 Resource-Based Theory

L E A R N I N G O B J E C T I V E S

1. Define the four characteristics of resources that lead to sustained competitive advantage as articulated by

the resource-based theory of the firm.

2. Understand the difference between resources and capabilities.

3. Be able to explain the difference between tangible and intangible resources.

4. Know the elements of the marketing mix.

Four Characteristics of Strategic Resources

Southwest Airlines provides an illustration of resource-based theory in action. Resource-

based theory contends that the possession of strategic resources provides an organization with a golden

opportunity to develop competitive advantages over its rivals. These competitive advantages in turn

can help the organization enjoy strong profits.[1]

A strategic resource is an asset that is valuable, rare, difficult to imitate, and nonsubstitutable. [2] A

resource is valuable to the extent that it helps a firm create strategies that capitalize on opportunities and

ward off threats. Southwest Airlines’ culture fits this standard well. Most airlines struggle to be profitable,

but Southwest makes money virtually every year. One key reason is a legendary organizational culture

that inspires employees to do their very best. This culture is also rare in that strikes, layoffs, and poor

morale are common within the airline industry.

Competitors have a hard time duplicating resources that are difficult to imitate. Some difficult to imitate

resources are protected by various legal means, including trademarks, patents, and copyrights. Other

resources are hard to copy because they evolve over time and they reflect unique aspects of the firm.

Southwest’s culture arose from its very humble beginnings. The airline had so little money that at times it

had to temporarily “borrow” luggage carts from other airlines and put magnets with the Southwest logo

on top of the rivals’ logo. Southwest is a “rags to riches” story that has evolved across several decades.

Other airlines could not replicate Southwest’s culture, regardless of how hard they might try, because of

Southwest’s unusual history.

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A resource is nonsubstitutable when competitors cannot find alternative ways to gain the benefits that a

resource provides. A key benefit of Southwest’s culture is that it leads employees to treat customers well,

which in turn creates loyalty to Southwest among passengers. Executives at other airlines would love to

attract the customer loyalty that Southwest enjoys, but they have yet to find ways to inspire the kind of

customer service that the Southwest culture encourages.

Southwest Airlines’ unique culture is reflected in the customization of their aircraft over the years, such as the “Lone Star

One” design.

Image courtesy of planephotoman,http://en.wikipedia.org/wiki/File:Southwest_737_Lonestar_One.jpg.

Ideally, a firm will have a culture that embraces the four qualities. If so, these resources can provide

not only a competitive advantage but also a sustained competitive advantage—one that

will endure over time and help the firm stay successful far into the future. Resources that do not

have all four qualities can still be very useful, but they are unlikely to provide long-term advantages.

A resource that is valuable and rare but that can be imitated, for example, might provide an edge in the

short term, but competitors can overcome such an advantage eventually.

Resource-based theory also stresses the merit of an old saying: the whole is greater than the sum of its

parts. Specifically, it is also important to recognize that strategic resources can be created by taking

several strategies and resources that each could be copied and bundling them together in a way that

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cannot be copied. For example, Southwest’s culture is complemented by approaches that individually

could be copied—the airline’s emphasis on direct flights, its reliance on one type of plane, and its unique

system for passenger boarding—to create a unique business model whose performance is without peer in

the industry.

Resource-based theory can be confusing because the term resources is used in many different ways within

everyday common language. It is important to distinguish strategic resources from other resources. To

most individuals, cash is an important resource. Tangible goods such as one’s car and home are also vital

resources. When analyzing organizations, however, common resources such as cash and vehicles are not

considered to be strategic resources. Resources such as cash and vehicles are valuable, of course, but an

organization’s competitors can readily acquire them. Thus an organization cannot hope to create an

enduring competitive advantage around common resources.

On occasion, events in the environment can turn a common resource into a strategic resource. Consider,

for example, a very generic commodity: water. Humans simply cannot live without water, so water has

inherent value. Also, water cannot be imitated (at least not on a large scale), and no other substance can

substitute for the life-sustaining properties of water. Despite having three of the four properties of

strategic resources, water in the United States has remained cheap. Yet this may be changing. Major cities

in hot climates such as Las Vegas, Los Angeles, and Atlanta are confronted by dramatically shrinking

water supplies. As water becomes more and more rare, landowners in Maine stand to benefit. Maine has

been described as “the Saudi Arabia of water” because its borders contain so much drinkable water. It is

not hard to imagine a day when companies in Maine make huge profits by sending giant trucks filled with

water south and west or even by building water pipelines to service arid regions.

From Resources to Capabilities

The tangibility of a firm’s resources is an important consideration within resource-based

theory. Tangible resources are resources that can be readily seen, touched, and quantified. Physical assets

such as a firm’s property, plant, and equipment, as well as cash, are considered to be tangible resources.

In contrast, intangible resources are quite difficult to see, to touch, or to quantify. Intangible resources

include, for example, the knowledge and skills of employees, a firm’s reputation, and a firm’s culture. In

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comparing the two types of resources, intangible resources are more likely to meet the criteria for

strategic resources (i.e., valuable, rare, difficult to imitate, and nonsubstitutable) than are tangible

resources. Executives who wish to achieve long-term competitive advantages should therefore place a

premium on trying to nurture and develop their firms’ intangible resources.

Capabilities are another key concept within resource-based theory. A good and easy-to-remember way to

distinguish resources and capabilities is this: resources refer to what an organization owns, capabilities

refer to what the organization can do. Capabilities tend to arise over time as a firm takes actions that build on

its strategic resources. Southwest Airlines, for example, has developed the capability of providing excellent

customer service by building on its strong organizational culture. Capabilities are important in part because

they are how organizations capture the potential value that resources offer. Customers do not simply

send money to an organization because it owns strategic resources. Instead, capabilitiesare needed to bundle,

to manage, and otherwise to exploit resources in a manner that provides value added to customers

and creates advantages over competitors.

Some firms develop a dynamic capability. This means that a firm has a unique capability of creating new

capabilities. Said differently, a firm that enjoys a dynamic capability is skilled at continually updating its

array of capabilities to keep pace with changes in its environment. General Electric, for example, buys and

sells firms to maintain its market leadership over time, while Coca-Cola has an uncanny knack for

building new brands and products as the soft-drink market evolves. Not surprisingly, both of these firms

rank among the top thirteen among the “World’s Most Admired Companies” for 2011.

Strategy at the Movies

That Thing You Do!

How can the members of an organization reach success “doing that thing they do”? According to resource-

based theory, one possible road to riches is creating—on purpose or by accident—a unique combination of

resources. In the 1996 movie That Thing You Do!, unwittingly assembling a unique bundle of resources

leads a 1960s band called The Wonders to rise from small-town obscurity to the top of the music charts.

One resource is lead singer Jimmy Mattingly, who possesses immense musical talent. Another is guitarist

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Lenny Haise, whose fun attitude reigns in the enigmatic Mattingly. Although not a formal band member,

Mattingly’s girlfriend Faye provides emotional support to the group and even suggests the group’s name.

When the band’s usual drummer has to miss a gig due to injury, the door is opened for charismatic

drummer Guy Patterson, whose energy proves to be the final piece of the puzzle for The Wonders.

Despite Mattingly’s objections, Guy spontaneously adds an up-tempo beat to a sleepy ballad called “That

Thing You Do!” during a local talent contest. When the talent show audience goes crazy in response, it

marks the beginning of a meteoric rise for both the song and the band. Before long, The Wonders perform

on television and “That Thing You Do!” is a top-ten hit record. The band’s magic vanishes as quickly as it

appeared, however. After their bass player joins the Marines, Lenny elopes on a whim, and Jimmy’s diva

attitude runs amok, the band is finished and Guy is left to “wonder” what might have been. That Thing

You Do! illustrates that while bundling resources in a unique way can create immense success, preserving

and managing these resources over time can be very difficult.

Liv Tyler plays Faye Dolan, the love interest of drummer Guy Patterson, in That Thing You Do!

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Image courtesy of Daniel Dormann,http://en.wikipedia.org/wiki/File:LivTylerJune08.jpg.

Is Resource-Based Theory Old News?

Resource-based theory has evolved in recent years to provide a way to understand how strategic resources

and capabilities allow firms to enjoy excellent performance. But more than one wry observer has

wondered aloud, “Is resource-based theory just old wine in a new bottle?” This is a question worth

considering because the role of resources in shaping success and failure has been discussed for many

centuries.

Aesop was a Greek storyteller who lived approximately 2,500 years ago. Aesop is known in particular for

having created a series of fables—stories that appear on the surface to be simply children’s tales but that

offer deep lessons for everyone. One of Aesop’s fables focuses on an ass (donkey) and some grasshoppers.

When the ass tries to duplicate the sweet singing of the grasshoppers by copying their diet, he soon dies of

starvation. Attempting to replicate the grasshoppers’ unique singing capability proved to be a fatal

mistake. The fable illustrates a central point of resource-based theory: it is an array of resources and

capabilities that fuels enduring success, not any one resource alone.

In a far more recent example, sociologist Philip Selznick developed the concept

of distinctive competence through a series of books in the 1940s and 1950s.[3] A distinctive competence is

a set of activities that an organization performs especially well. Southwest Airlines, for example, appears

to have a distinctive competency in operations, as evidenced by how quickly it moves its flights in and out

of airports. Further, Selznick suggested that possessing a distinctive competency creates a competitive

advantage for a firm. Certainly, there is plenty of overlap between the concept of distinctive competency,

on the one hand, and capabilities, on the other.

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So is resource-based theory in fact old wine in a new bottle? Not really. Resource-based theory builds on

past ideas about resources, but it represents a big improvement on past ideas in at least two ways. First,

resource-based theory offers a complete framework for analyzing organizations, not just snippets of

valuable wisdom like Aesop and Selznick provided. Second, the ideas offered by resource-based theory

have been developed and refined through scores of research studies involving thousands of organizations.

In other words, there is solid evidence backing it up.

The Marketing Mix

Leveraging resources and capabilities to create desirable products and services is important, but

customers must still be convinced to purchase these goods and services. The marketing mix—also known

as the four Ps of marketing—provides important insights into how to make this happen. A master of the

marketing mix was circus impresario P. T. Barnum, who is famous in part for his claim that “there’s a

sucker born every minute.” The real purpose of the marketing mix is not to trick customers but rather to

provide a strong alignment among the four Ps (product, price, place, and promotion) to offer customers a

coherent and persuasive message.

A firm’s product is what it sells to customers. Southwest Airlines sells, of course, airplane flights. The

airline tries to set its flights apart from those of airlines by making flying fun. This can include, for

example, flight attendants offering preflight instructions as a rap. The price of a good or service should

provide a good match with the value offered. Throughout its history, Southwest has usually charged lower

airfares than its rivals. Place can refer to a physical purchase point as well as a distribution channel.

Southwest has generally operated in cities that are not served by many airlines and in secondary airports

in major cities. This has allowed the firm to get favorable lease rates at airports and has helped it create

customer loyalty among passengers who are thankful to have access to good air travel.

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Finally, promotion consists of the communications used to market a product, including advertising, public

relations, and other forms of direct and indirect selling. Southwest is known for its clever advertising. In a

recent television advertising campaign, for example, Southwest lampooned the baggage fees charged by

most other airlines while highlighting its more customer-friendly approach to checked luggage. Given the

consistent theme of providing a good value plus an element of fun to passengers that is developed across

the elements of the marketing mix, it is no surprise that Southwest has been so successful within a very

challenging industry.

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Few executives in history have had the marketing savvy of P. T. Barnum.

Image courtesy of The Strobridge Litho. Co., Cincinnati & New York,

http://en.wikipedia.org/wiki/File:Barnum_%26_Bailey_clowns_and_geese2.jpg.

K E Y T A K E A W A Y

x Resource-based theory suggests that resources that are valuable, rare, difficult to imitate, and

nonsubstitutable best position a firm for long-term success. These strategic resources can provide the

foundation to develop firm capabilities that can lead to superior performance over time. Capabilities are

needed to bundle, to manage, and otherwise to exploit resources in a manner that provides value added

to customers and creates advantages over competitors.

E X E R C I S E S

1. Does your favorite restaurant have the four qualities of resources that lead to success as articulated by

resource-based theory?

2. If you were hired by your college or university to market your athletic department, what element of the

marketing mix would you focus on first and why?

3. What other classic stories or fables could be applied to discuss the importance of firm resources and

superior performance?

[1] Barney, J. B. 1991. Firm resources and sustained competitive advantage. Journal of Management, 17, 99–120;

Wernerfelt, B. 1984. A resource-based view of the firm. Strategic Management Journal, 5, 171–180.

[2] Barney, J. B. 1991. Firm resources and sustained competitive advantage. Journal of Management, 17, 99–120;

Chi, T. 1994. Trading in strategic resources: Necessary conditions, transaction cost problems, and choice of

exchange structure. Strategic Management Journal, 15(4), 271–290.

[3] Selznick, P. 1957. Leadership in administration. New York: Harper; Selznick, P. 1952. The organizational weapon.

New York, NY: McGraw-Hill; Selznick, P. 1949. TVA and the grass roots. Berkeley, CA: University of California Press.

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4.2 Intellectual Property

L E A R N I N G O B J E C T I V E S

1. Define the four major types of intellectual property.

2. Be able to provide examples of each intellectual property type.

3. Understand how intellectual property can be a valuable resource for firms.

Defining Intellectual Property

The inability of competitors to imitate a strategic resource is a key to leveraging the resource to achieve

long–term competitive advantages. Companies are clever, and effective imitation is often very possible.

But resources that involve intellectual property reduce or even eliminate this risk. As a result, developing

intellectual property is important to many organizations.

Intellectual property refers to creations of the mind, such as inventions, artistic products, and symbols.

The four main types of intellectual property are patents, trademarks, copyrights, and trade secrets.

If a piece of intellectual property is also valuable, rare, and nonsubstitutable, it constitutes

a strategic resource. Even if a piece of intellectual property does not meet all four criteria for serving as a

strategic resource, it can be bundled with other resources and activities to create a resource.

A variety of formal and informal methods are available to protect a firm’s intellectual property from

imitation by rivals. Some forms of intellectual property are best protected by legal means, while defending

others depends on surrounding them in secrecy. This can be contrasted with Southwest Airlines’ well-

known culture, which rivals are free to attempt to copy if they wish. Southwest’s culture thus is not

intellectual property, although some of its complements such as Southwest’s logo and unique color

schemes are.

Patents

Patents are legal decrees that protect inventions from direct imitation for a limited period of time.

Obtaining a patent involves navigating a challenging process. To earn a patent from the US

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Patent and Trademark Office, an inventor must demonstrate than an invention is new, nonobvious, and

useful. If the owner of a patent believes that a company or person has infringed on the patent, the owner

can sue for damages. In 2011, for example, a private company named EBSCO alleged that retailer Bass Pro

Shops sold a product that violated EBSCO’s patent on a deer-hunting stand that helps prevent hunters

from falling out of trees. Rather than endure a costly legal fight, the two sides agreed to settle EBSCO’s

complaint out of court.

Patenting an invention is important because patents can fuel enormous profits. Imagine, for example, the

potential for lost profits if the Slinky had not been patented. Shipyard engineer Richard James came up

with the idea for the Slinky by accident in 1943 while he was trying to create springs for use in ship

instruments. When James accidentally tipped over one of his springs, he noticed that it moved downhill in

a captivating way. James spent his free time perfecting the Slinky and then applied for a patent in 1946.

To date, more than three hundred million Slinkys have been sold by the company that Richard James and

his wife Betty created.

Patenting inventions such as the Slinky helps ensure that the invention is protected from imitation.

Image courtesy of Roger McLassus,http://upload.wikimedia.org/wikipedia/commons/f/f3/2006-

02-04_Metal_spiral.jpg.

Trademarks

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Trademarks are phrases, pictures, names, or symbols used to identify a particular organization.

Trademarks are important because they help an organization stand out and build an identity in the

marketplace. Some trademarks are so iconic that almost all consumers recognize them, including

McDonald’s golden arches, the Nike swoosh, and Apple’s outline of an apple.

Other trademarks help rising companies carve out a unique niche for themselves. For example, French

shoe designer Christian Louboutin has trademarked the signature red sole of his designer shoes. Because

these shoes sell for many hundreds of dollars via upscale retailers such as Neiman Marcus and Saks Fifth

Avenue, competitors would love to copy their look. Thus legally protecting the distinctive red sole from

imitation helps preserve Louboutin’s profits.

Fashionistas instantly recognize the trademark red sole of Christian Louboutin’s high-end shoes.

Image courtesy of

Arroser,http://wikimediafoundation.org/wiki/File:Louboutin_altadama140.jpg.

Trademarks are important to colleges and universities. Schools earn tremendous sums of money through

royalties on T-shirts, sweatshirts, hats, backpacks, and other consumer goods sporting their names and

logos. On any given day, there are probably several students in your class wearing one or more pieces of

clothing featuring your school’s insignia; your school benefits every time items like this are sold.

Schools’ trademarks are easy to counterfeit, however, and the sales of counterfeit goods take money away

from colleges and universities. Not surprisingly, many schools fight to protect their trademarks. In

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October 2009, for example, the University of Oklahoma announced that it was teaming with law

enforcement officials to combat the sale of counterfeit goods around its campus. [1] This initiative and

similar ones at other colleges and universities are designed to ensure that schools receive their fair share

of the sales that their names and logos generate.

Figure 4.7 Trademarks

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Images courtesy of unknown author, http://en.wikipedia.org/wiki/File:Aspirine-1923.jpg (bottom

left); Wilinckx, http://en.wikipedia.org/wiki/File:Trademark-symbool.png (top left); Hult Ketchen

International Group, LLC (top right); Helix84,

http://en.wikipedia.org/wiki/File:Burrbery_check.gif

Copyrights

Copyrights provide exclusive rights to the creators of original artistic works such as books, movies, songs,

and screenplays. Sometimes copyrights are sold and licensed. In the late 1960s,

Buick thought it had an agreement in place to license the number one hit “Light My Fire” for a television

advertisement from The Doors until the band’s volatile lead singer Jim Morrison loudly protested what he

saw as mistreating a work of art. Classic rock by The Beatles has been used in television ads in recent

years. After the late pop star Michael Jackson bought the rights to the band’s music catalog, he licensed

songs to Target and other companies. Some devoted music fans consider such ads to be abominations,

perhaps proving the merit of Morrison’s protest decades ago.

He looks calm here, but the licensing of a copyrighted song for a car commercial enraged rock legend Jim Morrison.

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Image courtesy of Polfoto/Jan Persson,

http://upload.wikimedia.org/wikipedia/commons/1/15/The_Doors_in_Copenhagen_1968.jpg.

Over time, piracy has become a huge issue for the owners of copyrighted works. In China, millions of

pirated DVDs are sold each year, and music piracy is estimated to account for at least 95 percent of music

sales. This piracy deprives movie studios, record labels, and artists of millions of dollars in royalties. In

response to the damage piracy has caused, the US government has pressed its Chinese counterpart and

other national governments to better enforce copyrights.

Trade Secrets

Trade secrets refer to formulas, practices, and designs that are central to a firm’s business and that remain

unknown to competitors. Trade secrets are protected by laws on theft, but once a secret is revealed,

it cannot be a secret any longer. This leads firms to rely mainly on silence and privacy rather than the

legal system to protect trade secrets.

Some trade secrets have become legendary, perhaps because a mystique arises around the unknown. One

famous example is the blend of eleven herbs and spices used in Kentucky Fried Chicken’s original recipe

chicken. KFC protects this secret by having multiple suppliers each produce a portion of the herb and

spice blend; no one supplier knows the full recipe. The formulation of Coca-Cola is also shrouded in

mystery. In 2006, Pepsi was approached by shady individuals who were offering a chance to buy a stolen

copy of Coca-Cola’s secret recipe. Pepsi wisely refused. An FBI sting was used to bring the thieves to

justice. The soft-drink industry has other secrets too. Dr Pepper’s recipe remains unknown outside the

company. Although Coke’s formula has been the subject of greater speculation, Dr Pepper is actually the

original secret soft drink; it was created a year before Coca-Cola.

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The recipe for Dr Pepper is a secret dating back to the 1880s.

Image courtesy of anyjazz65,

http://www.flickr.com/photos/49024304@N00/4262262427/sizes/l/in/photostream.

K E Y T A K E A W A Y

x Intellectual property can serve as a strategic resource for organizations. While some sources of

intellectual property such as patents, trademarks, and copyrights can receive special legal protection,

trade secrets provide competitive advantages by simply staying hidden from competitors.

E X E R C I S E S

1. What designs for your college or university are protected by trademarks?

2. What type of intellectual property provides the most protection for firms?

3. Why would a firm protect a resource through trade secret rather than by a formal patent?

[1] Ward, C. 2009, October 8. OU works to prevent trademark infringement. The Oklahoma Daily. Retrieved

from http://www.oudaily.com/news/2009/oct/08/ou-works-prevent-trademark-infringement

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4.3 Value Chain

L E A R N I N G O B J E C T I V E S

1. Define the primary activities of the value chain.

2. Know the different support activities within the value chain.

3. Be able to apply the value chain to an organization of your choosing.

4. Understand the difference between a value chain and supply chain.

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Image courtesy of Carol M. Highsmith,

http://commons.wikimedia.org/wiki/File:Randy%27s_donuts1_edit1.jpg.

Elements of the Value Chain

When executives choose strategies, an organization’s resources and capabilities should be examined

alongside consideration of its value chain. A value chain charts the path by which products and services

are created and eventually sold to customers. [1] The term value chain reflects the fact that, as each step of

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this path is completed, the product becomes more valuable than it was at the previous step.

Within the lumber business, for example, value is added when a tree is transformed into usable

wooden boards; the boards created from a tree can be sold for more money than the price of the tree.

Adapted from Porter, M. (1985). Competitive Advantage. New York: Free Press. Exhibit is Creative Commons licensed at http://en.wikipedia.org/wiki/Image:ValueChain.PNG.”

Value chains include both primary and secondary activities. Primary activities are actions that are directly

involved in creating and distributing goods and services. Consider a simple illustrative example: doughnut

shops. Doughnut shops transform basic commodity products such as flour, sugar, butter, and grease into

delectable treats. Value is added through this process because consumers are willing to pay much more for

doughnuts than they would be willing to pay for the underlying ingredients.

There are five primary activities. Inbound logistics refers to the arrival of raw materials. Although

doughnuts are seen by most consumers as notoriously unhealthy, the Doughnut Plant in New York City

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has carved out a unique niche for itself by obtaining organic ingredients from a local farmer’s

market.Operations refers to the actual production process, while outbound logistics tracks the movement

of a finished product to customers. One of Southwest Airlines’ unique capabilities is moving passengers

more quickly than its rivals. This advantage in operations is based in part on Southwest’s reliance on one

type of airplane (which speeds maintenance) and its avoidance of advance seat assignments (which

accelerates the passenger boarding process).

Attracting potential customers and convincing them to make purchases is the domain

of marketing and sales. For example, people cannot help but notice Randy’s Donuts in Inglewood,

California, because the building has a giant doughnut on top of it. Finally, service refers to the extent to

which a firm provides assistance to their customers. Voodoo Donuts in Portland, Oregon, has developed a

clever website (voodoodoughnut.com) that helps customers understand their uniquely named products,

such as the Voodoo Doll, the Texas Challenge, the Memphis Mafia, and the Dirty Snowball.

Secondary activities are not directly involved in the evolution of a product but instead provide important

underlying support for primary activities. Firm infrastructure refers to how the firm is organized and led

by executives. The effects of this organizing and leadership can be profound. For example, Ron Joyce’s

leadership of Canadian doughnut shop chain Tim Hortons was so successful that Canadians consume

more doughnuts per person than all other countries. In terms of resource-based theory, Joyce’s leadership

was clearly a valuable and rare resource that helped his firm prosper.

Also important is human resource management, which involves the recruitment, training, and

compensation of employees. A recent research study used data from more than twelve thousand

organizations to demonstrate that the knowledge, skills, and abilities of a firm’s employees can act as a

strategic resource and strongly influence the firm’s performance. [2] Certainly, the unique level of

dedication demonstrated by employees at Southwest Airlines has contributed to that firm’s excellent

performance over several decades.

Technology refers to the use of computerization and telecommunications to support primary activities.

Although doughnut making is not a high-tech business, technology plays a variety of roles for doughnut

shops, such as allowing customers to use credit cards. Procurement is the process of negotiating for and

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purchasing raw materials. Large doughnut chains such as Dunkin’ Donuts and Krispy Kreme can gain cost

advantages over their smaller rivals by purchasing flour, sugar, and other ingredients in bulk. Meanwhile,

Southwest Airlines has gained an advantage over its rivals by using futures contracts within its

procurement process to minimize the effects of rising fuel prices.

From the Value Chain to Best Value Supply Chains

“Time is money!” warns a famous saying. This simple yet profound statement suggests that organizations

that quickly complete their work will enjoy greater profits, while slower-moving firms will suffer. The

belief that time is money has encouraged the modern emphasis on supply chain management. A

supply chain is a system of people, activities, information, and resources involved in creating a product

and moving it to the customer. A supply chain is a broader concept than a value chain; the latter refers to

activities within one firm, while the former captures the entire process of creating and distributing a

product, often across several firms.

Competition in the twenty-first century requires an approach that considers the supply chain concept in

tandem with the value-creation process within a firm: best value supply chains. These chains do not fixate

on speed or on any other single metric. Instead, relative to their peers, best value supply chains focus on

the total value added to the customer.

Creating best value supply chains requires four components. The first is

strategic supply chain management—the use of supply chains as a means to create competitive advantages

and enhance firm performance. Such an approach contradicts the popular wisdom centered on the need

to maximize speed. Instead, there is recognition that the fastest chain may not satisfy customers’ needs.

Best value supply chains strive to excel along four measures. Speed (or “cycle time”) is the time duration

from initiation to completion of the production and distribution process. Quality refers to the relative

reliability of supply chain activities. Supply chains’ efforts at managing cost involve enhancing value by

either reducing expenses or increasing customer benefits for the same cost level. Flexibility refers to a

supply chain’s responsiveness to changes in customers’ needs. Through balancing these four metrics, best

value supply chains attempt to provide the highest level of total value added.

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The value of strategic supply chain management is reflected in how firms such as Walmart have used their

supply chains as competitive weapons to gain advantages over peers. Walmart excels in terms of speed

and cost by locating all domestic stores within one day’s drive of a warehouse while owning a trucking

fleet. This creates distribution speed and economies of scale that competitors simply cannot match. When

Kmart’s executives decided in the late 1990s to compete head-to-head with Walmart on price, Walmart’s

sophisticated logistics system enabled it to easily withstand the price war. Unable to match its rival’s

speed and costs, Kmart soon plunged into bankruptcy. Walmart’s supply chains also possess strong

quality and flexibility. When Hurricane Katrina devastated the Gulf Coast in 2005, Walmart used not only

its warehouses and trucks but also its satellite technology, radio frequency identification (RFID), and

global positioning systems to quickly divert assets to affected areas. The result was that Walmart emerged

as the first responder in many towns and provided essentials such as drinking water faster than local and

federal governments could.

Meanwhile, failing to manage a supply chain effectively causes serious harm. For example, in 2003

Motorola was unable to meet demand for its new camera phones because it did not have enough lenses

available. Also, firms whose supply chains were centered in the Port of Los Angeles collectively lost more

than $2 billion a day during a 2002 workers’ strike. In terms of stock price, firms’ market value erodes by

an average of 10 percent following the announcement of a major supply chain problem.

The second component is agility, the supply chain’s relative capacity to act rapidly in response to dramatic

changes in supply and demand. [3] Agility can be achieved using buffers. Excess capacity, inventory, and

management information systems all provide buffers that better enable a best value supply chain to

service and to be more responsive to its customers. Rapid improvements and decreased costs in deploying

information systems have enabled supply chains in recent years to reduce inventory as a buffer. Much

popular thinking depicts inventory reduction as a goal in and of itself. However, this cannot occur without

corresponding increases in buffer capacity elsewhere in the chain, or performance will suffer. A best value

supply chain seeks to optimize the total costs of all buffers used. The costs of deploying each buffer differs

across industries; therefore, no solution that works for one company can be directly applied to another in

a different industry without adaptation.

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Agility in a supply chain can also be improved and achieved by colocating with the customer. This

arrangement creates an information flow that cannot be duplicated through other methods. Daily face-to-

face contact for supply chain personnel enables quicker response times to customer demands due to the

speed at which information can travel back and forth between the parties. Again, this buffer of increased

and improved information flows comes at an expense, so executives seeking to build a best value supply

chain will investigate the opportunity and determine whether this action optimizes total costs.

Adaptability refers to a willingness and capacity to reshape supply chains when necessary. Generally,

creating one supply chain for a customer is desired because this helps minimize costs. Adaptable firms

realize that this is not always a best value solution, however. For example, in the defense industry, the US

Army requires one class of weapon simulators to be repaired within eight hours, while another class of

items can be repaired and returned within one month. To service these varying requirements efficiently

and effectively, Computer Science Corporation (the firm whose supply chains maintain the equipment)

must devise adaptable supply chains. In this case, spare parts inventory is positioned in proximity to the

class of simulators requiring quick turnaround, while the less-time-sensitive devices are sent to a

centralized repair facility. This supply chain configuration allows Computer Science Corporation to satisfy

customer demands while avoiding the excess costs that would be involved in localizing all repair activities.

In situations in which the interests of one firm in the chain and the chain as a whole conflict, most

executives will choose an option that benefits their firm. This creates a need for alignment among chain

members. Alignment refers to creating consistency in the interests of all participants in a supply chain. In

many situations, this can be accomplished through carefully writing incentives into contracts.

Collaborative forecasting with suppliers and customers can also help build alignment. Taking the time to

sit together with participants in the supply chain to agree on anticipated business levels permits shared

understanding and rapid information transfers between parties. This is particularly valuable when

customer demand is uncertain, such as in the retail industry. [4]

K E Y T A K E A W A Y

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x The value chain provides a useful tool for managers to examine systematically where value may be added

to their organizations. This tool is useful in that it examines key elements in the production of a good or

service, as well as areas in which value may be added in support of those primary activities.

E X E R C I S E S

1. If you were hired as a consultant for your university, what specific element of the value chain would you

seek to improve first?

2. What local business in your town could be improved most dramatically by applying the value chain?

Would improvements of primary or support activities help to improve this firm most? Could knowledge of

strategic supply chain management add further value to this firm?

[1] Porter, M. E. 1985. Competitive advantage: Creating and sustaining superior performance. New York, NY: Free

Press.

[2] Crook, T. R., Todd, S. Y., Combs, J. G., Woehr, D. J., & Ketchen, D. J. 2011. Does human capital matter? A meta-

analysis of the relationship between human capital and firm performance. Journal of Applied Psychology, 96(3),

443–456.

[3] Lee, H. L. 2004, October. The triple-A supply chain. Harvard Business Review, 83, 102–112.

[4] This section of the chapter is adapted from Ketchen, D. J., Rebarick, W., Hult, G. T., & Meyer, D. 2008. Best

value supply chains: A key competitive weapon for the 21st century. Business Horizons, 51, 235–243.

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4.4 Beyond Resource-Based Theory: Other Views on Firm Performance

L E A R N I N G O B J E C T I V E S

1. Be able to discuss other theories about firm success and failure beyond resource-based theory.

2. Be able to apply different theories to help explain competition in different industries.

Although resource-based theory stands as perhaps the most popular explanation of why some

organizations prosper while others do not, several other theories are popular. Enactment treats

executives as the masters of their domains. Enactment contends that an organization can, at least in

part, create an environment for itself that is beneficial to the organization. This is accomplished by

putting strategies in place that reshape competitive conditions in a favorable way.

By the 1990s, Microsoft had been so successful at reshaping the software industry to its benefit that

the firm was the subject of a lengthy antitrust investigation by the federal government. More

recently, Apple has been able to reshape its environment by introducing products such as the iPhone

and the iPad that transcend the traditional boundaries between the cell phone, digital camera, music

player, and computer businesses. No airline has ever been able to enact the environment, however,

perhaps because the airline industry is so fragmented.

Environmental determinism offers a completely opposite view from enactment on why some firms

succeed and others fail. Environmental determinism views organizations much like biological

theories view animals—organizations (and animals) are very limited in their ability to adapt to the

conditions around them. Thus just as harsh environmental changes are believed to have made

dinosaurs extinct, changes in the business environment can destroy organizations regardless of how

clever and insightful executives are.

Until 1978, the federal government regulated the airline industry by dictating what routes each

airline would fly and what prices it would charge. Once these controls were removed, airlines were

subjected to a series of negative environmental trends, including recession, overcapacity in the

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industry, new entrants, fierce price competition, and fuel shortages. Perhaps not surprisingly, dozens

of airlines have been crushed by these conditions.

An old saying notes that “imitation is the sincerest form of flattery.” This flattery is the focus

of institutional theory. In particular, institutional theory centers on the extent to which firms copy one

another’s strategies. Consider, for example, fast-food hamburger restaurants. Innovations such as

dollar menus and drive-through windows tend to be introduced by one firm and then duplicated by

the others.

Airlines also seem to follow a “monkey see, monkey do” mentality. To build passenger loyalty,

American Airlines introduced a frequent flyer program called AAdvantage in 1981. After flying a

certain number of miles on American flights, AAdvantage members were rewarded with a free flight.

The idea was to make passengers less likely to shop around for the cheapest ticket. Ironically,

AAdvantage turned out to be not much of an advantage at all. Many of American’s rivals quickly

developed their own frequent-flyer programs, and today most airlines reward frequent passengers.

In recent years, ideas such as charging passengers to check their luggage and eliminating free food

on flights have been copied by one airline after another.

Transaction cost economics is a theory that centers on just one element of business activity: whether it

is cheaper for a firm to make or to buy the products that it needs. This is an important element,

however, because choosing the more efficient option can enhance a firm’s profits. Automakers such

as Ford and General Motors face a wide variety of make-or-buy decisions because so many different

parts are needed to build cars and trucks. Sometimes Ford and GM make these products, and other

times they purchase them from outside suppliers. These firms’ financial situations are improved

when these decisions are made wisely and harmed when they are made poorly.

In contrast, airlines always buy (or rent) their airplanes. Large planes are generally bought from

Boeing or Airbus, while modest-sized airliners are purchased from companies such as Brazil’s

Embraer. It would be simply too costly for an airline to pursue a backward integration strategy and

enter the airplane manufacturing business. Insights such as these are powerful enough that the

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creator of transaction cost economics, Professor Oliver Williamson, was awarded a Nobel Prize in

Economic Sciences in 2009.

Each of these theories—enactment, environmental determinism, institutional theory, and

transaction cost economics—is useful for understanding some situations and some important

business decisions. Thus executives should keep these perspectives in mind as they attempt to lead

their firms to greater levels of success. However, one important advantage that resource-based

theory offers over the alternatives is that only resource-based theory does a good job of explaining

firm performance across a wide variety of contexts. Thus resource-based theory offers the point of

view of business that has the strongest value for most executives.

K E Y T A K E A W A Y

x Although resource-based theory is the dominant perspective to predict performance in the strategic

management field, other theories exist to explain firm behavior. In some industries, explanations

provided by these theories can be very convincing.

E X E R C I S E S

1. What theory of the firm do you think best explains competition in the fast-food industry?

2. What is an example of an industry in which institutional theory seems to explain the behavior of firms?

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4.5 SWOT Analysis

L E A R N I N G O B J E C T I V E S

1. Understand what SWOT analysis is.

2. Learn how SWOT analysis can help organizations and individuals, and its limitations.

Five forces analysis examines the situation faced by the competitors in an industry. Strategic groups

analysis narrows the focus by centering on subsets of these competitors whose strategies are

similar. SWOT analysis takes an even narrower focus by centering on an individual firm. Specifically,

SWOT analysis is a tool that considers a firm’s strengths and weaknesses along with the

opportunities and threats that exist in the firm’s environment.

Executives using SWOT analysis compare these internal and external factors to generate ideas about

how their firm might become more successful. In general, it is wise to focus on ideas that allow a firm

to leverage its strengths, steer clear of or resolve its weaknesses, capitalize on opportunities, and

protect itself against threats. For example, untapped overseas markets have presented potentially

lucrative opportunities to Subway and other restaurant chains such as McDonald’s and Kentucky

Fried Chicken. Meanwhile, Subway’s strengths include a well-established brand name and a simple

business format that can easily be adapted to other cultures. In considering the opportunities offered

by overseas markets and Subway’s strengths, it is not surprising that entering and expanding in

different countries has been a key element of Subway’s strategy in recent years. Indeed, Subway

currently has operations in nearly 100 nations.

SWOT analysis is helpful to executives, and it is used within most organizations. Important cautions

need to be offered about SWOT analysis, however. First, in laying out each of the four elements of

SWOT, internal and external factors should not be confused with each other. It is important not to

list strengths as opportunities, for example, if executives are to succeed at matching internal and

external concerns during the idea generation process. Second, opportunities should not be confused

with strategic moves designed to capitalize on these opportunities. In the case of Subway, it would be

a mistake to list “entering new countries” as an opportunity. Instead, untapped markets are the

opportunity presented to Subway, and entering those markets is a way for Subway to exploit the

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opportunity. Finally, and perhaps most important, the results of SWOT analysis should not be

overemphasized. SWOT analysis is a relatively simple tool for understanding a firm’s situation. As a

result, SWOT is best viewed as a brainstorming technique for generating creative ideas, not as a

rigorous method for selecting strategies. Thus the ideas produced by SWOT analysis offer a starting

point for executives’ efforts to craft strategies for their organization, not an ending point.

In addition to organizations, individuals can benefit from applying SWOT analysis to their personal

situation. A college student who is approaching graduation, for example, could lay out her main

strengths and weaknesses and the opportunities and threats presented by the environment. Suppose,

for instance, that this person enjoys and is good at helping others (a strength) but also has a rather

short attention span (a weakness). Meanwhile, opportunities to work at a rehabilitation center or to

pursue an advanced degree are available. Our hypothetical student might be wise to pursue a job at

the rehabilitation center (where her strength at helping others would be a powerful asset) rather than

entering graduate school (where a lot of reading is required and her short attention span could

undermine her studies).

K E Y T A K E A W A Y

x Executives using SWOT analysis compare internal strengths and weaknesses with external opportunities

and threats to generate ideas about how their firm might become more successful. Ideas that allow a firm

to leverage its strengths, steer clear of or resolve its weaknesses, capitalize on opportunities, and protect

itself against threats are particularly helpful.

E X E R C I S E S

1. What do each of the letters in SWOT represent?

2. What are your key strengths, and how might you build your own personal strategies for success around

them?

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4.6 Conclusion

This chapter explains key issues that executives face in managing resources to keep their firms

competitive. Resource-based theory argues that firms will perform better when they assemble

resources that are valuable, rare, difficult to imitate, and nonsubstitutable. When executives can

successfully bundle organizational resources into unique capabilities, the firm is more likely to enjoy

lasting success. Different forms of intellectual property—which include patents, trademarks,

copyrights, and trade secrets—may also serve as strategic resources for firms. Examining a firm’s

resources can be aided by the value chain, a tool that systematically examines primary and secondary

activities in the creation of a good or service and by a knowledge of supply chain management that

examines the value added of multiple firms working together. While resource-based theory provides

a dominant view for examining the determinants of firm success, other perspectives provide insight

for understanding specific behaviors of firms within an industry. Finally, SWOT analysis is a simple

but powerful technique for examining the interactions between factors internal and external to the

firm.

E X E R C I S E S

1. Divide your class into four or eight groups, depending on the size of the class. Each group should search

for a patent tied to a successful product, as well as a patent associated with a product that was not a

commercial hit. Were there resources tied to the successful organization that the poor performer did not

seem to attain?

2. This chapter discussed Southwest Airlines. Based on your reading of the chapter, how well has Southwest

done in bundling together the resources recommended by resource-based theory? What theoretical

perspective best explains the competitive actions of most firms in the airline industry?

3. Conduct a SWOT analysis of your college or university. Based on your analysis, what one strategic move

should your school make first, and why?

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more than 3,200 Kentucky Fried Chicken stores. Overall, Subway was on a roll, and this success seemed

likely to continue.

How had Subway surpassed a global icon like McDonald’s? One key factor was Subway’s efforts to provide

and promote healthy eating options. This emphasis took hold in the late 1990s when the American public

became captivated by college student Jared Fogle. As a freshman at Indiana University in 1998, the 425

pound Fogle decided to try to lose weight by walking regularly and eating a diet consisting of Subway

subs. Amazingly, Fogle dropped 245 pounds by February of 1999.

Subway executives knew that a great story had fallen into their laps. They decided to feature Fogle in

Subway’s advertising and soon he was a well-known celebrity. In 2007, Fogle met with President Bush

about nutrition and testified before the US Congress about the need for healthier snack options in schools.

Today, Fogle is the face of Subway and one of the few celebrities that are instantly recognizable based on

his first name alone. Much like Beyoncé and Oprah, you can mention “Jared” to almost anyone in America

and that person will know exactly of whom you are speaking. Subway’s line of Fresh Fit sandwiches is

targeted at prospective Jareds who want to improve their diets.

Because American diets contain too much salt, which can cause high blood pressure, salt levels in

restaurant food are attracting increased scrutiny. Subway responded to this issue in April 2011 when its

outlets in the United States reduced the amount of salt in all its sandwiches by at least 15 percent without

any alteration in taste. The Fresh Fit line of sandwiches received a more dramatic 28 percent reduction in

salt. These changes were enacted after customers of Subway’s outlets in New Zealand and Australia

embraced similar adjustments. Although the new sandwich recipes cost slightly more than the old ones,

Subway plans to absorb these costs rather than raising their prices. [2] This may be a wise strategy for

retaining customers, who have become very price sensitive because of the ongoing uncertainty

surrounding the American economy and the high unemployment.

[1] Kingsley, P. 2011, March 9. How a sandwich franchise ousted McDonald’s. The Guardian. Retrieved

from http://www.guardian.co.uk/lifeandstyle/2011/mar/09/subway-biggest -fast-food-chain

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[2] Riley, C. 2011, April. Subway lowers salt in its sandwiches. CNNMoney. Retrieved from

http://money.cnn.com/2011/04/18/news/companies/subway_salt/index.htm

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3.1 The Relationship between an Organization and Its Environment

L E A R N I N G O B J E C T I V E S

1. Define the environment in the context of business.

2. Understand how an organization and its environment affect each other.

3. Learn the difference between the general environment and the industry.

What Is the Environment?

For any organization, the environment consists of the set of external conditions and forces that have the

potential to influence the organization. In the case of Subway, for example, the environment contains its

customers, its rivals such as McDonald’s and Kentucky Fried Chicken, social trends such as the shift in

society toward healthier eating, political entities such as the US Congress, and many additional conditions

and forces.

It is useful to break the concept of the environment down into two components.

The general environment (or macroenvironment) includes overall trends and events in society such as

social trends, technological trends, demographics, and economic conditions. The

industry (or competitive environment) consists of multiple organizations that collectively compete with

one another by providing similar goods, services, or both.

Every action that an organization takes, such as raising its prices or launching an advertising campaign,

creates some degree of changes in the world around it. Most organizations are limited to influencing their

industry. Subway’s move to cut salt in its sandwiches, for example, may lead other fast-food firms to

revisit the amount of salt contained in their products. A few organizations wield such power and influence

that they can shape some elements of the general environment. While most organizations simply react to

major technological trends, for example, the actions of firms such as Intel, Microsoft, and Apple help

create these trends. Some aspects of the general environment, such as demographics, simply must be

taken as a given by all organizations. Overall, the environment has a far greater influence on most

organizations than most organizations have on the environment.

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Why Does the Environment Matter?

Understanding the environment that surrounds an organization is important to the executives in charge

of the organizations. There are several reasons for this. First, the environment provides resources that an

organization needs in order to create goods and services. In the seventeenth century, British poet John

Donne famously noted that “no man is an island.” Similarly, it is accurate to say that no organization is

self-sufficient. As the human body must consume oxygen, food, and water, an organization needs to take

in resources such as labor, money, and raw materials from outside its boundaries. Subway, for example,

simply would cease to exist without the contributions of the franchisees that operate its stores, the

suppliers that provide food and other necessary inputs, and the customers who provide Subway with

money through purchasing its products. An organization cannot survive without the support of its

environment.

Second, the environment is a source of opportunities and threats for an organization. Opportunities are

events and trends that create chances to improve an organization’s performance level. In the late 1990s,

for example, Jared Fogle’s growing fame created an opportunity for Subway to position itself as a healthy

alternative to traditional fast-food restaurants. Threats are events and trends that may undermine an

organization’s performance. Subway faces a threat from some upstart restaurant chains. Saladworks, for

example, offers a variety of salads that contain fewer than five hundred calories. Noodles and Company

offers a variety of sandwiches, pasta dishes, and salads that contain fewer than four hundred calories.

These two firms are much smaller than Subway, but they could grow to become substantial threats to

Subway’s positioning as a healthy eatery.

Executives must also realize that virtually any environmental trend or event is likely to create

opportunities for some organizations and threats for others. This is true even in extreme cases. In

addition to horrible human death and suffering, the March 2011 earthquake and tsunami in Japan

devastated many organizations, ranging from small businesses that were simply wiped out to corporate

giants such as Toyota whose manufacturing capabilities were undermined. As odd as it may seem,

however, these tragic events also opened up significant opportunities for other organizations. The

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rebuilding of infrastructure and dwellings requires concrete, steel, and other materials. Japanese concrete

manufacturers, steelmakers, and construction companies are likely to be very busy in the years ahead.

Third, the environment shapes the various strategic decisions that executives make as they attempt to lead

their organizations to success. The environment often places important constraints on an organization’s

goals, for example. A firm that sets a goal of increasing annual sales by 50 percent might struggle to

achieve this goal during an economic recession or if several new competitors enter its business.

Environmental conditions also need to be taken into account when examining whether to start doing

business in a new country, whether to acquire another company, and whether to launch an innovative

product, to name just a few.

K E Y T A K E A W A Y

x An organization’s environment is a major consideration. The environment is the source of resources that

the organizations needs. It provides opportunities and threats, and it influences the various strategic

decisions that executives must make.

E X E R C I S E S

1. What are the three reasons that the environment matters?

2. Which of these three reasons is most important? Why?

3. Can you identify an environmental trend that no organizations can influence?

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3.2 Evaluating the General Environment

L E A R N I N G O B J E C T I V E S

1. Explain how PESTEL analysis is useful to organizations.

2. Be able to offer an example of each of the elements of the general environment.

The Elements of the General Environment: PESTEL Analysis

An organization’s environment includes factors that it can readily affect as well as factors that largely lay

beyond its influence. The latter set of factors are said to exist within the general environment. Because the

general environment often has a substantial influence on an organization’s level of success, executives

must track trends and events as they evolve and try to anticipate the implications of these trends and

events.

PESTEL analysis is one important tool that executives can rely on to organize factors within the general

environment and to identify how these factors influence industries and the firms within them. PESTEL is

an anagram, meaning it is a word that created by using parts of other words. In particular, PESTEL

reflects the names of the six segments of the general environment: (1) political, (2) economic, (3) social,

(4) technological, (5) environmental, and (6) legal. Wise executives carefully examine each of these six

segments to identify major opportunities and threats and then adjust their firms’ strategies accordingly.

P Is for “Political”

The political segment centers on the role of governments in shaping business. This segment includes

elements such as tax policies, changes in trade restrictions and tariffs, and the stability of governments.

Immigration policy is an aspect of the political segment of the general environment that offers important

implications for many different organizations. What approach to take to illegal immigration into the United

States from Mexico has been a hotly debated dilemma. Some hospital executives have noted that illegal

immigrants put a strain on the health care system because immigrants seldom can pay for medical

services and hospitals cannot by law turn them away from emergency rooms.

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Meanwhile, farmers argue that a tightening of immigration policy would be harmful because farmers rely

heavily on cheap labor provided by illegal immigrants. In particular, if farmers were forced to employ only

legal workers, this would substantially increase the cost of vegetables. Restaurant chains such as Subway

would then pay higher prices for lettuce, tomatoes, and other perishables. Subway would then have to

decide whether to absorb these costs or pass them along to customers by charging more for subs. Overall,

any changes in immigration policy will have implications for hospitals, farmers, restaurants, and many

other organizations.

E Is for “Economic”

The economic segment centers on the economic conditions within which organizations operate. It

includes elements such as interest rates, inflation rates, gross domestic product, unemployment rates,

levels of disposable income, and the general growth or decline of the economy.

The economic crisis of the late 2000s has had a tremendous negative effect on a vast array of

organizations. Rising unemployment discouraged consumers from purchasing expensive, nonessential

goods such as automobiles and television sets. Bank failures during the economic crisis led to a dramatic

tightening of credit markets. This dealt a huge blow to home builders, for example, who saw demand for

new houses plummet because mortgages were extremely difficult to obtain.

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Some businesses, however, actually prospered during the crisis. Retailers that offer deep discounts, such

as Dollar General and Walmart, enjoyed an increase in their customer base as consumers sought to find

ways to economize. Similarly, restaurants such as Subway that charge relatively low prices gained

customers, while high-end restaurants such as Ruth’s Chris Steak House worked hard to retain their

clientele.

S Is for “Social”

A generation ago, ketchup was an essential element of every American pantry and salsa was a relatively

unknown product. Today, however, food manufacturers sell more salsa than ketchup in the United States.

This change reflects the social segment of the general environment. Social factors include trends in

demographics such as population size, age, and ethnic mix, as well as cultural trends such as attitudes

toward obesity and consumer activism. The exploding popularity of salsa reflects the increasing number

of Latinos in the United States over time, as well as the growing acceptance of Latino food by other

ethnic groups.

Sometimes changes in the social segment arise from unexpected sources. Before World War II, the

American workforce was overwhelmingly male. When millions of men were sent to Europe and Asia to

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fight in the war, however, organizations had no choice but to rely heavily on female employees. At the

time, the attitudes of many executives toward women were appalling. Consider, for example, some of the

advice provided to male supervisors of female workers in the July 1943 issue of Transportation

Magazine: [1]

x Older women who have never contacted the public have a hard time adapting themselves and are

inclined to be cantankerous and fussy. It’s always well to impress upon older women the importance

of friendliness and courtesy.

x General experience indicates that “husky” girls—those who are just a little on the heavy side—are

more even tempered and efficient than their underweight sisters.

x Give every girl an adequate number of rest periods during the day. You have to make some allowances

for feminine psychology. A girl has more confidence and is more efficient if she can keep her hair

tidied, apply fresh lipstick and wash her hands several times a day.

The tremendous contributions of female workers during the war contradicted these awful stereotypes. The

main role of women who assembled airplanes, ships, and other war materials was to support the military,

of course, but their efforts also changed a lot of male executives’ minds about what females could

accomplish within organizations if provided with opportunities. Inequities in the workplace still exist

today, but modern attitudes among men toward women in the workplace are much more enlightened than

they were in 1943.

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Women’s immense contributions to the war effort during World War II helped create positive

social changes in the ensuing decades.

Image courtesy of J. Howard Miller, http://en.wikipedia.org/wiki/File:We_Can_Do_It!.jpg.

Beyond being a positive social change, the widespread acceptance of women into the workforce has

created important opportunities for certain organizations. Retailers such as Talbot’s and Dillard’s sell

business attire to women. Subway and other restaurants benefit when the scarceness of time lead dual

income families to purchase take-out meals rather than cook at home.

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T Is for “Technological”

The technological segment centers on improvements in products and services that are provided by

science. Relevant factors include, for example, changes in the rate of new product development, increases

in automation, and advancements in service industry delivery. One key feature of the modern era

is the ever-increasing pace of technological innovation. In 1965, Intel cofounder Gordon E. Moore

offered an idea that has come to be known as Moore’s law. Moore’s law suggests that the performance

of microcircuit technology roughly doubles every two years. This law has been very accurate in the

decades since it was offered.

One implication of Moore’s law is that over time electronic devices can become smaller but also more

powerful. This creates important opportunities and threats in a variety of settings. Consider, for example,

photography. Just a decade ago, digital cameras were relatively large and they produced mediocre images.

With each passing year, however, digital cameras have become smaller, lighter, and better. Today, digital

cameras are, in essence, minicomputers, and electronics firms such as Panasonic have been able to

establish strong positions in the market. Meanwhile, film photography icon Kodak has been forced to

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abandon products that had been successful for decades. In 2005, the firm announced that it would stop

producing black-and-white photographic paper. Four years later, Kodachrome color film was phased out.

Successful technologies are also being embraced at a much faster rate than in earlier generations. The

Internet reached fifty million users in only four years. In contrast, television reached the same number of

users in thirteen years while it took radio thirty-eight years. This trend creates great opportunities for

organizations that depend on emerging technologies. Writers of applications for Apple’s iPad and other

tablet devices, for example, are able to target a fast-growing population of users. At the same time,

organizations that depend on technologies that are being displaced must be aware that consumers could

abandon them at a very rapid pace. As more and more Internet users rely on Wi-Fi service, for example,

demand for cable modems may plummet.

Although the influence of the technological segment on technology-based companies such as Panasonic

and Apple is readily apparent, technological trends and events help to shape low-tech businesses too. In

2009, Subway started a service called Subway Now. This service allows customers to place their orders in

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advance using text messages and avoid standing in line at the store. By offering customers this service,

Subway is also responding to a trend in the general environment’s social segment: the need to save time in

today’s fast-paced society.

E Is for “Environmental”

The environmental segment involves the physical conditions within which organizations operate. It

includes factors such as natural disasters, pollution levels, and weather patterns. The threat of

pollution, for example, has forced municipalities to treat water supplies with chemicals. These chemicals

increase the safety of the water but detract from its taste. This has created opportunities for businesses that

provide better-tasting water. Rather than consume cheap but bad-tasting tap water, many consumers

purchase bottled water. Indeed, according to the Beverage Marketing Corporation, the amount of bottled water

consumed by the average American increased from 1.6 gallons in 1976 to 28.3 gallons in 2006.[2]

At present, roughly one-third of Americans drink bottled water regularly.

As is the case for many companies, bottled water producers not only have benefited from the general

environment but also have been threatened by it. Some estimates are that 80 percent of plastic bottles end

up in landfills. This has led some socially conscious consumers to become hostile to bottled water.

Meanwhile, water filtration systems offered by Brita and other companies are a cheaper way to obtain

clean and tasty water. Such systems also hold considerable appeal for individuals who feel the need to cut

personal expenses due to economic conditions. In sum, bottled water producers have been provided

opportunities by the environmental segment of the general environment (specifically, the spread of poor-

tasting water to combat pollution) but are faced with threats from the social segment (the social

conscience of some consumers) and the economic segment (the financial concerns of other consumers).