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LO 2-1 Explain the role of vision, mission, and values in the strategic management process.
LO 2-2 Describe and evaluate the role of strategic intent in achieving long-term goals.
LO 2-3 Distinguish between customer-oriented and product-oriented missions and identify strategic implications.
LO 2-4 Critically evaluate the relationship between mission statements and competitive advantage.
LO 2-5 Explain why anchoring a firm in ethical values is essential for long-term success.
LO 2-6 Compare and contrast strategic planning, scenario planning, and strategy as planned emergence, and discuss strategic implications.
LEARNING OBJECTIVES After studying this chapter, you should be able to:
2C H A P T E R
The Strategic Management Process
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31
After reading the chapter, you will find more about this case, with related questions, on page 47.
CHAPTERCASE 2
Teach For America: Inspiring Future Leaders
T EACH FOR AMERICA is a nonprofit orga- nization that recruits college graduates and professionals to teach for two years in socially and eco- nomically disadvan-
taged communities in the United States. The idea behind Teach For America was developed by then 21-year-old Wendy Kopp as her senior thesis at Princeton. Kopp was convinced young people today are searching for meaning in their lives by making a positive contribution to society.
The genius of Kopp’s idea was to turn on its head the social perception of teaching—to make
what appeared to be an unattractive, low-status job into a high-prestige professional opportunity. Kopp established a mission for the organization she had in mind: to eliminate educational inequal- ity by enlisting our nation’s most promising future leaders in the effort. Her underlying assumption was that significant numbers of young people have a desire to take on meaningful responsibility in order to have a positive impact on the lives of
others. To be chosen for TFA is a badge of honor. In 2010, TFA received some 46,000 appli- cations for only about 4,500 positions across the country (paying the same as all other first-year teachers, ranging from $30,000 to $51,500 a year). This translates to a mere 12 percent acceptance rate, comparable to being accepted to study at Harvard (a little
less than 10 percent), Stanford (12 percent), or MIT (14 percent).1
▲ PERSUADING highly qualified teachers to take up jobs in inner-city Detroit or Los Angeles and some rural areas in West Virginia or the Mississippi Delta region has been an elusive goal for many decades. How did an undergraduate student accomplish what the Department of Education, state and local school boards, and the national Parent- Teacher Association could not accomplish, despite trying for decades and spending bil- lions of dollars in the process? First, Kopp established a clear mission that appealed to a large number of young people. Second, she made the hiring process highly selective and turned down many who might easily qualify for teaching jobs. Making TFA highly selective changed the social perception of teaching in underprivileged areas. Suddenly, it was an honor (and great résumé builder) to be chosen for TFA. In Chapter 2, we move from thinking about why strategy is important to considerations of how firms and other organizations define their vision, mission, and values and then translate them into strate- gic intent and plans.
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32 PART 1 | Strategy Analysis
VISION, MISSION, AND VALUES In this chapter, we study the strategic management process, which describes the method by which managers conceive of and implement a strategy that can lead to a sustainable competitive advantage. The strategic management process follows the analyze-formulate- implement (AFI) strategy framework introduced in Chapter 1.
Discovering a firm’s vision and mission and defining its values are the first steps in the strategic management process. For new organizations, like TFA, the founders usually begin with a driving vision that they must further shape into statements about what they want to accomplish and how they will do so. For existing firms, this step is about fine-tuning their vision and mission as well as reaffirming their values. To begin the strategic management process, managers ask the following questions:
■ What do we want to accomplish ultimately? What is our vision? ■ What are we about? What is our mission? ■ How do we accomplish our goals? What are our values?
To answer questions about vision, mission, and values, managers need to begin with the end in mind. Think of building a house. The future owner must communicate her vision to the architect, who draws up a blueprint of the home. The process is iterated a couple of times until all the homeowner’s ideas have been translated into the blueprint. Only then does the build- ing of the house begin. The same holds for strategic success. Thus, success is created twice: first by creating, through strategic analysis, a clear mental model of what the firm wants to accomplish, and second by formulating and implementing a strategy that makes this vision a reality. An effectively communicated strategy should guide everyone in the organization.
Visionary Organizations A vision is a statement about what an organization ultimately wants to accomplish. It captures the company’s aspiration. An effective vision pervades the organization with a sense of winning and motivates employees at all levels to aim for the target, while leaving room for individual and team contributions. Employees in visionary companies tend to feel like part of something bigger than themselves. An inspiring vision helps employees find meaning in their work. Monetary rewards form only one part of what motivates people. An effective vision allows employees to reap intrinsic rewards by making the world a better place through their work activities.2 This in turn is highly motivating for employees, lead- ing to higher organizational performance.3 Basing actions on its vision, a firm will build the necessary resources and capabilities through continuous organizational learning, including learning from failure, to translate into reality what begins as a “stretch goal.”
Vision statements should be forward-looking and inspiring to provide meaning for employees when pursuing the organization’s ultimate goals. Take Teach For America (TFA), whose vision is that “one day, all children in this nation will have the opportunity to attain an excellent education.” It effectively and clearly communicates what TFA ulti- mately wants to accomplish; it provides an inspiring target to aim for. Exhibit 2.1 contains TFA’s vision, mission, and values.
It’s not surprising that vision statements can be inspiring and motivating in the not- for-profit sector. Many people would find meaning in wanting to help children attain an excellent education (TFA) or wanting to be “always there,” touching the lives of people in need (American Red Cross). But what about for-profit firms? The main difference is the metric by which we assess successful performance. TFA measures its organizational success by the effects its teachers have on student performance. In the for-profit sector,
>> LO 2-1 Explain the role of vision, mission, and values in the strategic management process.
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companies typically measure financial performance. Chapter 5 explores the various per- spectives by which to measure performance and capture the multifaceted nature of com- petitive advantage.
Forming Strategic Intent Strategic intent is the staking out of a desired leadership position in the long term that far exceeds a company’s current resources and capabilities.4 Challenging goals that stretch an individual or an organization can lead to higher performance.5 Many Japanese competi- tors set ambitious stretch goals of global leadership (reflected in their missions) and made them a reality: Canon “beat Xerox,” Komatsu “encircled Caterpillar,” and Honda became “a second Ford.” (Today the latter may not sound like a desirable goal, but it was in the 1970s when Honda began its quest for global leadership.) Currently, Chinese companies such as Baidu, BYD, and Lenovo aspire to world leadership. These companies set their ambitious goals when they were only a fraction the size of the companies they were chasing. Indeed, they were so small that initially the market leaders did not even recognize them as potential competitors; many had never competed outside their domestic markets. Yet all made global leadership their mission, with goals so ambitious they exceeded the firms’ existing resources and capabilities by a large margin. Effective use of stretch goals created at all levels of the organization an obsession with winning that has been sustained over several decades.6
Strategic intent allows managers to operationalize their vision because it is not only forward-looking and future-oriented but also helps in identifying steps that need to be taken to make a vision become reality. Creating and executing strategy to achieve a strategic fit with today’s environment is like driving a car while looking only in the rearview mirror. The focus should be how to create competitive advantage tomorrow. In fact, rather than
>> LO 2-2 Describe and evaluate the role of strategic intent in achieving long-term goals.
EXHIBIT 2.1
Teach For America: Vision, Mission, and Values
Vision One day, all children in this nation will have the opportunity to attain an excellent education.
Mission Eliminate educational inequality by enlisting our nation’s most promising future leaders in the effort.
Values Relentless Pursuit of Results: We assume personal responsibility for achieving ambitious, measurable results in pursuit of our vision. We persevere in the face of challenges, seek resources to ensure the best outcomes, and work toward our goals with a sense of purpose and urgency.
Sense of Possibility: We approach our work with optimism, think boldly, and greet new ideas openly.
Disciplined Thought: We think critically and strategically in search of the best answers and approaches, reflect on past experiences and data to draw lessons for the future, and make choices that are deeply rooted in our mission.
Respect and Humility: We value all who are engaged in this challenging work. We keep in mind the limitations of our own experiences and actively seek out diverse perspectives.
Integrity: We ensure alignment between our actions and our beliefs, engage in honest self-scrutiny, and do what is right for the broader good.
Source: www.teachforamerica.org
strategic management process Method by which managers conceive of and implement a strategy that can lead to a sustainable competitive advantage.
vision A statement about what an organization ultimately wants to accomplish; it captures the company’s aspiration.
strategic intent The staking out of a desired leadership position that far exceeds a company’s current resources and capabilities.
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attempting a strategic fit between a firm’s resources and capabilities and today’s external industry environ- ment, strategic intent creates an extreme misfit by set- ting ambitious goals and then challenging managers and employees across all organizational levels to close the gap by building the resources and capabilities nec- essary to accomplish these goals. It does matter where you are today, but more importantly, it matters where you want to go tomorrow. Strategy Highlight 2.1 illustrates the powerful effects that strategic intent can have. It also demonstrates, however, what can happen when a firm accomplishes its strategic intent but then fails to set new stretch goals.
Mission Statements Building on the vision, organizations establish a mission, which describes what an organization actually does—the products and services it plans to provide and the markets in which it will compete. Effective mission statements work through metaphors that help employees make appropriate decisions when faced with day-to-day situations, which sometimes can be novel or stressful.
Let’s look at Disney’s mission, which is to make people happy.8 Disney’s translation of this mission to employees who work at a Disney theme park is that they are not mere employees, they are cast members. Similarly, visitors to the park are not customers, they are audience members, there to enjoy a show. This metaphor has important implications for employees’ behavior, beginning before they are even hired. Rather than interviewing for a job, for instance, they audition for a role, like cast members in a play. Thus any time a Disney park employee is in uniform, he or she is actually “on stage,” delivering a performance. Even street sweepers (often college students on break) are part of the cast. Because they have the closest con- tact with guests, they are trained in great detail and are evaluated not only on personal neatness and job performance, but also on their knowledge about rides, parades, and restaurant and restroom locations. Like cast members in the theater, Disney employees pull off daily “the show must go on” performances that allow them to fulfill Disney’s mission to make people happy.
CUSTOMER-ORIENTED MISSIONS. Disney’s mission is aimed at its customers. A customer-oriented mis- sion defines a business in terms of providing solutions to customer needs. Companies that have customer- oriented missions (“We are in the business of providing
STRATEGY HIGHLIGHT 2.1
Winning Through Strategic Intent In the aftermath of World War II, an obscure Japanese technology startup firm named Tokyo Tsushin Kogyo K.K. began its life by repairing shortwave radios and inventing an electric rice cooker. Its lead scientist, Masaru Ibuka, thought a portable radio based on tran- sistors might be possible. He conferred with scientists from Bell Labs, the U.S. firm that invented the transis- tor. They told him a transistor radio was not techno- logically feasible. Undeterred, Ibuka asked Japan’s Ministry of International Trade and Industry (MITI) to obtain a license for the transistor from Bell Labs so he could build the portable radio. MITI turned him down, believing the fledgling firm could not commercialize such cutting-edge technology given its lack of track record and resources.
Ibuka persisted, however. Finally, in 1953 he secured permission to license the transistor. He then created an explicit strategic intent for his firm, focus- ing on being first to market with an innovative portable transistor radio of the highest possible quality.
Ibuka faced long odds: Radios then were enclosed in large pieces of decorative furniture; at that time, “Made in Japan” was synonymous with poor quality; and by the mid-1950s, Bell Labs scientists had already won two Nobel Prizes for physics. The idea that a Japanese startup working out of makeshift quarters in Tokyo could beat Bell Labs in commercializing the transistor radio seemed preposterous. But Ibuka inspired his hungry engineers to pursue their strategic intent. In 1957, they introduced the world’s first pocket transistor radio, the TR-55. It sold 1.5 million units and catapulted the firm to leadership in consumer elec- tronics. In 1958, the company changed its Japanese name to Sony Corporation.
Over time, Sony continually honed its core compe- tency in miniaturization, which allowed it to create the Walkman, Discman, and MP3 players. More recently, though, Sony has fallen on hard times. Blamed on a silo mentality, it was not able to capitalize on its MP3 player or its electronic readers and has lost market share to Apple.7
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solutions to professional communication needs”) tend to be more flexible when adapting to changing environments. In contrast, companies that have product-oriented missions (“We are in the typewriter business”) tend to be less flexible and thus more likely to fail. Companies with customer-oriented missions are more likely to maintain strategic flexibility over time.
It is important not to confuse customer-oriented missions with listening to your cus- tomer. They are not the same thing! Customer-oriented missions identify a critical need but leave open the means of how to meet this need. It is critical not to define how a customer need will be met—because the future is unknowable, and innovation might provide new ways to meet needs that we have not thought of today. Even if customer needs are constant, the organization’s mission should be flexible because the means of meeting those needs can change over time.
Think about the customer need for personal mobility. About 100 years ago, this need was met by horse-drawn buggies, horseback riding, or by trains for long distances. But Henry Ford had a different idea; he is famous for saying, “If I had listened to my customers, I would have built a better horse and buggy.”9 In contrast, Henry Ford’s original mission was to make the automobile accessible to every American. He succeeded, and the automo- bile changed how mobility was achieved. Fast-forward to today: Ford Motor Company’s mission is to provide personal mobility for people around the world. It does not even men- tion the automobile. Clearly, Ford is focusing on the consumer need for personal mobility while leaving open the door for how exactly it will fulfill this need. Today, it’s with tradi- tional cars and trucks propelled by gas-powered internal combustion engines, with some hybrid electric vehicles in its lineup. In the near future, however, Ford is likely to provide vehicles powered by alternative energy sources like electric power or hydrogen, among other new energy sources. In the far-reaching future, perhaps Ford will even get into the business of individual flying devices. If so, its mission would still be relevant and compel its managers to engage in this future market; a product-oriented mission would not allow for such a degree of strategic flexibility.
PRODUCT-ORIENTED MISSIONS. Product-oriented missions define a business in terms of a good or service provided rather than in terms of the customer need to be met. As noted, customer-oriented missions provide greater strategic flexibility than product-oriented mis- sions. The strategic decisions of U.S. railroad companies show the potential shortcomings of defining a business based on a product-oriented mission. Railroads are in the business of moving goods and people from point A to point B by rail. When they started, their short- distance competition was the horse or horse-drawn carriage; there was little long-distance competition (such as ship canals and good roads) to cover the U.S. from coast to coast. Not surprisingly, the early U.S. railroad companies saw their mission as being in the railroad business, clearly a product-based definition. Due to their monopoly, especially in long- distance travel, they initially made big money. Indeed, many early fortunes were made in the railroad business. Leland Stanford, who made his fortune as president of the Central and Southern Pacific Companies, later founded and endowed Stanford University with a gift that equals approximately $500 million today (about half his total wealth).
The railroad companies’ monopoly did not last. Technological innovations changed the transportation business dramatically. After the introduction of the automobile and the com- mercial jet, consumers had a wider range of choices, such as trucks and airplanes, to meet their long-distance transportation needs. Rail companies were slow to respond, however, and did not re-define their business in terms of services provided to the consumer. Had they seen themselves as serving the full range of transportation needs of people across America (a customer-oriented mission), they might have become successful forerunners of modern logistics companies like FedEx or UPS. Recently, the railroad companies seem to
mission Description of what an organization actually does—what its business is—and why it does it; can be customer-oriented or product-oriented.
>> LO 2-3 Distinguish between customer-oriented and product-oriented missions and identify strategic implications.
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be learning some lessons: CSX Railroad is now re-defining itself as a green-transportation alternative with an ad campaign claiming it can move one ton of freight 423 miles on one gallon of fuel. Yet, its mission remains product-oriented: to be the safest, most progressive North American railroad.
Although a product-centric view can potentially limit a company’s strategic options, it can also help a company to refocus. Shell Canada provides an example of how deal- ing with the question, “What are we about?” led to a refocusing of the company and as a consequence, superior performance.10 Although the majority owner was Royal Dutch Shell, Shell Canada was more or less independent; its shares were traded on the Toronto Stock Exchange. In the 1980s, Shell Canada was a widely diversified business with interests not only in oil and gas exploration and distribution, but also in activities rang- ing from chemicals to forestry. Although it had performance comparable to the industry average, Shell Canada’s executives began to focus on the firm’s mission during this time. After some soul searching, the company’s managers realized that Shell Canada was at its heart a low-cost producer of oil and gas. With this new clarity of mission, Shell Canada began to sell off its peripheral businesses to refocus on oil and gas. In 2007, Royal Dutch Shell bought, at a cost of $8.7 billion, the remaining 22 percent of shares that it didn’t already own. By refocusing on oil and gas, Shell Canada was able to apply its core competency to increase the value created for customers, and to do this at a low cost. Its mission statement helped Shell Canada focus on the activities that yielded the greatest returns.
MISSION STATEMENTS AND COMPETITIVE ADVANTAGE. So, we must ask, do mis- sion statements help firms gain and sustain competitive advantage? The results are mixed: Having a clearly defined mission helps in some cases, actually hurts in others, and some- times has no effect on performance, as the following examples demonstrate. (Note that although visions and missions are not entirely synonymous as discussed earlier, many man- agers use the terms interchangeably.)
Positive Association Between Mission Statements and Competitive Advantage. Research ers have found that visionary companies—those whose stated missions clearly capture the com- pany’s aspirations—such as 3M, Hewlett-Packard (HP), Merck, Nordstrom, and Procter & Gamble (P&G)—financially outperformed their peers by a wide margin.11 An investment of $1 in the general stock market fund in 1926 (equivalent to the Dow Jones Industrial Index today) by 1990 would have grown to $415. Yet, an investment of $1 in a hypothetical stock fund composed of companies researchers identified as visionary would have grown over the same time period to $6,356. This implies visionary companies outperformed average com- panies by more than 1,400 percent. For visionary companies, superior financial performance is a byproduct of living up to their missions. Merck’s mission, for example, is to preserve and improve human life.12 The words of founder George W. Merck still form the basis of Merck’s corporate philosophy today: “We try to never forget that medicine is for the people. It is not for profits. The profits follow, and if we have remembered that, they have never failed to appear. The better we have remembered it, the larger they have been.”13
Negative Association Between Mission Statements and Competitive Advantage. Sometimes a firm’s mission statement can hurt its financial performance. Better World Books (BWB), for example, is an online bookstore that focuses on economic, social, and environmental goals. (As we will discuss in Chapter 5, the combination of economic, social, and environmental con- cerns that can lead to a sustainable strategy is called the triple-bottom line.) BWB’s stated mis- sion is to collect and sell books online to fund literacy initiatives worldwide.14 Initially, BWB’s founders—recent graduates from Notre Dame University—decided to donate 50 percent of
GAINING & SUSTAINING COMPETITIVE ADVANTAGE
>> LO 2-4 Critically evaluate the relationship between mission statements and competitive advantage.
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the firm’s revenues to various non- governmental organizations (NGOs) that promote literacy. After a while, the founders realized that the way they operationalized their mission was threatening the future viability of the venture. They decided they had to reduce their donation commitment from 50 percent of revenues to between 7 and 10 percent. BWB provides an example in which a firm’s mission and competitive advantage can be negatively associated, especially when competitive advantage is understood more narrowly as superior financial performance. (We will explore more about the triple-bottom line concept and competitive advantage in Chapter 5.)
No Association Between Mission State ments and Competitive Advantage. In some cases, mission statements have little or no effect on performance and competitive advantage. Intel Corporation, one of the world’s leading silicon innovators, provides an illustrative case. Intel’s early mission was to be the pre-eminent building-block supplier of the PC industry. Intel designed the first commercial microprocessor chip in 1971 and set the standard for microprocessors in 1978; during the personal computer (PC) revolution in the 1980s, microprocessors became Intel’s main line of business. Intel’s customers were OEMs (original equipment manufacturers) that produce consumer end-products, such as computer manufacturers HP, IBM, Dell, and Compaq.
In the Internet age, however, the standalone PC as the end-product has become less important. Customers now want to stream video and share photos online. Such activi- ties consume a tremendous amount of computing power. To reflect this shift, Intel in 1999 changed its mission to focus on being the preeminent building-block supplier to the Internet economy. Later, in 2008, Intel fully made the shift to a customer-oriented mission: Its current mission statement is to delight our customers, employees, and share- holders by relentlessly delivering the platform and technology advancements that become essential to the way we work and live. Part of this shift can be explained by a hugely successful “Intel Inside” advertising campaign in the 1990s that made Intel a household name worldwide.
Intel accomplished superior firm performance over decades through continuous adap- tation to changing market realities. Yet its formal mission statement lagged the firm’s transformations. Intel regularly changed its mission statement after it had accomplished successful transformation.15 In such a case, mission statements and firm performance are clearly not related to one another.
Taken together, what empirical research shows is that sometimes mission statements and firm performance are associated with one another. What is less clear, however, is whether these relationships are causal—whether an effective mission statement leads to competitive advantage. The upshot is that an effective mission statement can lay the foun- dation upon which to craft a strategy that creates economic value, leading to competitive advantage. (You will learn more about economic value creation in Chapter 5, when study- ing competitive advantage in more depth.)
To be effective, firms do need to back up their mission statements with strategic commit- ments, actions that are costly, long-term oriented, and difficult to reverse. Boeing’s decision to develop the 787 Dreamliner, for example, is a multibillion-dollar, multidecade strate- gic commitment.16 Without such commitments, the firm’s mission statement is just words. Eventually, both employees and external stakeholders may perceive the hollowness of the mis- sion statement and realize that, however good the statement, it will not result in competitive
strategic commitments Actions that are costly, long-term oriented, and difficult to reverse.
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advantage without strategic actions to back it up. Moreover, if the vision-mission-values are not in coherence with each other, then a firm’s strategy will necessarily be compromised. Effective alignment is key when translating a mission statement into strategic actions.
Living the Values Organizational values are the ethical standards and norms that govern the behavior of individuals within a firm or organization (and within society). Strong ethical values, in turn, have two important functions: First, they form a solid foundation on which a firm can build its mission and long-term success. They also are the guardrails put in place so the company can stay on track when pursuing its mission in its quest for competitive advantage.
Employees tend to follow values practiced by strategic leaders. Without commitment and involvement from top managers, any statement of values remains a meaningless public relations exercise. Employees find out very quickly by observing executives’ day-to-day decisions whether they are guided by an unchangeable and ethical core that is reflected in the company’s mission, or whether they merely pay lip service to its values. True values must be lived with integrity, especially by the top management team. Unethical behavior by top managers is like a virus that spreads quickly throughout the entire organization.
The values espoused by a company provide answers to the question, How do we accom- plish our goals? They help individuals make choices that are both ethical and effective in advancing the company’s goals. For instance, John Hammergren, Chairman and CEO of McKesson, a $110 billion health care company, sees a direct relationship between the company’s performance and its values: “At McKesson, we are guided by a common set of values: integrity, customer-first, accountability, respect, and excellence. We call them our ICARE Shared Principles, and they serve as the framework for who we are and how we interact with each other and our customers. These ethics and behavior models are the cornerstones on which we have built our business and our culture.”17 The key issue is the extent to which these ICARE Shared Principles are used in everyday business situations. Do they really guide employee behavior, or are they just a part of public relations?
At McKesson, employees incorporate the ICARE Shared Values into their daily activi- ties. For example, the employees of McKesson’s U.S. Pharmaceutical Distribution center worked long overtime hours after the tragedies of hurricanes Katrina and Rita when assist- ing the Federal Emergency Management Agency (FEMA). One functional-level manager, credits this experience for helping workers to gain a deeper appreciation of the impact their work has on the well-being of thousands of people in need. It also helped families under- stand the importance of what McKesson’s employees do for a living.18
Google’s values also guided some tough strategic decisions.19 In 2006, Google entered the Chinese market with a customized search engine (google.cn) to service some 400 million new online customers. This was a self-censored version of its regular search engine (google. com) to comply with China’s restrictions on free speech. At that time, Google felt the good that access to its searches, albeit censored, would bring to the Chinese people would out- weigh its discomfort with censorship. By 2010, Google felt it could no longer continue to provide self-censored searches; it alleged that the firm was the target of sophisticated hacker attacks, accessing some of its users’ Gmail accounts, including those of Chinese human rights activists. Google decided it would no longer censor its searches in China, thus risking having its search engine shut down by the Chinese government. Google’s strong values— such as “democracy on the web works,” “you can make money without doing evil,” and “the need for information crosses all borders”—guided this decision, which had potentially far- reaching strategic consequences.20 Google now runs its China website on a server in Hong Kong. After several months of negotiations, the Chinese government renewed Google’s
>> LO 2-5 Explain why anchoring a firm in ethical values is essential for long- term success.
organizational values Ethical standards and norms that govern the behavior of individuals within a firm or organization.
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license to do business in China.21 Yet, Google’s exit from mainland China further strength- ened Baidu’s lead with an almost 75 percent share of one of the fastest-growing online markets worldwide.22 Baidu is a domestic Chinese company founded by Robin Li.
In contrast, when a firm does not have strong organizational values to inform the behav- ior of its top managers or other employees, major stakeholder value destruction is likely to follow. In the following examples, managers acted unethically and illegally:
■ Using a giant Ponzi scheme, Bernie Madoff, with the help of several employees in his investment securities firm, defrauded high-profile institutional and individual investors such as bank HSBC, Banco Santander, Human Rights First, the International Olympic Committee, film producer and CEO of DreamWorks Animation Jeffrey Katzenberg, actor Kevin Bacon, and Nobel Peace Prize winner Elie Wiesel. Madoff’s fraud totaled an estimated $65 billion. He was sentenced to 150 years imprisonment and fines of more than $170 billion.23
■ At one time, it was hailed as one of “America’s Best Companies to Work For,” with more than 22,000 employees and over $100 billion in annual revenues. Enron’s mission statement touted integrity as one of its key values. Yet, Enron’s top-level executives were systematically defrauding investors, employees, customers, and other stakehold- ers. Enron’s collapse in 2001 remains one of the biggest bankruptcies in U.S. history. Former Enron president Jeffrey Skilling was convicted of fraud and insider trading and is currently serving a 25-year term in a federal prison. The Enron shockwaves also sank Arthur Andersen, formerly the largest of the big five accounting firms, because of its role as an accomplice in the accounting scandal. Some 30,000 Andersen accountants and consultants lost their livelihoods.24
STRATEGIZING FOR COMPETITIVE ADVANTAGE: HOW IS STRATEGY “MADE”? Since we now have a basic understanding of what strategy is and why it is important (dis- cussed in Chapter 1) as well as vision, mission, and values, we can think about how strategy is made. How does strategy come about? When strategizing for competitive advantage, managers rely on three different approaches that can complement one another: (1) strategic planning, (2) scenario planning, and (3) strategy as planned emergence.
Strategic Planning With the tremendous growth of corporations in the prosperous decades following World War II, corporate executives began to use strategic (or long-range) planning to manage firms more effectively and enhance their performance. Top executives and scholars alike understood strategic planning to be a rational, top-down process through which they could program future success.25 One scholar wrote during this time: “Long-range planning is one of the really new techniques left to management that can give a company a major competitive advantage.”26
With strategic planning, all strategic intelligence and decision-making responsibilities are concentrated in the office of the CEO who, much like a military general, leads the company strategically through competitive battles. Five-year plans, revisited regularly, predict future sales based on anticipated future growth. Strategic planners provide careful analyses of internal and external data and apply it to all quantifiable areas: prices, costs, margins, market demand, head count, and production runs. Top executives tie the alloca- tion of the annual corporate budget to the strategic plan and monitor ongoing performance accordingly. In this process, the formulation of strategy is separate from implementation, and thinking about strategy is separate from doing it.
>> LO 2-6 Compare and contrast strategic planning, scenario planning, and strategy as planned emergence, and discuss strategic implications.
strategic (long- range) planning A rational, top-down process through which management can program future success; typically concentrates strategic intelligence and decision-making responsibilities in the office of the CEO.
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Top-down strategic planning works reasonably well when the environment does not change very much, because it rests on the assumption that we can predict the future from the past. One major shortcoming of the strategic planning approach is that we cannot know the future. Unforeseen events can make even the most sci- entifically developed and best formalized plans obso- lete. Moreover, as seen in Chapter 1, the rate of change appears to be increasing, which further undercuts the effectiveness of strategic planning.
Scenario Planning Given that the only constant is change, should man- agers even use strategic planning? The answer is yes, but they also need to expect that unpredictable events will happen. We can compare strategic planning in a fast-changing environment to the operations of a fire department.27 There is no way to know where and when the next emergency will arise, nor can we know its magnitude beforehand. Nonetheless, fire chiefs put contingency plans in place to address a wide range of emergencies along different dimensions. In the same way, scenario planning asks the “what if” questions. It is a strategy-planning activity in which managers envi- sion different scenarios to anticipate plausible futures. As General (and later President) Eisenhower wisely said, “In preparing for battle, I have always found that plans are useless, but planning is indispensable.”28
In scenario planning, managers envision different what-if scenarios: New laws might restrict carbon emis- sions or expand employee health care. Demographic shifts may alter the ethnic diversity of a nation, while changing tastes or economic conditions will affect consumer behavior. How would those changes affect a firm and how should it respond? Typical scenario plan- ning addresses both optimistic and pessimistic futures. For instance, strategy executives at UPS recently iden-
tified six issues as critical to shaping its future competitive scenarios: (1) the price of oil; (2) climate change; (3) trade barriers (such as “buy American” or “buy Chinese” clauses in new laws around the world); (4) the emerging BRIC (Brazil, Russia, India, and China) economies; (5) political instability; and (6) online commerce worldwide.29 Managers then formulated strategies they can activate and implement should one of the envisioned sce- narios play a more significant role. Strategy Highlight 2.2 shows how the energy company Shell has used scenario planning to significantly improve its performance.
Exhibit 2.2 shows how to use the AFI strategy framework for scenario planning, to create strategic plans that are more flexible, and thus more effective, than the more static strategic planning approach.
In the analysis stage, managers brainstorm to identify possible future scenarios. Input from several different hierarchies within the organization and from different functional areas such as R&D, manufacturing, and marketing and sales is critical. UPS executives
scenario planning Strategy-planning activity in which managers envision different what-if scenarios to anticipate plausible futures.
STRATEGY HIGHLIGHT 2.2
Shell’s Future Scenarios Shell predicts that in 2025 most of our energy will con- tinue to be generated from fossil fuels but 20 percent will come from alternative energy sources like wind, solar, and hydro power. Shell managers thus focus more on fossil fuels in their scenario analysis than on renewable technologies.
Given Shell’s past success in using scenario plan- ning, one ought to pay attention to its predictions. Shell can claim a number of accurate predictions to its credit. In the 1960s, with the price of a barrel of crude oil around $10 (compared to a record high of close to $150 in the summer of 2008), managers at Shell began to formulate strategic plans for a future with a strong OPEC (the cartel of oil-exporting countries) and an accompanying drastic rise in oil prices. When the price of crude oil suddenly surged to over $80 a bar- rel in the late 1970s, Shell was well-positioned to take advantage of this new situation; other oil companies were scrambling to adjust. Shell activated one of its alternative strategic plans that detailed how to obtain crude oil from North Sea drilling, to which the firm had already secured the rights.
In the early 1980s, Shell made strategic prepara- tions to take advantage of another apparently far- fetched scenario when it speculated that communism might fail, bringing down the powerful Soviet Union and ending Soviet artificial restrictions on the supply of natural gas. As a consequence of these strategies, Shell moved from eighth place to become the second- largest oil company in the world.30
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48 Managing Stratregy in The Global Marketplace
CHAPTER 2 | The Strategic Management Process 41
considered how they would compete if the price of a barrel of oil was $35, or $125, or even $200. Managers may also attach probabilities (highly likely vs. unlikely, or 85 per- cent likely vs. 2 percent likely) to different future states.
Managers often overlook pessimistic future scenarios. For example, many were caught off-guard by the recent economic downturn. Managers should consider negative scenar- ios more carefully, for example, how to obtain liquidity when credit and equity markets are tight. This was a serious problem during the 2008–2009 world financial crisis. An exporter like Boeing or Harley-Davidson would want to analyze the impact of shifts in exchange rates on sales and production costs—what if the euro depreciated to $1 per euro, or the Chinese yuan depreciated rather than appreciated?
In the formulation stage, management teams develop different strategic plans to address possible future scenarios. This kind of what-if exercise forces managers to consider contingency plans in the formulation stage, before events occur. Each plan relies on the entire set of analytical tools (which will be introduced in upcoming chapters) to capture the firm’s internal and external environments and to answer several key questions:
■ What resources and capabilities do we need to compete successfully in each future scenario?
■ Which strategic initiatives should we put in place to respond to each? ■ How can we shape our expected future environment?
Identify Multiple Future Scenarios
Execute Dominant Strategic Plan
Develop Strategic Plans to Address Future Scenarios
Create Strategic Options
Through Developing Implementation of Alternative Plan(s)
ANALYSIS FORMULATION
IMPLEMENTATION
Activate New Plan
If Necessary Di
sc ard
Do mi
na nt
Pla n i
f N ec
es sa
ry
Monitoring
Perform ance
Fe
ed ba
ck L
oo p
EXHIBIT 2.2
Scenario Planning in the AFI Strategy Framework
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42 PART 1 | Strategy Analysis
By formulating responses to the scenario analysis stage, managers achieve strategic flexibility by building a portfolio of future options. They continue integrating additional information over time, which in turn influences future decisions. Finally, they transform the most viable options into full-fledged strategic plans to be activated when needed.
In the implementation stage, managers activate the dominant strategic plan, the option they think most closely matches reality. If reality changes, managers can quickly retrieve and implement any of the alternate plans developed in the formulation stage. The firm’s perfor- mance in the marketplace provides feedback to the managers concerning the viability of the dominant strategic plan. If the performance feedback is positive, managers continue to pursue the dominant strategic plan, while fine-tuning it in the process. If the performance feedback is negative, managers consider whether modifying the dominant strategic option will enhance firm performance or whether they are better off activating one of the alternative strategic plans.
To conduct successful scenario planning, managers need current information. The network-equipment giant Cisco Systems has invested huge sums in technology to generate just this kind of data.31 Cisco’s senior executives can track daily customer order data from its sales teams around the globe with up-to-the-minute accuracy. Walmart’s CEO Mike Duke indicates that he too is using real-time sales data tracking, enabling top executives to monitor daily sales of each of the over 8,500 Walmart stores worldwide in real time.32 With these real-time data systems, managers can identify emerging trends in each region and market segment long before they materialize in financial data. This in turn allows them to fine-tune their functional strategy with unprecedented accuracy and speed.
The circular nature of the scenario-planning model in Exhibit 2.2 highlights the continu- ous interaction between analysis, formulation, and implementation. Through this interac- tive process, managers can adjust and modify their actions as new realities emerge. The interdependence among analysis, formulation, and implementation also enhances organi- zational learning and flexibility.
“DON’T SEPARATE STRATEGIC ANALYSIS FROM STRATEGIC ACTION!” Critics of strategic planning and scenario planning, most notably Henry Mintzberg of McGill University, argue that strategic planning is not the same as strategic thinking.33 In fact, Mintzberg suggests the strategic planning process often is too regimented and confining and does not allow for strategic thinking. Managers doing strategic planning may fall prey to an illusion of control—the hard numbers in a strategic plan can convey a false sense of security. To be successful, say these critics, a strategy should be based on an inspiring mission, and not on hard data alone. They advise that managers should focus on all types of information sources, including “soft” sources that can generate new insights, such as personal experience or the experience of front-line employees. The important work, say the critics of strategic planning, is to synthesize all available input into an overall strategic mission, which should then guide the firm’s strategy.
Indeed, some companies choose not to articulate a corporate or business strategy. Rather, they focus on consistency in strategic actions across all levels of the organization.34 For example, Nucor Corporation had 2010 sales of $16 billion and employed 22,500 people (fewer than 100 of them in its corporate headquarters), making it the largest steel maker in the United States.35 Nucor has been profitable for several decades and has never laid off an employee for lack of work. Its employees are among the highest paid in the industry (two-thirds of their compensation is performance-related), and it has the lowest labor cost per ton of steel produced. Yet Nucor has no written strategic plan, no written mission state- ment, and no written goals and objectives. It does, however, have a strong organizational culture based on peer control combined with a set of clear operational rules supporting its functional-level strategy.36
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50 Managing Stratregy in The Global Marketplace
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How can a company like Nucor be so successful without an overarching strategic plan? Because lack of a written strategic plan does not indicate lack of a strategy. We can deduce a firm’s strategy from the pattern of its actions.37 Indeed, everything Nucor’s managers and employees do across all levels of the organization indicate its strategy of cost leadership (providing an acceptable standard of product quality or value to the cus- tomer at the lowest cost to produce it). The absence of an explicitly formulated plan may give Nucor flexibility to more quickly react to changes in the marketplace. In addition, it may make Nucor’s strategy less transparent and its future strategic moves less obvi- ous to competitors. All this contributes to protecting and sustaining Nucor’s competitive advantage.
Strategy as Planned Emergence: Top-Down and Bottom-Up We now come to the third approach to strategizing for competitive advantage. In contrast to the two rational planning approaches just discussed, another view considers less formal and less stylized approaches to the development of strategy.
A strategic initiative is any activity a firm pursues to explore and develop new prod- ucts and processes, new markets, or new ventures. Strategic initiatives can come from anywhere. They could be the result of top-down planning by executives, and they also can emerge through a bottom-up process. Strategic initiatives can emerge from deep within a firm through autonomous actions by lower-level employees, from random events, and maybe even luck.38 Consider the following examples, in which the impulse for strategic initiatives emerged from the bottom up.
■ Google’s Vice President Marissa Mayer reports that 50 percent of the firm’s new prod- ucts come from the 20 percent rule, which allows all employees to spend one day a week (20 percent of the workweek) on ideas of their own choosing. Examples of innovations that resulted from the 20 percent rule include Gmail, Google News, and Orkut.39
■ A mid-level engineer at General Electric in 2001 proposed buying Enron Wind, a division that was up for sale as part of Enron’s bankruptcy proceedings. CEO Jack Welch’s response was that GE wouldn’t touch anything with the name Enron on it, given its large-scale accounting fraud. When the mid-level engineer kept insisting, after being rejected several times, GE’s leadership relented and bought Enron Wind for $200 million. It turned out to be a huge success, with revenues over $6 billion in 2009, and it opened up other significant opportunities for GE in the alternative-energy industry such as its ecomagination initiative. GE’s shift from a product-oriented com- pany (“We bring good things to life”) to a more consumer-oriented one (“Imagination at work”) was part of the leadership change from Jack Welch to Jeffrey Immelt, who approved the investment in Enron Wind.40
A firm’s actual strategy, therefore, is often a combination of its top-down strategic intentions (which typically are expressed in written strategic plans) and bottom-up emergent strategy.41 An emergent strategy describes any unplanned strategic initiative undertaken by mid-level
dominant strategic plan The strategic option that managers think most closely matches reality at a given point in time.
strategic initiative Any activity a firm pursues to explore and develop new products and processes, new markets, or new ventures.
emergent strategy Any unplanned strategic initiative undertaken by mid-level employees of their own volition.
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44 PART 1 | Strategy Analysis
employees of their own volition.42 If successful, emer- gent strategies have the potential to influence and shape a firm’s strategy. Strategy Highlight 2.3 provides further evidence for the notion that successful emergent strate- gies are sometimes the result of serendipity combined with the tenacity of lower-level employees.
MINTZBERG’S PLANNING FRAMEWORK. To reflect the reality that strategy can be planned or can emerge from the bottom up, Mintzberg developed a more integrative and complete framework for s trategy- making, shown in Exhibit 2.3.
According to this more holistic model, the strategy process may begin with a top-down strategic plan. Based on external and internal analyses, top-level executives design an intended strategy—the outcome of a rational and structured, top-down strategic plan. This is the first important step in strategy-making. However, in today’s complex and uncertain world, unpredicted events can have huge effects. Very few people predicted, for example, that easy credit would lead to a housing bubble. The bursting of that bubble in 2008 rendered obsolete the best-laid strategic plans of financial, mortgage and insurance companies like Bank of America, Citigroup, Fannie Mae, Freddy Mac, and AIG. Indeed, most of these venerable institutions and many other firms would have faced bankruptcy were it not for a government bailout of $10 trillion.44
Unpredicted changes don’t have to be cataclysmic, however, to be disruptive. Apple’s hugely popular iPod and iPhone upset the strategic plans of a number of companies including Nokia, Sony, and RIM (the maker of the BlackBerry), forcing them to respond. Apple is trying to repeat this feat with its iPad, which could lead to industry convergence in computing, telecommunications, and media.45 When unexpected events have dramatic strategic implications, part (or all) of a firm’s strategic plan becomes an unrealized strategy and falls by the wayside.
Sometimes new ideas for strategic initiatives pop up in unusual ways. In these instances, astute man- agers combine serendipity and bottom-up emergent strategy into a successfully realized strategy. An unexpected event at the largest rail carrier in the world, Japan Railways, led to diversification from railroads into bottled water.46 This may sound far- fetched, but here is how it happened: Japan Railways was constructing a new bullet train through the moun- tains north of Tokyo, requiring many tunnels. In one
STRATEGY HIGHLIGHT 2.3
Starbucks’s CEO: ”It’s Not What We Do!” Diana, a Starbucks store manager in southern California, received several requests a day for an iced beverage offered by a local competitor. After she received more than 30 requests one day, she tried the beverage herself. Thinking it might be a good idea for Starbucks to offer a similar iced beverage, she requested that headquarters consider adding it to the product lineup. Diana had an internal champion in Howard Behar, then one of Starbucks’s top execu- tives. Mr. Behar presented this strategic initiative to the Starbucks executive committee on which he sat, but it was voted down in a 7:1 vote. Starbucks’s CEO Howard Schultz commented, “We do coffee, we don’t do iced drinks.”
Diana, however, was undeterred. She started experimenting with a blender to re-create this specific drink. Satisfied with her results, she began to offer the drink in her store. When Howard Behar visited Diana’s store, he was shocked to see this new drink on the menu—all Starbucks stores were supposed to offer only company-approved drinks. But Diana told him the new drink was selling well.
Howard Behar flew Diana’s team (and her blender) to Starbucks headquarters in Seattle, to serve this new drink to the executive committee. They liked the drink, but still said no. Then Behar pulled out the sales num- bers that Diana had carefully kept. The drink was sell- ing like crazy: 40 drinks a day the first week, 50 drinks a day the next week, and then 70 drinks in the third week after introduction. They had never seen such growth numbers. These results persuaded the executive team to give reluctant approval to introduce the drink in all Starbucks stores. You’ve probably by now guessed the drink—Starbucks’s Frappuccino. Frappuccino is now a billion-dollar business for Starbucks, and at one point brought in more than 20 percent of Starbucks’s total revenues (which were $11 billion in 2010).43
As the Starbucks example shows, companies can benefit from an attitude of “expect the unexpected, and react to it strategically”! Strategy can be planned, but sometimes important strategic initiatives simply emerge from the bottom up.
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52 Managing Stratregy in The Global Marketplace
CHAPTER 2 | The Strategic Management Process 45
of the mountains, persistent flooding caused huge problems. Engineers responded by drawing up complex plans to drain the water. Meanwhile, workers inside the tunnel were making good use of the water—they were drinking it. A maintenance worker suggested the water should not be pumped away but rather bottled and sold as premium drinking water because it tasted so fresh. Its source was snow pack, purified and filtered in the slow percolation process through the mountain’s geological layers and enhanced on the way with healthy amounts of calcium, potassium, and magnesium. Eventually, Japan Railways set up vending machines on 1,000 railroad platforms in and around Tokyo, and home delivery of water, juices, and coffee followed. The employee’s proposal had turned an expensive engineering problem into a multimillion-dollar business. Because Japan Railways was willing to define its business as broader than just being in railroads, it was able to capture the emergent strategy and diversify into drinking water.
Bottom-up strategies can also emerge as a consequence of the firm’s resource alloca- tion process (RAP).47 The core argument linking the RAP and strategy is that the way a firm allocates its resources can be critical in shaping its realized strategy.48 Intel Corp.’s famous rule to “maximize margin-per-wafer-start” illustrates this concept.49 Intel was founded in 1968 to produce DRAM (dynamic random-access memory) chips. From the start, producing these chips was the firm’s top-down strategic plan, and initially it worked well. However, in the 1980s, Japanese competitors brought better-quality chips to the market at lower cost, threatening Intel’s position and strategic plan. Intel was able, how- ever, to pursue a strategic transformation due to the way it set up its RAP. In a sense, Intel was using functional-level strategies to drive business and corporate strategies. In particular, during this time Intel had only a few “fabs” (fabrication plants to produce silicon-based products). It would have taken several years and billions of dollars to build additional fabs.
intended strategy The outcome of a rational and structured top-down strategic plan.
unrealized strategy Part or all of a firm’s strategic plan that falls by the wayside due to unexpected events.
realized strategy Combination of intended and emergent strategy.
Bottom-up Emergent Strategy • Autonomus Actions
• Serendipity • Resource Allocation Process
• Real Options
Realized Strategy
Unrealized Strategy
• Unpredictable Events
Intended Strategy
• Top-down Strategic Plan
EXHIBIT 2.3
Realized Strategy Is a Combination of Top-down Intended Strategy and Bottom-up Emergent Strategy Source: Adapted from H. Mintzberg and A. McHugh (1985), “Strategy formation in an adhocracy,” Administrative Science Quarterly 30: 162.
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46 PART 1 | Strategy Analysis
Since Intel’s production capacity was constrained, it had implemented the decision rule to “maximize margin-per-wafer-start.” Each time functional managers initiated a new pro- duction run, they were to consider the profit margins for DRAM and for semiconductors (the “brains” of personal computers), and then to produce whichever product delivered the higher margin. Following this simple rule, front-line managers shifted Intel’s production capacity away from the low-margin DRAM business to the higher-margin semiconductor business. The firm’s focus on semiconductors thus emerged from the bottom up, based on resource allocation and without top-management planning. Indeed, by the time top- management finally approved the de facto strategic switch, the company’s market share in DRAM had dwindled to less than 3 percent.50
Taken together, the Japan Railways and Intel examples demonstrate that a firm’s realized strategy is frequently a combination of top-down strategic intent and bottom-up emergent strategies, as Exhibit 2.3 shows. Strategy-making has thus been called by some planned emergence, in which organizational structure and systems allow bottom-up strategic initia- tives to emerge and be evaluated and coordinated by top management.51
A word of caution is in order: Not all emergent strategies are successful. As the story of Microsoft’s Keywords in Chapter 1 shows, promising strategic initiatives can emerge from deep within the company, but top managers must have a system in place that allows them to judge whether to support those initiatives and allow them to influ- ence and shape the firm’s overall strategy. Although Microsoft missed the opportunity to lead in online search and advertising, it has a history of adapting successfully to quickly evolving environments. Mid-level Microsoft employees envisioned and devel- oped both Internet Explorer (the leading web browser with more than two-thirds market share) and the Xbox videogame system to address threats posed by Netscape and Sony’s PlayStation.
Implications for the Strategist What approach can managers take to ensure that potentially high-impact strategic initia- tives receive due consideration? When new ideas emerge, managers can go beyond stan- dard evaluation metrics like net present value (NPV) and apply a real options perspective.52 Both NPV and real options are tools taught in corporate finance. They provide critical information when a firm is making strategic decisions.
Though widely used, the net present value calculation is often inappropriate to assess the potential of highly uncertain strategic initiatives: It applies a high discount rate on the net present value of future cash flows, to reflect the high risk of these initiatives. At the same time, it ignores the potentially huge upside of such strategic initiatives. Applying net present value calculations, therefore, frequently leads to a premature death of strate- gic initiatives such as the Keywords project within Microsoft. Since there was no viable business model for it, shutting it down—based on an NPV calculation—was a rational decision.
In contrast, applying a real-options perspective to strategic decision making would break down a large investment decision into a set of smaller decisions that are staged sequentially over time. This approach allows the firm to obtain additional information in planned stages. At each stage, the firm evaluates a real option, which is the right, but not the obligation, to make a business decision. (Real options are sometimes called strategic options, to differ- entiate them from financial options.) Unlike the final “go or no-go” decision that an NPV calculation requires, applying a real-options framework allows managers to break down a big decision into smaller, stepped decisions based on a sequence of option payments over time. The idea is to keep the firm’s alternatives open so that more information can reveal
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CHAPTER 2 | The Strategic Management Process 47
itself. Basically, managers are keeping open the possibility of changing the scope or t iming of projects and other strategic initiatives, or even abandoning them altogether, as new infor- mation emerges.
Some cost is always involved in a real-options approach, but it’s often less cost than a full-bore investment in a project that will not pan out. This approach reduces the uncer- tainty that surrounds the value of a bottom-up strategic initiative. Moreover, it prevents prematurely closing down a strategic initiative that is of high potential, but whose potential is revealed only at a later date. For example, rather than shutting down the Keywords ini- tiative, Microsoft could have invested some money in it, to see if a business opportunity would arise.
A profitable business model in online search was demonstrated by Yahoo and later by Google. Microsoft’s CEO Ballmer now attempts to apply a real-options perspective to emerging strategic initiatives: “The biggest mistakes I claim I’ve been involved with is where I was impatient—because we didn’t have a business yet in something, we should have stayed patient. If we’d kept consistent with some of the ideas, we might have been in paid search. We are letting more flowers bloom.”53 Basically, the idea is not to shut down strategic experiments prematurely to foreclose future options. This approach requires not only application of a real-options perspective, but also recognition of strategy as planned emergence.
Here, we conclude our discussion of the strategic management process, which marks the end of the “getting started” portion of the AFI framework. The next chapter moves us into the analysis part of the framework—where we begin by studying the important topics of external and internal analysis, followed by consideration of how competitive advantage can be measured.
I N FEBRUARY 2011, Teach For America (TFA) celebrated its 20th anniversary. In those 20 years, it has grown into a $212 million organization that attracted 12 percent of all Ivy League seniors in its
2010 application pool.54 Studies show that TFA teach- ers have a stronger positive effect on high-school stu- dents’ test scores than regular certified teachers—and that the performance difference was especially pro- nounced in math and science.55
A recent publication by TFA notes that teacher effectiveness is improved when teachers have course objectives that are “student-achievement based, mea- sureable, and rigorous.” Such course objectives are, in effect, mission statements. According to TFA, a poorly worded objective might be “The teacher will present
a lesson on ordering fractions with different denominators.” An improved objective would be “The student will be able to order fractions with different denominators.”56
1. What role (if any) do you think TFA’s vision statement may have had in the success of the organization?
2. How has TFA succeeded in recruiting so many Ivy League students into teaching in the lowest- performing regions of the United States?
3. Do you think TFA could have been just as suc- cessful if it had been structured as a traditional for-profit company?
CHAPTERCASE 2 Consider This . . .
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48 PART 1 | Strategy Analysis
This chapter explained the role of vision, mission, and values in the strategic management process and gave an overview of how strategy is made, as summarized by the following learning objectives and related take- away concepts.
LO 2-1 Explain the role of vision, mission, and values in the strategic management process. >> A vision captures an organization’s aspirations.
An effective vision inspires members of the organization.
>> A mission statement describes what an organiza- tion actually does—what its business is—and why it does it.
>> Values define the ethical standards and norms that should govern the behavior of individuals within the firm.
>> Success is created twice: first by creating a men- tal model of what the firm wants to accomplish, and second by formulating and implementing a strategy that makes this vision a reality.
LO 2-2 Describe and evaluate the role of strategic intent in achieving long-term goals. >> Strategic intent finds its expression in stretch
goals that exceed the firms’ existing resources and capabilities by a large margin.
>> Effective use of strategic intent creates at all levels of the organization an obsession with win- ning that can help companies ascend to global leadership.
LO 2-3 Distinguish between customer- oriented and product-oriented missions and identify strategic implications. >> Customer-oriented missions define business in
terms of providing solutions to customer needs. >> Product-oriented missions define a business in
terms of a good or service provided.
>> Customer-oriented missions provide managers with more strategic flexibility than product- oriented missions.
LO 2-4 Critically evaluate the relationship between mission statements and competitive advantage. >> Mission statements can help a firm achieve
superior performance, but mission statements by themselves do not directly affect firm performance.
>> To be effective, mission statements need to be backed up by hard-to-reverse commitments.
LO 2-5 Explain why anchoring a firm in ethical values is essential for long-term success. >> Ethical core values enable employees to make
day-to-day decisions that are guided by correct principles.
>> Strong ethical values are the guardrails that help keep the company on track when pursuing its mission and its quest for competitive advantage.
LO 2-6 Compare and contrast strategic planning, scenario planning, and strategy as planned emergence, and discuss strategic implications. >> Top-down strategic (long-range) planning works
reasonably well when the environment does not change much.
>> In scenario planning, managers envision different what-if scenarios and prepare contingency plans that can be called upon when necessary.
>> Strategic initiatives can be the result of top-down planning by executives or can emerge through a bottom-up process from deep within the organization.
>> A firm’s realized strategy is generally a com- bination of its top-down intended strategy and bottom-up emergent strategy, resulting in planned emergence.
Take-Away Concepts
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Dominant strategic plan (p. 42)
Emergent strategy (p. 43)
Intended strategy (p. 44)
Mission (p. 34)
Organizational values (p. 38)
Realized strategy (p. 44)
Scenario planning (p. 40)
Strategic commitments (p. 37)
Strategic initiative (p. 43)
Strategic intent (p. 33)
Strategic management process (p. 32)
Strategic (long-range) planning (p. 39)
Unrealized strategy (p. 44)
Vision (p. 32)
Key Terms
1. What characteristics does an effective mission statement have?
2. What is strategic intent? How can it be useful for goal set- ting and achievement?
3. In what situations is top-down planning likely to be superior
to bottom-up emergent strat- egy development?
4. Based on discussions in this chapter, which railroad firm seems more prepared to use planned emergence, CSX or Japan Railways? Why?
5. Discuss how scenario plan- ning can be used to prepare a firm for future events. Can some industries benefit more than others from this type of process?
Discussion Questions
1. As noted in the “Living the Values” section, over 50,000 people lost their jobs and many their life savings in the Enron debacle. Some of those at Enron who were closely involved in the scan- dal, such as Jeffrey Skilling (CEO) and Andrew Fastow (CFO), are serving significant prison sentences. What responsibility do lower-level executives bear for not reporting such question- able practices by the firm’s leadership? Why do you think only one employee initially came for- ward to report the irregularities and help with the investigation?
2. In the circumstance when an emergent idea arises that appears to mid-level managers to have strong merits yet conflicts with an existing intended strategy from the top managers, how would you suggest the organization decide which idea to push forward into a plan of action and thus con- tribute to a realized strategy? What would you do in this situation if you were (a) a mid-level man- ager or (b) an executive?
Ethical/Social Issues
SMALL GROUP EXERCISE 1 The National Aeronautics and Space Administration (NASA) is leading the public space program in the United States. Its vision is “to advance U.S. scien- tific, security, and eco nomic interests through a robust space exploration program.” Its mission is “to pioneer the future in space exploration, scientific discovery, and aeronautics research.” To accomplish its vision
and mission, in 2006 NASA specified a set of six stra- tegic goals to be accomplished over the next 10 years:
1. Fly the Shuttle as safely as possible until its retirement, not later than 2010.
2. Complete the International Space Station in a man- ner consistent with NASA’s International Partner commitments and the needs of human exploration.
Small Group Exercises
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50 PART 1 | Strategy Analysis
3. Develop a balanced overall program of science, exploration, and aeronautics consistent with the redirection of the human spaceflight program to focus on exploration.
4. Bring a new Crew Exploration Vehicle into ser- vice as soon as possible after Shuttle retirement.
5. Encourage the pursuit of appropriate partnerships with the emerging commer cial space sector.
6. Establish a lunar return program having the maxi- mum possible utility for later missions to Mars and other destinations.
NASA’s quest to accomplish these goals is grounded in its values of (1) safety, (2) teamwork, (3) integrity, and (4) mission success. In NASA’s strate- gic plan, each of the six strategic goals is broken down into a number of detailed sub-goals. These goals are accompanied by a detailed list of expected outcomes that enables NASA to measure its progress and report its accomplishments back to its stakeholders. Michael Griffin, the NASA Administrator when the strategic plan was devised, said that “By pursuing the goals of the Vision for Space Exploration, NASA will contrib- ute to American leadership in defining and pursuing the frontiers that expand humankind’s reach, and we will help keep our nation at the cutting edge of sci- ence and technology. We also will work with other nations to do those things that fulfill the dreams of humankind, dreams that always have included the desire to see what lies beyond the known world.”57
1. How is NASA including its mission and values in its strategic planning to make its goals become reality?
2. Do you think a 10-year planning horizon is realis- tic? Why or why not?
3. Do you agree with Michael Griffin’s interpreta- tion of the expected results of pursuing NASA’s mission? Discuss why or why not.
SMALL GROUP EXERCISE 2 In many situations, promising ideas emerge from the lower levels of an organization only to be discarded before they can be tested and implemented. It was only due to extraordinary tenacity (and indeed disregard) for the policy of selling only corporate-approved drinks that permitted the Frappuccino to “bloom” within Starbucks (see Strategy Highlight 2.3). Some scholars have suggested that companies should set aside up to 2 percent of their budgets for any manager with budget control to be able to invest in new ideas within the com- pany.58 (Someone with a $100,000 annual budget to manage would be able to invest $2,000 in cash or staff time toward such a project. Multiple managers could go in together for somewhat larger funds or time amounts.)
Through such a process, the organization can gener- ate a network of “angel investors.” Small funds or staff time can be invested into a variety of projects. Approval mechanisms would be easier for these small “seed stock” ideas, to give them a chance to develop before going for bigger funding at the top levels of the organization.
What would be some problems that would need to be addressed to introduce this “angel network” idea into a firm? Use a firm someone in your group has worked for or knows well to discuss possible issues of widely distributing small funding level approvals across the firm.
MODULE 2: MISSION, GOALS, AND THE STRATEGIC MANAGEMENT PROCESS
1. Search for a mission statement for the firm. Not all organizations publish such a statement, so alternatively you can look for enduring prin- ciples and values upon which the firm seems to be anchored. This information is often available at the firm’s website (though it may take some searching) or is contained in its annual reports. You may also interview a manager of the firm or contact “investor relations.”
2. Identify the major goals of the company.
3. Does the firm seem to have any longer-term chal- lenging or stretch goals that would serve as its strategic intent?
4. Trace any changes in strategy that you can iden- tify over time. Try to determine whether the stra- tegic changes of your selected firm are a result of intended strategies, emergent strategies, or some combination of both.
Strategy Term Project
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myStrategy HOW MUCH ARE YOUR VALUES WORTH TO YOU?
H ow much are you willing to pay for the job you want? This may sound like a strange question, since your employer will pay you to work, but think again. Consider how much you value a specific type of work, or how much you would want to work for a specific organiza- tion because of its values.
A recent study shows scientists who want to continue engaging in research will accept some $14,000 less in annual salary to work at an organization that permits them to publish their findings in academic journals, implying that some scien- tists will “pay to be scientists.” This finding appears to hold in the general business world, too. In a recent survey, 97 per- cent of Stanford MBA students indicated they would forgo some 14 percent of their expected salary, or about $11,480 a year, to work for a company that matches their own values with concern for stakeholders and sustainability. According
to Monster.com, an online career service, about 92 percent of all undergraduates want to work for a “green” company. These diverse examples demonstrate that people put a real dollar amount on pursuing careers in sync with their values.
On the other hand, certain high-powered jobs such as management consulting or investment banking pay very well, but their high salaries come with strings attached. Professionals in these jobs work very long hours, including weekends, and often take little or no vacation time. These workers “pay for pay” in that they are often unable to form stable relationships, have little or no leisure time, and some- times even sacrifice their health. People “pay for”—make certain sacrifices for—what they value, because strategic decisions require important trade-offs.59
1. What values are (were) most important to you in your career choice?
2. How much less salary would (did) you accept to find employment with a company that is in line with your values?
1. This ChapterCase is based on the following sources: Frankl, V. E. (1984), Man’s Search for Meaning (New York: Washington Square Press); Kopp, W. (2001), One Day, All Children…: The Unlikely Triumph of Teach For America and What I Learned Along the Way (Cambridge, MA: Perseus Book Group); Xu, Z., J. Hannaway, and C. Taylor (2008), “Making a difference? The effect of Teach For America on student performance in high school,” Urban Institute, March 27; and data from the U.S. Census Bureau, www. hernandezcollegeconsulting.com/ ivy-league-admission-statistics-2009/.
2. Frankl, V. E. (1984), Man’s Search for Meaning.
3. Xu, Z., J. Hannaway, and C. Taylor (2008), “Making a difference? The effect of Teach For America on student perfor- mance in high school.”
4. This section is based on: Hamel, G., and C. K. Prahalad (1989), “Strategic intent,” Harvard Business Review (May–June): 64–65; and Hamel, G., and
C. K. Prahalad (1994), Competing for the Future (Boston, MA: Harvard Business School Press).
5. Locke, E. A., and G. P. Latham (1990), A Theory of Goal Setting and Task Performance (Englewood Cliffs, NJ: Prentice Hall).
6. Hamel, G., and C. K. Prahalad (1989), “Strategic intent,” Harvard Business Review; and Hamel, G., and C. K. Prahalad (1994), Competing for the Future.
7. This Strategy Highlight is based on: Heath, C., and D. Heath (2007), Made to Stick. Why Some Ideas Survive and Others Die (New York, NY: Random House), pp. 93–95; and www.sony.net/ SonyInfo/CorporateInfo/History/history. html.
8. The Disney and Subway discussion is based on: Heath, C., and D. Heath (2007), Made to Stick, pp. 60–61.
9. “The three habits…of highly irritat- ing management gurus,” The Economist, October 22, 2009.
10. Author’s interviews with Blaine Lawlor, former staff analyst at Shell Canada, and now a strategic manage- ment professor at the University of West Florida, November 6–7, 2009.
11. Collins, J. C., and J. I. Porras (1994), Built to Last: Successful Habits of Visionary Companies (New York: Harper Collins). Collins and Porras define visionary companies as follows: “Visionary companies are premier institutions—the crown jewels—in their industries, widely admired by their peers and having a long track record of mak- ing a significant impact on the world around them” (p. 1).
12. www.merck.com.
13. George W. Merck, address to the Medical College of Virginia, Richmond, VA (December 1, 1950), quoted in Collins, J. C., and J. I. Porras (1994), Built to Last, p. 48.
14. Rothaermel, F. T., K. Grigoriou, and V. Eberhardt (2013), “Better World Books: Social Entrepreneurship and
Endnotes
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52 PART 1 | Strategy Analysis
the Triple Bottom Line,” case study, in Rothaermel, F. T., Strategic Management (Burr Ridge, IL: McGraw-Hill).
15. Burgelman, R. A., and A. S. Grove (1996), “Strategic dissonance,” California Management Review 38: 8–28; and Grove, A. S. (1996), Only the Paranoid Survive: How to Exploit the Crisis Points that Challenge Every Company (New York: Currency Doubleday).
16. Dixit, A., and B. Nalebuff (1991), Thinking Strategically: The Competitive Edge in Business, Politics, and Everyday Life (New York: Norton); and Brandenburger, A. M., and B. J. Nalebuff (1996), Co-opetition (New York: Currency Doubleday).
17. www.mckesson.com.
18. Ibid.
19. The original statement about Google’s new approach to China is at http://googleblog.blogspot.com/2010/01/ new-approach-to-china.html. Other sources: “Google threat jolts China web users,” The Wall Street Journal, January 13, 2010; and “Flowers for a funeral,” The Economist, January 14, 2010.
20. Google’s values are at www.google. com/corporate/tenthings.html.
21. “China renews Google’s license,” The Wall Street Journal, July 11, 2010.
22. “How Baidu won China,” Bloomberg BusinessWeek, November 11, 2010.
23. “Q&A on Madoff case,” The Wall Street Journal, March 12, 2009.
24. “Watch out! If your mission state- ment is a joke, Enron may be the punch- line,” Entrepreneur Magazine, May 2002; and McLean, B., and P. Elkind (2003), The Smartest Guys in the Room. The Amazing Rise and Scandalous Fall of Enron (New York: Portfolio).
25. This discussion is based on: Mintzberg, H. (1993), The Rise and Fall of Strategic Planning: Reconceiving Roles for Planning, Plans, and Planners (New York: Simon & Schuster); and Mintzberg, H. (1994), “The fall and rise of strategic planning,” Harvard Business Review (January– February): 107–114.
26. Payne, B. (1956), “Steps in long- range planning,” Harvard Business Review (March–April): 97–106.
27. Grove, A. S. (1996), Only the Paranoid Survive.
28. As quoted in Rothaermel, F. T. (2008), “Competitive advantage in tech- nology intensive industries,” Advances in the Study of Entrepreneurship, Innovation, and Economic Growth 18: 203–226.
29. Personal communication with UPS strategy executives during onsite visit in corporate headquarters, June 17, 2009.
30. This Strategy Highlight is based on: deGeus, A. P. (1988), “Planning as learning,” Harvard Business Review (March–April); Grant, R. M. (2003), “Strategic planning in a turbulent environment: Evidence from the oil majors,” Strategic Management Journal 24: 491–517; Willmore, J. (2001), “Scenario planning: Creating strat- egy for uncertain times,” Information Outlook (September); and “Shell dumps wind, solar, and hydro power in favour of biofuels,” The Guardian, March 17, 2009.
31. “Managing in the fog,” The Economist, February 26, 2009.
32. Duke, M. T. (CEO of Walmart) (2010), presentation at Georgia Institute of Technology, April 1; and Walmart–Corporate Fact Sheet (walmart- stores.com).
33. Mintzberg, H. (1993), The Rise and Fall of Strategic Planning; and Mintzberg, H. (1994), “The fall and rise of strategic planning.”
34. Inkpen, A., and N. Choudhury (1995), “The seeking of strategy where it is not: Toward a theory of strategy absence,” Strategic Management Journal 16: 313–323.
35. www.nucor.com.
36. See discussion on Nucor in Chapter 11, “Organizational Design: Structure, Culture, and Control.”
37. Mintzberg, H., and J. A. Waters (1985), “Of strategies, deliberate and emergent,” Strategic Management Journal 6: 257–272.
38. Arthur, B. W. (1989), “Competing technologies, increasing returns, and lock-in by historical events,” Economic Journal 99: 116–131; and Brown, S. L., and K. M. Eisenhardt (1998), Competing on the Edge. Strategy as Structured Chaos (Boston, MA: Harvard Business School Press).
39. Mayer, M. (2006), “Nine lessons learned about creativity at Google,” presentation at Stanford Technology Ventures Program, May 17.
40. John Rice (GE Vice Chairman, President & CEO, GE Technology Infrastructure) (2009), presentation at Georgia Institute of Technology, May 11.
41. Mintzberg, H., and A. McHugh (1985), “Strategy formation in an adhoc- racy,” Administrative Science Quarterly 30: 160–197.
42. Ibid.; and Hill, C. W. L., and F. T. Rothaermel (2003), “The perfor- mance of incumbent firms in the face of radical technological innovation,” Academy of Management Review 28: 257–274.
43. Based on Howard Behar (retired President, Starbucks North America and Starbucks International) (2009), Impact Speaker Series Presentation, College of Management, Georgia Institute of Technology, October 14. See also Behar, H. (2007), It’s Not About the Coffee: Leadership Principles from a Life at Starbucks (New York: Portfolio).
44. “U.S. taxpayers risk $9.7 trillion on bailout programs,” Bloomberg News, February 9, 2009.
45. “The book of Jobs,” The Economist, January 28, 2010.
46. This example is based on Robinson, A. G., and S. Stern (1997), Corporate Creativity: How Innovation and Improvement Actually Happen (San Francisco, CA: Berret-Koehler Publishers).
47. Bower, J. L. (1970), Managing the Resource Allocation Process (Boston, MA: Harvard Business School Press); Bower, J. L., and C. G. Gilbert (2005), From Resource Allocation to Strategy (Oxford, UK: Oxford University Press); Burgelman, R. A. (1983), “A model of the interaction of strategic behavior, cor- porate context, and the concept of strat- egy,” Academy of Management Review 8: 61–71; and Burgelman, R. A. (1983), “A process model of internal corporate venturing in a major diversified firm,” Administrative Science Quarterly 28: 223–244.
48. Bower, J. L., and C. G. Gilbert (2005), From Resource Allocation to Strategy.
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54. “What They’re Doing After Harvard,” The Wall Street Journal, July 10, 2010.
55. Xu, Z., J. Hannaway, and C. Taylor (2008), “Making a difference? The effect of Teach For America on student perfor- mance in high school.”
56. “Teaching as leadership: The highly effective teachers’ guide to closing the achievement gap,” Jossey-Bass, February 3, 2010.
57. “2006 NASA Strategic Plan,” NASA (www.nasa.gov).
58. Hamel, G. (2007), The Future of Management (Boston, MA: Harvard Business School Publishing).
59. This myStrategy vignette is based on Stern, S. (2004), “Do scientists pay to be scientists?” Management Science 50(6): 835–853; and Esty, D. C., and A. S. Winston (2009), Green to Gold: How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, revised and updated (Hoboken, NJ: John Wiley).
dynamics for corporate longevity,” Strategic Management Journal 28: 965–979.
52. Dixit, A. K. S., and R. Pindyck (1994), Investment Under Uncertainty (Princeton, NJ: Princeton University Press); Amram, M., and N. Kulatilaka (1998), Real Options: Managing Strategic Investment in an Uncertain World (Boston, MA: Harvard Business School Press); McGrath, R. G., and I. C. MacMillan (2000), “Assessing technology projects using real options reasoning,” Research Technology Management 43: 35–49; Hill, C. W. L., and F. T. Rothaermel (2003), “The per- formance of incumbent firms in the face of radical technological innovation”; and Adner, R., and D. A. Levinthal (2004), “What is not a real option: Considering boundaries for the application of real options to business strategy,” Academy of Management Review 29: 74–85.
53. “Microsoft bid to beat Google builds on a history of misses,” The Wall Street Journal, January 16, 2009.
49. Burgelman, R. A. (1994), “Fading memories: A process theory of strategic business exit in dynamic environments,” Administrative Science Quarterly, 39: 24–56.
50. Burgelman, R. A., and A. S. Grove (1996), “Strategic dissonance,” California Management Review 38: 8–28.
51. Grant, R. M. (2003), “Strategic planning in a turbulent environment: Evidence from the oil majors,” Strategic Management Journal 24: 491–517; Brown, S. L., and K. M. Eisenhardt (1997), “The art of continuous change: Linking complexity theory and time- based evolution in relentlessly shifting organizations,” Administrative Science Quarterly 42: 1–34; Farjourn, M. (2002), “Towards an organic perspec- tive on strategy,” Strategic Management Journal 23: 561–594; Mahoney, J. (2005), Economic Foundation of Strategy (Thousand Oaks, CA: Sage); and Burgelman, R. A., and A. S. Grove (2007), “Let chaos reign, then rein in chaos – repeatedly: Managing s trategic
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