Module 1: Fundamentals of Strategic Management

What Is Strategic Management?

Organizations exist for a purpose. The mission is articulated in a broadly defined but enduring statement of
purpose that identifies the scope of an organization’s operations and its offerings to affected groups and entities.
Strategy refers to top management’s plans to develop and sustain competitive advantage-- a state whereby a firm’s
successful strategies cannot be easily duplicated by its competitors-- so that the organization’s mission is fulfilled.
Following this definition, it is assumed that an organization has a plan, its competitive advantage is
understood, and its members understand the reason for its existence. These assumptions may appear self-evident, but
many strategic problems can be traced to fundamental misunderstandings associated with defining the strategy.
Debates over the nature of the organization’s competitive advantage, its mission, and whether or not a strategic plan
is really needed can be widespread. As such, comments such as “We’re too busy to focus on developing a strategy”
or “I’m not exactly sure what my company is really trying to accomplish” can be overheard in many organizations.

Strategic management is a broader term than strategy and is a process that includes top management’s analysis
of the environment in which the organization operates prior to formulating a strategy, as well as the plan for
implementation and control of the strategy. The difference between a strategy and the strategic management process
is that the latter includes considering what must be done before a strategy is formulated through assessing whether
or not the success of an implemented strategy was successful. The strategic management process can be summarized
in five steps, each of which is discussed in greater detail in subsequent chapters of the book (see Figure 1.1):

1. External Analysis: Analyze the opportunities and threats, or constraints that exist in the organization’s
external environment, including industry and forces in the external environment.
2. Internal Analysis: Analyze the organization’s strengths and weaknesses in its internal environment.
Consider the context of managerial ethics and corporate social responsibility.
3. Strategy Formulation: Formulate strategies that build and sustain competitive advantage by matching the
organization’s strengths and weaknesses with the environment’s opportunities and threats.
4. Strategy Execution: Implement the strategies that have been developed.
5. Strategic Control: Measure success and make corrections when the strategies are not producing the desired
outcomes.

The sequential order of the steps is logical. A thorough understanding of the organization and its environment is
essential if the appropriate strategy is to be developed, put into action and controlled. One could transpose the first
two steps and analyze the internal environment before the external environment—the logic being that
comprehending the organization informs the strategic assessment of factors outside of the firm. The external
environment is analysed before the internal environment in Figure 1.1, however, because internal goals, resources,
and competencies are viewed in a relative fashion to some extent and are understood within the context of the
industry and the factors that drive it. This dilemma resembles the chicken and egg argument; in a practical sense,
external and internal analysis often occurs simultaneously.

A distinction between outside and inside perspectives on strategy is also relevant. Outsiders analyzing a firm
should apply a systematic approach that progresses through these steps in order. Doing so develops a holistic
understanding of the firm, its industry, and its strategic challenges.
Inside organizations, strategies are being formulated, implemented, and controlled simultaneously while
external and internal factors are continually reassessed. In addition, changes in one stage of the strategic
management process will inevitably affect other stages as well. After a planned strategy is implemented, it often
requires modification as conditions change. Hence, because these steps are so tightly intertwined, insiders tend to
treat all of the steps as a single integrated, ongoing process.

Consider the strategic management process at a fast-food restaurant chain. At any given time, top managers
are likely assessing changes in consumer taste preferences and food preparation, analyzing the activities of
competitors, working to overcome firm weaknesses, controlling remnants of a strategy implemented several years
ago, implementing a strategy crafted months earlier, and formulating strategic plans for the future. Although each of
these activities can be linked to a distinct stage in the strategic management process, they occur simultaneously.
 An effective strategy is built on the foundation of the organization’s business model, the mechanism
whereby the organization seeks to earn a profit by selling its goods or services. While all firms seek to produce a
product or service and sell it at a price higher than its production and overhead costs, a business model is stated in
greater detail. For example, a magazine publisher might adopt a subscription model, an advertising model, or
perhaps some combination of the two. Profits would be generated primarily from readers under the subscription
model but from advertisers under the advertising model. As we can see, identifying a firm’s business model can
become more complex when intricate details are considered. Progressive firms often devise innovative business
models that extract revenue—and ultimately profits—from sources not identified by competitors.

Consider the razor and blades business model invented by Gillette. A company gives away or deeply
discounts a product—the razor—while planning to profit from future sales of required replacement or
complementary products—the blades. Cell phones are often given to customers willing to sign a 2-year service
contract. Computer printers are typically sold below production cost, but customers must periodically replace the ink
cartridges, which are high-margin items. This model is not fool proof, however. In a competitive marketplace,
customers may be able to purchase the required complementary products at lower prices from rivals not under
pressure to recoup initial losses. Successful business models can change over time.

While a successful strategy is built on the firm’s business model, crafting one can be a challenge. Realistically, a
number of factors are typically associated with successful strategies. Some of these factors including the following:
1. The organization’s competitive environment is well understood, in detail.
2. Strengths and weaknesses are assessed in a thorough and realistic manner.
3. The strategy is consistent with the mission and goals of the organization.
4. Plans for putting the strategy into action are designed with specificity before it is implemented.
5. Possible future changes in the proposed strategy—a process called strategic control—are evaluated before
the strategy is adopted.

Careful consideration of these factors reinforces the interrelatedness of the steps in the strategic management
process. Each factor is most closely associated with one of the five steps, yet they fit together like pieces of a puzzle.
The details associated with the success factors—and others—will be discussed in greater detail in subsequent
chapters. While some of these success factors are associated with the competitive environment in profit-seeking
firms, strategic management is not limited to for-profit organizations. Top managers of any organization, regardless
of profit or non- profit status, must understand the organization’s environment and its capabilities and develop
strategies to assist the enterprise in attaining its goals.

Intended and Realized Strategies

One of the most critical challenges facing organizations is the reality that strategies are not always
implemented as originally planned. Sometimes strategic decisions seem to evolve. In this respect, strategy
formulation can be seen as an iterative process where decision makers take actions, make sense of those actions
afterward, and then decide how to proceed. Henry Mintzberg introduced two terms to help clarify the shift that often
occurs between the time a strategy is formulated and the time it is implemented. An intended strategy (i.e.,what
management originally planned) may be realized just as it was planned, in a modified form, or even in an entirely
different form. Occasionally, the strategy that management intends is actually realized, but the intended strategy and
the realized strategy—what management actually implements—usually differ. Hence, the original strategy may be
realized with desirable or undesirable results, or it may be modified as changes in the firm or the environment
become known.

The gap between the intended and realized strategies usually results from unforeseen environmental or
organizational events, better information that was not available when the strategy was formulated, or an
improvement in top management’s ability to assess its environment. Although it is important for managers to
formulate responsible strategies based on a realistic and thorough assessment of the firm and its environment, things
invariably change along the way. Hence, it is common for such a gap to exist, creating the need for constant strategic
action if a firm is to stay on course. Instead of resisting modest strategic changes when new information is
discovered, managers should search for new information and be willing to make such changes when necessary. This
activity is part of strategic control—the final step in the strategic management process.
Influence on Strategic Management

The roots of the strategic management field can be traced to the 1950s when the discipline was originally
called “business policy.” Today, strategic management is an eclectic field, drawing upon a variety of theoretical
frameworks. Three prominent perspectives are summarized in Table 1.1 and discussed next. There are a number of
other influences as well, but these three illustrate how competing viewpoints have coalesced into an overarching
discipline.

Theoretical Primary Influence on Firm

How Perspective is Applied to the
Perspective Performance
    Case Analysis
   
Industrial Organization Structure of the Industry Industry analysis portion of the external
(IO) theory   environment
Resource- based
Firm's unique combination of strategic Analysis of internal strengths and
theory
  resources weaknesses
Contingency theory Fit between the firm and its external SWOT (Strengths, Weaknesses,
  environment Opportunities and Threats ) analysis and
    SW/OT matrix

Industrial organization (IO), a branch of microeconomics, emphasizes the influence of the industry
environment upon the firm. The central tenet of IO theory is the notion that a firm must adapt to influences in its
industry to survive and prosper; thus, its financial performance is primarily determined by the success of the
industry in which it competes. Industries with favourable structures offer the greatest opportunity for firm
profitability. Following this perspective, it is more important for a firm to choose the correct industry within which
to compete than to determine how to compete within a given industry. Recent research has supported the notion that
industry factors tend to play a dominant role in the performance of most firms, except for those that are the notable
industry leaders or losers.

IO assumes that an organization’s performance and ultimate survival depend on its ability to adapt to
industry forces over which it has little or no control. According to IO, strategic managers should seek to understand
the nature of the industry and formulate strategies that feed off the industry’s characteristics. Because IO focuses on
industry, forces, strategies, resources, and competencies are assumed to be fairly similar among competitors within a
given industry. If one firm deviates from the industry norm and implements a new, successful strategy, other firms
will rapidly mimic the higher-performing firm by purchasing the resources, competencies, or management talent that
have made the leading firm so profitable. Hence, although the IO perspective emphasizes the industry’s influence on
individual firms, it is also possible for firms to influence the strategy of rivals and in some cases even modify the
structure of the industry.

Perhaps the opposite of the IO perspective, resource-based theory views performance primarily as a
function of a firm’s ability to utilize its resources. Although environmental opportunities and threats are important, a
firm’s unique resources comprise the key variables that allow it to develop a distinctive competence, enabling the
firm to distinguish itself from its rivals and create competitive advantage. Resources include all of a firm’s tangible
and intangible assets, such as capital, equipment, employees, knowledge, and information. An organization’s
resources are directly linked to its capabilities, which can create value and ultimately lead to profitability for the
firm. Resource-based theory focuses primarily on individual firms rather than on the competitive environment.
 If resources are to be used for sustained competitive advantage—a firm’s ability to enjoy strategic benefits
over an extended period of time—those resources must be valuable, rare, not subject to perfect imitation, and
without strategically relevant substitutes. Valuable resources are those that contribute significantly to the firm’s
effectiveness and efficiency. Rare resources are possessed by only a few competitors, and imperfectly imitable
resources cannot be fully duplicated by rivals. Resources that have no strategically relevant substitutes enable the
firm to operate in a manner that cannot be effectively imitated by others and thereby sustain high performance.

According to the third perspective, contingency theory, the most profitable firms develop beneficial fits
with their environments. In other words, a strategy is most likely to be successful when it is consistent with the
organization’s mission, its competitive environment, and its resources. Contingency theory represents a middle
ground perspective that views organizational performance as the joint outcome of environmental forces and the
firm’s strategic actions. Firms can become proactive by choosing to operate in environments where opportunities
and threats match the firms’ strengths and weaknesses. Should the industry environment change in a way that is
unfavourable to the firm, its top managers should consider leaving that industry and reallocating its resources to
other, more favourable industries.

Differences aside, each perspective has merit and has been incorporated into the strategic management
process laid out in this text. The IO view is seen in the industry analysis phase, most directly in Michael Porter’s five
forces model. Resource-based theory is applied directly to the internal analysis phase and the effort to identify an
organization’s resources that could lead to sustained competitive advantage. Contingency theory is seen in the
strategic alternative generation phase, where alternatives are developed to improve the organization’s fit with its
environment. Hence, multiple perspectives are critical to a holistic understanding of strategic management.

Corporate Governance and Boards of Directors

A small business is often governed by one or several individuals well known to everyone in the
organization. Ownership is often privately held and may rest with a single person, a family, or a few business
partners. Because more resources are needed, many midsize and large organizations are publicly held, with shares of
stock available for purchase on exchanges such as the New York Stock Exchange. In public corporations,
shareholders—the owners of the firm—are represented by an elected board of directors legally authorized to monitor
firm activities as well as the selection, evaluation, and compensation of top managers. Strategic decision making in
these firms is more complex because the ownership is widely dispersed and often changes frequently.

Corporate governance refers to the board of directors, institutional investors (e.g., pension and retirement
funds, mutual funds, banks, insurance companies, among other money managers), and large shareholders known as
block holders who monitor firm strategies to ensure effective management.

Boards of directors and institutional investors—representatives of pension and retirement funds, mutual
funds, and financial institutions—are generally the most influential in the governance systems. Because institutional
investors own more than half of all shares of publicly traded firms, they tend to wield substantial influence. Block
holders tend to hold less than 20% of the shares, so their influence is proportionally less than that of institutional
investors. Boards of directors often include both inside (i.e., firm executives) and outside directors. Insiders bring
company-specific knowledge to the board whereas outsiders bring independence and an external perspective. Over
the past several decades, the composition of the typical board has shifted from one controlled by insiders to one
controlled by outsiders. This increase in outside influence often allows board members to oversee managerial
decisions more effectively. Moreover, when additional outsiders are added to insider-dominated boards, dismissal of
the chief executive officer (CEO) is more likely when corporate performance declines and outsiders are more likely
to pressure for corporate restructuring.

The Sarbanes-Oxley Act, which was passed in 2002, requires firms to include more independent directors
on their boards and make disclosures on internal controls, ethics codes, and the composition of their audit
committees on annual reports. The act requires that both the CEO and the chief financial officer (CFO) certify every
report that contains company financial statements. It restricts membership of the firm’s audit committee—the formal
group charged with reporting oversight—to outsiders (i.e., board members who are not managers). Sarbanes-Oxley
also prohibits firms from extending personal loans to board members or executives.
 Even with new disclosure regulations, however, it can be difficult to determine precisely what top
executives earn at public companies. A number of analysts have noted positive changes among boards as a result of
this legislation in terms of both independence and expertise, while others contend that government regulations like
Sarbanes-Oxley have merely added more costly paperwork. A record number of public firms went private in the
mid2000s primarily due to investor and management frustration with the legislation. Evidence also suggests that
many CEOs have become more reluctant to sit on boards of publicly held companies. Increased liability on the part
of board members and recent policy changes that often restrict the number of outside boards on which a CEO may
serve have also contributed to this change.

Boards of directors are responsible for monitoring activities in the organization, evaluating top
management’s strategic proposals, and establishing the broad strategic direction for the firm. As such, boards select
and terminate the CEO, establish his or her compensation package, advise top management on strategic issues, and
monitor managerial and company performance as representatives of the shareholders. Critics charge that board
members do not always fulfil their legal roles. One reason is that they are nominated by the CEO, who expects them
to support his or her strategic initiatives. The generous compensation they often receive is also a key issue.

When insiders control a board, a rubber stamp mentality can develop, whereby directors do not
aggressively challenge executive decisions as they should. This is particularly true when the CEO also serves as
chair of the board, a phenomenon known as CEO duality. 33 Insider board members may be less willing to exert
control when the CEO is also the chair of the board because present rewards and future career prospects within the
firm are largely determined by the CEO. In the absence of CEO duality, however, insiders may be more likely to
contribute to board control, often in subtle and indirect ways so as not to document any opposition to the decisions
of the CEO. For example, the insiders may ostensibly present both sides of various issues while carefully framing
the alternatives in favour of one that may be in opposition to the wishes of the CEO.

Activist shareholders can significantly influence a firm’s operations. Target, for example, suffered the
effects of the recession and experienced sluggish sales in the late 2000s. Investor activist William Ackman
challenged Target to address the recession more aggressively. Ackman’s Pershing Square Capital Management
hedge fund—an investment fund open to only a small number of investors but permitted by regulators to undertake
riskier and more speculative investments—is Target’s sixth largest shareholder and has actively supported dissident
nominees for board slots. In response to Ackman, Target expanded its fresh foods and other “recession-proof”
offerings in many of its stores.

Pressure on directors to acknowledge shareholder concerns has continued into the 2010s. The major source
of pressure in recent years has come from institutional investors, owners of large chunks of most publicly traded
companies via retirement or mutual funds. By virtue of the size of their investments, they wield considerable power
and are more willing to use it than ever before (see Strategy at Work 1.1).

Strategy at Work 1.1. The Growing Responsiveness of Corporate Boards.

There is an adage on Wall Street: “If you don’t like the stock, sell it.” Over the past decade, however, a
number of dismayed investors have decided to challenge the board instead. Many corporate boards have historically
functioned as rubber stamps for top executives. Nonetheless, the directors of many prominent corporations have
become increasingly responsible to shareholder interests, thanks in part to the increased influence of institutional
shareholders. These large investment firms control substantial numbers of shares in widely held firms and have the
clout necessary to pressure board members for change when needed.

Consider the case of Nell Minow. A principal at activist money-management firm Lens Inc., Minow
searches for companies with strong products and underlying values that appear to be underperforming. After
identifying a target, Minow purchases a substantial number of shares in the company and then advises the CEO of
her ownership position. She requests a meeting with the CEO and/or the board to discuss changes that could
improve the performance of the firm. Activist owners like Minow have sent a message to both top executives and
boards that poor performance is not unlikely to go unchallenged.
 However, a number of analysts and executives believe that further change to the system is needed.
According to David Leighton, former chairman of the board at Nabisco Brands, Ltd., companies should seek out
more independent and qualified board members who will consider the strategic direction of the firm more
aggressively Criticism notwithstanding, some board members have played effective stewardship roles. Many
directors promote strongly the best interests of the firm’s shareholders and various other stakeholder groups as well.
Research indicates, for instance, that board members are often invaluable sources of environmental and competitive
information. By conscientiously carrying out their duties, directors can ensure that management remains focused on
company performance.

A number of recommendations have been made on how to promote an effective governance system. For
example, it has been suggested that outside directors be the only ones to evaluate the performance of top managers
against the established mission and goals, that all outside board members should meet alone at least once annually,
and that boards of directors should establish appropriate qualifications for board membership and communicate
these qualifications to shareholders. For institutional shareholders, it is recommended that institutions and other
shareholders act as owners and not just investors that they not interfere with day-to-day managerial decisions, that
they evaluate the performance of the board of directors regularly, and that they should recognize that the prosperity
of the firm benefits all shareholders.

Strategic Decisions

How does one think and act strategically, and who makes the strategic decisions? The answers to these questions
vary across firms and may also be influenced by ownership and other issues related to corporate governance. It is
also important to distinguish between strategic decisions and common management decisions. In general, strategic
decisions are marked by four key distinctions:

1. They are based on a systematic, comprehensive analysis of internal attributes and factors external to the
organization. Decisions that address only part of the organization—perhaps a single functional area—are
usually not considered to be strategic decisions.
2. They are long-term and future-oriented but are built on knowledge about the past and present. Scholars and
managers do not always agree on what constitutes the long term, but most agree that it can range anywhere
from several years in duration to more than a decade.
3. They seek to capitalize on favourable situations outside the organization. In general, this means taking
advantage of opportunities that exist for the firm, but it also includes taking measures to minimize the
effects of external threats as well.
4. They involve choices. Although making win-win strategic decisions may be possible, most involve some
degree of trade-off between alternatives—at least in the short run. For example, raising salaries to retain a
skilled workforce can increase wages and adding product features or enhancing quality can increase the
cost of production. However, such trade-offs may diminish in the long run, as a more skilled, higher paid
workforce may be more productive than a typical workforce, and sales of a higher-quality product may
increase, thereby raising sales and potentially profits. Decision makers must understand these complex
relationships across the business spectrum.

Because of these distinctions, strategic decision making is generally reserved for the top executive and members
of his or her top management team. The CEO is the individual ultimately responsible (and generally held
responsible) for the organization’s strategic management, but he or she rarely acts alone. Except in the smallest
companies, he or she relies on a team of top-level executives—including members of the board of directors, vice
presidents, and even various line and staff managers in some instances—all of whom play instrumental roles in
strategically managing the firm. Generally speaking, the quality of strategic decisions improves dramatically when
more than one capable executive participates in the process.

The size of the team on which the top executive relies for strategic input and support can vary from firm to firm.
Companies organized around functions such as marketing and production generally involve the heads of the
functional departments in strategic decisions. Very large organizations often employ corporate level–strategic-
planning staffs and outside consultants to assist top executives in the process. The degree of involvement of top and
middle managers in the strategic management process also depends on the personal philosophy of the CEO. Some
CEOs are known for making quick decisions whereas others have a reputation for involving a large number of top
managers and others in the process.

Input to strategic decisions, however, need not be limited to members of the top management team. To the
contrary, obtaining input from others throughout the organization, either directly or indirectly, can be quite
beneficial. In fact, most strategic decisions result from the streams of inputs, decisions, and actions of many people.
The top management team might create the context for strategic decisions by establishing rules and procedures and
by influencing the informal means through which things are accomplished in the organization. Strategic decisions do
not necessarily start with top management action, however, but instead can bubble up from a series of lower level
decisions throughout the firm. For example, an employee in a company’s research and development department may
attend a trade show where a new product or production process idea that seems relevant to the company is discussed.
The employee may relate the idea to his or her manager, who, in turn, may modify and pass it along to his or her
manager. Eventually, a version of the idea may be discussed with the organization’s marketing and production
managers and later presented to top management. Ultimately, the CEO will decide whether or not to incorporate the
idea into the ongoing strategic planning process. This example illustrates the indirect involvement of individuals
throughout the organization in the prison strategic management process. Top management is ultimately responsible
for the final decision, but its decision is based on a culmination of the ideas, creativity, information, and analyses of
others (see Strategy at Work 1.1).

While participation can be healthy, most firms place significant limits of the say that their managers have in
strategic decisions. There are a few exceptions, however. At Ternary Software, for example, all of its 13 employees
must agree before a strategic decision can be implemented. Such democracy is easier to implement in larger
organizations, but even large companies like Google have taken steps to create an egalitarian culture for decision
making.

The corporate boardroom is often a place where decisions that have already been made in a less formal setting
are confirmed. A formal, systematic decision-making process is often applied as a means of confirming what top
executives already see as the appropriate course of action. A danger associated with this type of approach is that it
tends to jump straight to a proposed solution without considering how a decision should be made. Although there are
no guarantees, top management teams that circumvent a logical decision-making approach are more susceptible to
mistakes. For example, when a systematic cost-benefit analysis is not employed, leaders may confuse actual costs of
a decision with sunk costs—those already expended—which is a common error that distorts decision making and
can lead to an escalation of commitment to a failed strategy.

The Global Imperative

Most business organizations buy, sell, or trade across borders whether they have a physical presence in
other countries or sell a significant amount of imported merchandise. Although firms typically concentrate on
serving local or domestic markets before expanding internationally, many must interact with entities in other nations
as a means of survival. For example, virtually all of Japan’s industries would grind to a halt if imports of raw
materials from other nations ceased because the nation is small and isolated, and its natural resources are quite
limited. In larger nations like the United States, most manufacturers utilize components from abroad in their
production process while most retailers sell products that were produced abroad. Hence, strategic management is—
by definition—a global undertaking. For this reason, examples from concepts, industries, and firms outside of the
United States are integrated into each of the chapters.

The high degree of global interconnectedness common in many enterprises today emanates from the
economic concept of comparative advantage—the idea that certain products may be produced more cheaply or at a
higher quality in particular countries due to advantages in labor costs or technology. For this reason, many
manufacturers in the United States and other developed nations have shifted their production to Asia and other parts
of the world. Firms do not always engage in production only in areas where they are most efficient for several
reasons, however. The cost of transporting raw materials or goods from one nation to another can exceed the
potential cost savings. Political turmoil or trade restrictions can also create a barrier. Moreover, even if one nation
enjoys an absolute advantage over another in most areas, the weaker nation must participate in some forms of
business to maintain economic viability and employ its citizens. Firms in these nations tend to produce in areas
where the absolute advantage is lowest. Put another way, even firms in less developed nations lack a comparative
advantage; they tend to produce in areas where their inefficiencies are less pronounced while their counterparts in
developed nations concentrate in more vital industries. All nations benefit economically from such an arrangement.

The notion of comparative advantage is fluent, as nations enjoying a form of comparative advantage at one
period may not enjoy it in a future period. Chinese manufacturers enjoyed some of the lowest global labor rates for
unskilled or semiskilled production in the 2000s. Worker skills and production quality has increased in the rapidly
developing nation, making Chinese labor the third most expensive in Asia in 2011—well ahead of nations like India,
Pakistan, Indonesia, Cambodia, and Vietnam.

While comparative advantage is a key consideration for international operations, it is not the only one.
Global involvement may also provide advantages to a firm not directly related to costs. For political reasons, a firm
often needs to establish operations in other countries, especially if a substantial proportion of sales is derived abroad.
Doing so can also provide managers with a critical understanding of local markets. For example, Ford operates a
number of plants in Western Europe, where manufacturing has helped Ford’s engineers design windshield wipers
for cars engaged in high-speed driving on the German autobahns46 (see Case Analysis 1.1).\

Case Analysis 1.1 Step 1: Introduction of the Organization

The first step in analyzing a firm is to develop familiarity with the organization. Analyzing an ongoing enterprise
begins with a general introduction and understanding of the firm. When was the organization founded, why, and by
whom? Is any unusual history associated with the organization? Is it privately or publicly held? What is the
company’s mission? Has the mission changed since its inception? It is also important at this point to identify the
business model on which the organization’s success is predicated. In other words, what is the profit-generating idea
behind the company? Determining this information is simple for some companies (Ford, for example, hopes to sell
cars and offer consumer financing at a profit) but may be complicated for others where revenue streams and
competitive advantage are more difficult to identify.

Summary

Top managers face more complex strategic challenges today than ever before. Strategic management involves
analysis of an organization’s external and internal environments, formulation and implementation of its strategic
plan, and strategic control. These steps in the process are interrelated and typically done simultaneously in many
firms. A firm’s intended strategy often requires modification before it has been fully implemented due to changes in
environmental and/or organizational conditions. Because these changes are often difficult to predict, substantial
changes in the environment may transform an organization’s realized strategy into one that is quite different from its
intended strategy. The strategic management field has been influenced by such perspectives as IO theory, resource-
based theory, and contingency theory. Although they are based on widely varied assumptions about what leads to
high performance, each of these perspectives has merit and contributes to an overall understanding of the field.
Strategy formulation is the direct responsibility of the CEO, but he or she relies on a team of other individuals as
well, including the board of directors, vice presidents, and other various managers. In its final form, a strategic
decision is crafted from the streams of input, decisions, and actions of the entire top management team.

Key Terms

Block Holders: Large shareholders who monitor firm strategies to ensure effective management.
Business Model: The economic mechanism by which a business hopes to sell its goods or services and generate a
profit.
CEO Duality: A situation in which the CEO also serves as the chair of the board.
Comparative Advantage: The idea that certain products may be produced more cheaply or at a higher quality in
particular countries due to advantages in labor costs or technology.
Competitive Advantage: A state whereby a business unit’s successful strategies cannot be easily duplicated by its
competitors.
Contingency Theory: A view that states the most profitable firms are likely to be the ones that develop the best fit
with their environment.
Corporate Governance: The board of directors, institutional investors, and block holders who monitor firm
strategies to ensure managerial responsiveness.
Distinctive Competence: Unique resources, skills, and capabilities that enable a firm to distinguish itself from its
competitors and create competitive advantage.
Hedge Fund: An investment fund open to only a small number of investors but permitted by regulators to undertake
riskier and more speculative investments.
Industrial Organization (IO): A view based in microeconomic theory that states firm profitability is most closely
associated with industry structure.
Intended Strategy: The original strategy top management plans and intends to implement.
Mission: The reason for an organization’s existence. The mission statement is a broadly defined but enduring
statement of purpose that identifies the scope of an organization’s operations and its offerings to affected groups
(i.e., stakeholders, as defined later in the book).
Realized Strategy: The strategy top management actually implements.
Resource-Based Theory: The perspective that views performance primarily as a function of a firm’s ability to utilize
its resources.
Sarbanes-Oxley Act: Legislation passed in 2002 that created more detailed reporting requirements for boards and
executives in public U.S. companies and accounting firms.
Strategic Management: The continuous process of determining the mission and goals of an organization within the
context of its external environment and its internal strengths and weaknesses, formulating and implementing
strategies, and exerting strategic control to ensure that the organization’s strategies are successful in attaining its
goals.
Strategy: Top management’s plans to attain outcomes consistent with the organization’s mission and goals.
Sustained Competitive Advantage: A firm’s ability to enjoy strategic benefits over an extended period of time.
Top Management Team: A team of top-level executives—headed by the CEO—all of whom play instrumental roles
in the strategic management process.

Source: https://www.sagepub.com/sites/default/files/upm-binaries/53794_Chapter_1.pdf