CHAPTER 1: Strategic Management
Review Questions and Answers
Note: Some of the questions have answers contained in the text, while other questions or parts of questions are intended to provoke discussion and therefore don’t have a right answer.
1. Explain each of the component activities in the definition of the strategic management process. Which of these activities do you think is most important to the success of an organization? Why?
The components of the strategic management process are shown in Figure 1.1. They include direction setting, external and internal environmental analysis, strategy selection, allocation of resources, building relationships, and finally evaluating performance. The key activities in the process begins with (1) a situation analysis of the broad and operating environments of the organization, including internal resources, and both internal and external stakeholders; (2) establishment of strategic direction, reflected in mission statements and organizational visions; (3) formulation of specific strategies, which is often divided into three levels—corporate, business, and functional and (4) strategy implementation, which includes designing an organizational structure, controlling organizational processes, managing relationships with stakeholders, and managing resources so as to develop competitive advantage. Figure 1.4 provides a visual presentation of the process. Of course, all of the activities are important.
2. Summarize the traditional, resource-based, and stakeholder perspectives of strategic management.
Many perspectives on strategic management and the strategic management process have emerged. The approach found in this book is based predominantly on three of these perspectives: the traditional perspective, the resource-based view of the firm, and the stakeholder approach.
The Traditional Perspective: The traditional process for developing strategy consists of analyzing the internal and external environments of the company to arrive at organizational strengths, weaknesses, opportunities, and threats (SWOT). The results from this “situation analysis,” as this process is sometimes called, are the basis for developing missions, goals, and strategies. In general, a company should select strategies that (1) take advantage of organizational strengths and environmental opportunities or (2) neutralize or overcome organizational weaknesses and environmental threats. After strategies are formulated, plans for implementing them are established and carried out.
The traditional approach to strategy development also brought with it some ideas that strategic management scholars have had to reevaluate. The first of these ideas was that the environment is the primary determinant of the best strategy. This is called environmental determinism. The traditional school of thought concerning strategy formulation also supported the view that managers respond to the forces discussed thus far by making decisions that are consistent with a preconceived strategy. In other words, strategy is deliberate.
The Resource-Based View: The resource-based view of the firm grew out of the question, “Why do some firms persistently outperform other firms?” The resource-based view explains that organizational success can be explained in terms of the resources and capabilities possessed by an organization. According to this view, an organization is a bundle of resources, which fall into the general categories of (1) financial resources, including all of the monetary resources from which a firm can draw; (2) physical resources, such as plants, equipment, locations, and access to raw materials; (3) human resources, which pertains to the skills, background, and training of managers and employees, as well as the way they are organized; (4) organizational knowledge and learning; and (5) general organizational resources, including firm reputation, brand names, patents, contracts, and relationships with external stakeholders. Superior resources are those that have value in the market, are possessed by only a small number of firms, and are not easy to substitute. If a particular resource is also costly or impossible to imitate, then the competitive advantage may be sustainable. A sustainable competitive advantage may lead to higher-than-average organizational performance over a long time period.
The Stakeholder Perspective: Business organizations are becoming a tangled web of alliances and contracts. Stakeholder theory expands a company’s responsibility beyond merely stockholders to groups or individuals who significantly affect or are significantly affected by the company’s activities, including stockholders. A firm has internal stakeholders, such as employees, that are considered a part of the internal organization. In addition, the firm has frequent interactions with stakeholders in what is called the operating (or task) environment. The firm and stakeholders in its operating environment are both influenced by other factors such as society, technology, the economy, and the legal environment. External stakeholder analysis involves identifying and prioritizing key external stakeholders, assessing their needs, collecting ideas from them, and integrating this knowledge into strategic management processes such as the establishment of strategic direction and the formulation and implementation of strategies. These are processes associated largely with adapting to the external environment. On the other hand, stakeholder management includes communicating, negotiating, contracting, and managing relationships with stakeholders, and motivating them to behave in ways that are beneficial to the organization and its other stakeholders. These processes are most closely associated with efforts on the part of organizations to influence, or enact, their environments.
3. What are some of the considerations that are motivating companies to go global?
Most successful organizations eventually find that their domestic markets are becoming saturated or that foreign markets offer opportunities for growth and profitability that often are not available domestically. Many forces are leading firms into the international arena. For example, global trends are leading to a more favorable environment for foreign business involvement. Trade barriers are falling in Europe (i.e., the European Community) and North America (i.e., the North American Free Trade Agreement). Also, industrialized countries such as Korea, Taiwan, and Spain are leading to increasing global competition and new marketing opportunities. There is a worldwide shift toward market economies, as in Germany and China, and financial capital is now readily exchanged in global markets. In addition, communication is easier due to satellites and the Internet, and English is becoming a universally spoken business language. Finally, technical standards have started to become uniform in industrialized countries around the world.
In addition to global trends, organizations have a variety of firm-specific reasons for international involvement. Sometimes firms are so successful that they have saturated their domestic markets, so they look overseas. Also, in some cases, international markets are more profitable than domestic markets. In order to remain competitive, organizations need to acquire state-of-the-art resources at the lowest prices possible. Sometimes the best product or service is not available in the home country, but in a foreign country. The same is true of lowest-cost goods and services. Finally, foreign investments offer opportunities to acquire technical knowledge and managerial techniques that can then be applied across all the businesses of the firm.
4. What is the difference between the strategic planning process and strategic thinking?
Strategic planning is an analytical process aimed at carrying out strategies that have already been identified. Strategic planning results in the creation of a plan. On the other hand, strategic thinking involves intuition and creativity. It is a way to synthesize stimuli from the internal and external environments to create an “an integrated perspective of the enterprise.”
5. Which of these is essential to effective strategic management?
Effective strategic management includes both strategic thinking and the essential elements of the strategic planning process.
6. What are the important characteristics associated with strategic thinking? How can an organization encourage this sort of thinking?
Strategic thinking is intent focused, comprehensive, opportunistic, long-term oriented, built on the past and the present, and hypothesis driven. Organizations can encourage strategic thinking in a number of ways.
First, managers and employees can receive training that describes strategic thinking and how to do it.
Second, an organization can encourage and reward employees that generate new ideas (hypotheses). For example, Disney allows some of its employees an opportunity each year to present new ideas to top managers. With a similar philosophy, Virgin Airline created a new one-stop bridal-services company because one of its flight attendants was having a hard time lining up those services for a friend’s wedding. Virgin Bride, the name of the venture, is now Britain’s largest bridal emporium. Lincoln Electric, the largest arc-welder manufacturer in the world, provides huge bonuses to its employees based, in part, on suggestions for improvements that were made during the year.
Third, a company can actually implement a strategic planning process that incorporates the elements of strategic thinking. Such a process would include a thorough evaluation of the external environment, with a special emphasis on relationships with stakeholders. It would also include the generation of new ideas and facilitate their testing.
Finally, to encourage strategic thinking, an organization has to be willing to take risks. It was risky for Sam W