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Chapter4: Planning and Strategic Management

Strategic Planning

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Strategic decision making is one of the most exciting and controversial topics in management today. In fact, many organizations currently are changing the ways they develop and execute their strategic plans.

   Traditionally, strategic planning emphasized a top-down approach—senior executives and specialized planning units developed goals and plans for the entire organization. Tactical and operational managers received those goals and plans, and their own planning activities were limited to specific procedures and budgets for the units.

   Over the years, managers and consulting firms innovated with a variety of analytical techniques and planning approaches, many of which have been critical for analyzing complex business situations and competitive issues. In many instances, however, senior executives spent too much time with their planning specialists to the exclusion of line managers in the rest of the organization. As a result, a gap often developed between strategic managers and tactical and operational managers, and managers and employees throughout the organization became alienated and uncommitted to the organization's success.12

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New ideas from managers throughout the organization can contribute to a plan's effectiveness.

   Today, however, senior executives increasingly are involving managers throughout the organization in the strategy formation process.13 The problems just described and the rapidly changing environment of the past 25 years have forced executives to look to all levels of the organization for ideas and innovations to make their firms more competitive. Although the CEO and other top managers continue to furnish the strategic direction, or “vision,” of the organization, tactical and even operational managers often provide valuable inputs to the organization's strategic plan. In some cases, these managers also have substantial autonomy to formulate or change their own plans. This authority increases flexibility and responsiveness, critical requirements for success in today's organizations.

   Because of this trend, a new term for the strategic planning process has emerged: strategic management. Strategic management A process that involves managers from all parts of the organization in the formulation and implementation of strategic goals and strategies. involves managers from all parts of the organization in the formulation and implementation of strategic goals and strategies. It integrates strategic planning and management into a single process. Strategic planning becomes an ongoing activity in which all managers are encouraged to think strategically and focus on long-term, externally oriented issues as well as short-term tactical and operational issues.

   As shown in Figure 4.4, the strategic management process has six major components:

1.

 

Establishment of mission, vision, and goals.

2.

  

Analysis of external opportunities and threats.

3.

  

Analysis of internal strengths and weaknesses.

4.

  

SWOT (strengths, weaknesses, opportunities, and threats) analysis and strategy formulation.

5.

  

Strategy implementation.

6.

  

Strategic control.

FIGURE 4.4

The Strategic Management Process

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   Because this process is a planning and decision process, it is similar to the planning framework discussed earlier. Although organizations may use different terms or emphasize different parts of the process, the components and concepts described in this section are found either explicitly or implicitly in every organization. Even a small entrepreneurial firm can benefit from the kind of planning framework we describe here.

Step 1: Establishment of Mission, Vision, and Goals

The first step in strategic planning is establishing a mission, a vision, and goals for the organization. The mission An organization's basic purpose and scope of operations. is a clear and concise expression of the basic purpose of the organization. It describes what the organization does, who it does it for, its basic good or service, and its values. Here are some mission statements from firms you will recognize:14

 

  McDonald's: “To be our customers' favorite place and way to eat.”

 

  Microsoft: “We work to help people and businesses throughout the world to realize their full potential.”

 

  Allstate: “To be the best … serving our customers by providing peace of mind and enriching their quality of life through our partnership in the management of the risks they face.”

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The mission statemant at McDonald's is “To be our customers' favorite place and way to eat.” How do you see that translated into the atmosphere at your local McDonald's?

Smaller organizations, of course, may have missions that aren't as broad as these. For example, the local bar found next to most campuses has this implicit mission: “To sell large quantities of inexpensive beer to college students in a noisily enjoyable environment.”

   The mission describes the organization as it currently operates. The strategic vision The long-term direction and strategic intent of a company. points to the future—it provides a perspective on where the organization is headed and what it can become. Ideally, the vision statement clarifies the long-term direction of the company and its strategic intent. Here are some actual vision statements:15

 
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  DuPont: “To be the world's most dynamic science company, creating sustainable solutions essential to a better, safer and healthier life for people everywhere.”

 

  City of Redmond, Washington: “Together we create a community of good neighbors.”

 

  Great Lakes Naval Museum: “To enhance and become an integral part of the training mission of the Naval Service Training Command, Great Lakes, by instilling in our newest sailors a strong sense of tradition and heritage of Naval service in the United States.”

   The most effective vision statements inspire organization members. They offer a worthwhile target for the entire organization to work together to achieve. Often, these statements are not strictly financial, because financial targets alone may not motivate all organization members. For example, DuPont's vision refers to being a “dynamic science company” that works toward a “better, safer and healthier life” for people. This vision inspires innovation aimed at making the world better—the type of work that is likely to motivate the scientists and other knowledge workers who can give the company an edge, ultimately improving DuPont's competitive position. Likewise, “instilling … a strong sense of tradition and heritage” provides an inspirational basis for operating the Great Lakes Naval Museum, in contrast to planning based only on budgets and historical artifacts.

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   Strategic goals evolve from the mission and vision of the organization. The chief executive officer of the organization, with the input and approval of the board of directors, establishes the mission, vision, and major strategic goals. The concepts and information within the mission statement, vision statement, and strategic goals statement may not be identified as such, but they should be communicated to everyone who has contact with the organization. Large firms generally provide public formal statements of their missions, visions, goals, and even values. For example, in support of its vision that “creating a community of good neighbors” is best done “together” with all sectors of the community, the City of Redmond has established goals such as these:

    Enhance citizen engagement in city issues.
    Sustain the natural systems and beauty of the community.
    Sustain a safe community with a coherent, comprehensive, cohesive approach to safety.
   

Maintain economic vitality.

Different city departments would contribute to various aspects of this vision in the way they carry out their operational plans with an emphasis on collaborating with local businesses and residents.

   Lofty words in a vision and mission statement cannot be meaningful without strong leadership support. At McDonald's, the commitment of past and present CEOs has played a large role in the success of the company's strategy implementation. Several years ago, the company was floundering as it lost sight of its commitment to quality, value, speed, and convenience. Under the leadership of James Cantalupo, the company created the mission statement quoted earlier, which placed the emphasis on the customer's experience. In a “Plan to Win,” strategic goals such as revamping restaurants for a better drive-through experience and improving the quality of the menu supported the mission. When Jim Skinner took the job of chief executive, he enthusiastically backed the mission statement and its supporting Plan to Win, not hesitating to share credit for the company's continued success.16

“There is no more powerful engine driving an organization toward excellence and long-term success than an attractive, worthwhile, and achievable vision of the future.”
Burt Nanus
SOURCE: Visionary Leadership (San Francisco: Jossey-Bass, 1992).
 

   Where leadership is strong, statements of visions and goals clarify the organization's purpose to key constituencies outside the organization. They also help employees focus their talent, energy, and commitment in pursuit of the organization's goals. When the time comes for you to seek employment with a firm, reviewing the firm's statements of mission, vision, and goals is a good first step in determining whether the firm's purposes and values will be compatible with your own.

Step 2: Analysis of External Opportunities and Threats

The mission and vision drive the second component of the strategic management process: analysis of the external environment. Successful strategic management depends on an accurate and thorough evaluation of the competitive environment and macroenvironment. The various components of these environments were introduced in Chapter 2. <a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077347366/student/809254/lo3.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (11.0K)</a>

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TABLE 4.1

Environmental Analysis

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   The important activities in an environmental analysis include the ones listed in Table 4.1. The analysis begins with an examination of the industry. Next, organizational stakeholders are examined. Stakeholders Groups and individuals who affect and are affected by the achievement of the organization's mission, goals, and strategies. are groups and individuals who affect and are affected by the achievement of the organization's mission, goals, and strategies. They include buyers, suppliers, competitors, government and regulatory agencies, unions and employee groups, the financial community, owners and shareholders, and trade associations. The environmental analysis provides a map of these stakeholders and the ways they influence the organization.17

Collaborating with key stakeholders can help organizations successfully develop and implement their strategic plan. At software company Intuit, CEO Brad Smith launched strategy development by learning what was on the minds of some key stakeholders. He visited with his board of directors and investors and set up meetings with groups of employees who work directly with Intuit's customers.

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   Smith asked each group of stakeholders some key questions related to strategic analysis: “What is Intuit's biggest untapped opportunity? What is the biggest risk facing Intuit that keeps you up at night? What is the biggest mistake I can make as a CEO in my first year?” From the answers, Smith gained insights that helped him establish priorities for Intuit's strategy.

   Smith learned that a sizable number of Intuit's business customers have international activities, so he determined that Intuit would have to become a more global company. Its QuickBooks financial software now handles multiple currencies for international transactions. In response to the competitive threat of a new release of financial software from Microsoft, Smith assembled managers to craft a marketing strategy that would convince customers to wait two more months for the next version of QuickBooks. That campaign caused QuickBooks sales to jump in spite of Microsoft's efforts.18

 

   The environmental analysis also should examine other forces in the environment, such as economic conditions and technological factors. One critical task in environmental analysis is forecasting future trends. As noted in Chapter 2, forecasting techniques range from simple judgment to complex mathematical models that examine systematic relationships among many variables. Even simple quantitative techniques outperform the intuitive assessments of experts. Judgment is susceptible to bias, and managers have a limited ability to process information. Managers should use subjective judgments as inputs to quantitative models or when they confront new situations.

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   Frequently, the difference between an opportunity and a threat depends on how a company positions itself strategically. For example, some states have required that electric utilities get a certain share of their power from renewable sources such as wind and solar energy, rather than from fossil fuels, including coal, oil, and natural gas. This requirement poses an obvious threat to utilities, because the costs of fossil fuel energy are less, and customers demand low prices. However, some companies see strategic opportunities in renewable power. For example, the German conglomerate Schott has developed a solar thermal technology in which sunlight heats oil in metal tubes enclosed in coated glass; the heated oil makes steam, which powers a turbine and generates electricity. Solar thermal energy, although it now costs more than fossil fuels, is more efficient than the solar panels installed on buildings, and it can store extra power to be used on cloudy days.19 Similarly, overflowing landfills are an expensive challenge for many municipalities, but a growing number are seeing an opportunity in the form of energy generation. As garbage decomposes, it produces methane gas, which is used as a fuel to power generators. In East Brunswick, New Jersey, for example, the Edgeboro landfill generates electricity that powers the county's wastewater treatment plant.20

   Some changes in the environment can bring one company a combination of threats and opportunities. Recently, the United States and European Union deregulated air travel between their respective countries, allowing any European air carrier to fly to any city in the United States, while U.S. carriers were granted access to all airports in EU countries. Before this agreement, airlines had to negotiate permission with each country whose airport they wanted to use. The deregulation allows American Airlines, for example, to broaden the variety of flights it offers in its one-world alliance with British Airways—an opportunity. But it also means threats, such as new competition to serve London's Heathrow Airport, where Continental and Delta previously could not land.21

“We wanted Nike to be the world's best sports and fitness company. Once you say that, you have a focus. You don't end up making wing tips or sponsoring the next Rolling Stone world tour.”
Philip Knight , Nike Founder
 

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Step 3: Analysis of Internal Strengths and Weaknesses

As managers conduct an external analysis, they will also assess the strengths and weaknesses of major functional areas inside their organization. Table 4.2 lists some of the major components of this internal resource analysis. For example, is your firm strong enough financially to handle the lengthy and costly investment new projects often require? Can your existing staff carry out its part of the plan, or will additional training or hiring be needed? Is your firm's image compatible with the strategy, or will it have to persuade key stakeholders that a change in direction makes sense? This kind of internal analysis provides strategic decision makers with an inventory of the organization's existing functions, skills, and resources as well as its overall performance level. Many of your other business courses will prepare you to conduct an internal analysis.

Resources and Core Competencies Without question, strategic planning has been strongly influenced in recent years by a focus on internal resources. Resources Inputs to a system that can enhance performance. are inputs to production (recall systems theory) that can be accumulated over time to enhance the performance of a firm. Resources can take many forms, but they tend to fall into two broad categories: (1) tangible assets such as real estate, production facilities, raw materials, and so on, and (2) intangible assets such as company reputation, culture, technical knowledge, and patents, as well as accumulated learning and experience. The Walt Disney Company, for example, has developed its strategic plan on combinations of tangible assets (e.g., hotels and theme parks) as well as intangible assets (brand recognition, talented craftspeople, culture focused on customer service).22

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Amazon’s key customer benefits are speed and excellence of service.

   Effective internal analysis provides a clearer understanding of how a company can compete through its resources. Resources are a source of competitive advantage only under certain circumstances. First, if the resource is instrumental for creating customer value—that is, if it increases the benefits customers derive from a good or service relative to the costs they incur—the resource can lead to a competitive advantage.23 For example, Amazon's powerful search technology and its ability to track customer preferences and offer personalized recommendations each time its site is accessed, as well as its quick product-delivery system, are clearly valuable resources that enhance Amazon's competitiveness.

TABLE 4.2

Internal Resource Analysis

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   Second, resources are a source of advantage if they are rare and not equally available to all competitors. Even for extremely valuable resources, if all competitors have equal access, the resource cannot provide a source of competitive advantage. For companies such as Merck, DuPont, Dow Chemical, and others, patented formulas represent important resources that are both rare and valuable. Amazon, too, sought a patent for its one-click shopping technique.

   Third, if resources are difficult to imitate, they provide a source of competitive advantage. Earlier in this chapter, we saw that Wells Fargo has managed to compete with larger banks by developing expertise in cross-selling. Unlike, say, free checking accounts, this intangible resource is difficult to imitate because it requires training and motivating employees at all levels to adopt customer-oriented thinking and collaborate across divisions. Under the strong leadership of Dick Kovacevich, Wells Fargo was able to inspire its employees to learn and use the necessary skills. Industry analyst Richard Bove says the strategy succeeded because of a hard-to-imitate resource, “the force of [Kovacevich's] personality, which is so strong and so positive that it infects other people.”24 As in this example, where success relies on leadership and collaboration practices, resources tend to be harder to imitate if they are complex, with many interdependent variables and no obvious links between easily explained behaviors and desired outcomes.25

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Imagine how skilled Coca-Cola's global network of bottlers are to be able to deliver their product worldwide and more efficiently than any of their competitors. Shown here is a truck delivering Coke in India.

   Finally, resources can enhance a firm's competitive advantage when they are well organized. For example, Coca-Cola's well-organized and global network of bottlers allows the company to quickly introduce a new soft drink worldwide and to distribute it more efficiently than any competitor. IBM, known primarily for computer hardware until it became more of a commodity than a source of competitive advantage, has organized its staff and systems to efficiently produce a consolidated technology product for its corporate clients—hardware, software, and service in one package. This spares its clients the cost of managing technology on their own.

   As shown in Figure 4.5, when resources are valuable, rare, inimitable, and organized, they can be viewed as a company's core competencies. Simply stated, a core competence A unique skill and/or knowledge an organization possesses that gives it an edge over competitors. is something a company does especially well relative to its competitors. Honda, for example, has a core competence in small engine design and manufacturing; Sony has a core competence in miniaturization; Federal Express has a core competence in logistics and customer service. As in these examples, a core competence typically refers to a set of skills or expertise in some activity, rather than physical or financial assets.

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FIGURE 4.5

Resources and Core Competence

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Kodak CEO Antonio Perez is attempting to redefine his firm's core competencies. Once a film-based business, Kodak developed digital camera products that eventually became standard fare. But even though these new products generated huge sales, overall profits for Kodak lagged. So Perez wants Kodak to shift its focus, creating innovative products that will help people organize, classify, and manage their personal photo libraries, much the same way Apple products do for their music libraries. In other words, he wants Kodak to concentrate on digital services instead of tangible products like cameras and film. The new digital services include such offerings as online photo sharing and a rapid-fire scanning system called Scan the World, which takes those old shoe boxes filled with snapshots and transforms them into digital images that are organized and catalogued by date. Perez knows that the change will be difficult. It will be “a very hard transformation,” he admits. But he believes this move will ultimately yield greater profits and a longer life for Kodak.26

 

Benchmarking  To assess and improve performance, some companies use benchmarking, the process of assessing how well one company's basic functions and skills compare with those of another company or set of companies. The goal of benchmarking is to thoroughly understand the “best practices” of other firms and to undertake actions to achieve both better performance and lower costs. Benchmarking programs have helped a myriad of companies, such as Ford, Corning, Hewlett-Packard, Xerox, and Anheuser-Busch, make great strides in eliminating inefficiencies and improving competitiveness.

   In London, doctors at Great Ormond Street Hospital for Children used benchmarking to improve their procedures for patient handoffs, the times when patients are transferred from one hospital unit or doctor's care to another. A team of doctors benchmarked an organization that excelled in complex procedures: the pit crew for Italy's Formula One Ferrari racing team. They learned, for example, that the pit crew carefully choreographed all their moves, based on information from a human factors engineer and a focus on minor mistakes that wouldn't be obvious. Unlike the surgical teams at Great Ormond, members of the pit crew knew who was in charge, had clearly specific responsibilities, worked in silence, and trained for every imaginable contingency. The doctors developed ways to apply those procedures to their cardiac surgery team, with the result that technical errors declined by 42 percent and failures to share information dropped by half.27

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   Depending on how it is applied, benchmarking may be of limited help in that it only helps a company perform as well as its competitors; strategic management ultimately is about surpassing those companies. Besides benchmarking against leading organizations in other industries, as Great Ormond Street Hospital did, companies may address this problem by engaging in internal benchmarking. That approach involves benchmarking their different internal operations and departments against one another to disseminate the company's best practices throughout the organization and thereby gain a competitive advantage.

   

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Aligning a firm’s bottom-line practices with “best practices” can improve its competitiveness.

Step 4: SWOT Analysis and Strategy Formulation

Once managers have analyzed the external environment and the internal resources of the organization, they will have the information they need to assess the organization's strengths, weaknesses, opportunities, and threats. Such an assessment normally is referred to as a SWOT analysis A comparison of strengths, weaknesses, opportunities, and threats that helps executives formulate strategy.. Strengths and weaknesses refer to internal resources. For example, an organization's strengths might include skilled management, positive cash flow, and well-known and highly regarded brands. Weaknesses might be lack of spare production capacity and the absence of reliable suppliers. Opportunities and threats arise in the macroenvironment and competitive environment. Examples of opportunities are a new technology that could make the supply chain more efficient and a market niche that is currently underserved. Threats might include the possibility that competitors will enter the underserved niche once it has been shown to be profitable. In the “Management Close-Up: Taking Action” feature, consider what strengths, weaknesses, opportunities, and threats Olli-Pekka Kallasvuo identified at Nokia.

   SWOT analysis helps managers summarize the relevant, important facts from their external and internal analyses. Based on this summary, they can identify the primary and secondary strategic issues their organization faces. The managers then formulate a strategy that will build on the SWOT analysis to take advantage of available opportunities by capitalizing on the organization's strengths, neutralizing its weakness, and countering potential threats.

   To take an example, consider how SWOT analysis might be carried out at Microsoft. The company's size and earnings from its dominant operating system and Office suite of software are an obvious strength. The company has weaknesses as well. One of the fastest-growing areas of the computer business is Internet applications, especially profits from the sale of online advertising. Microsoft has struggled in this area, with its Internet search engine losing market share year after year, and online ad sales growing but only as a tiny segment of the market. The dominant threat to Microsoft in this area is widely considered to be Google, which not only dominates the search business—and its related advertising—but even has challenged Microsoft with free business applications. This analysis would explain Microsoft's recent efforts to buy DoubleClick, which arranges deals between advertisers and online publishers. DoubleClick is a big player in the online-advertising business and has expertise that Microsoft lacks.28 By purchasing DoubleClick, Microsoft would use one of its strengths (its capital) to neutralize a weakness (inexperience and small market share in online advertising) and counter a threat (Google). Ironically, before the deal could close, Google emerged as another bidder for DoubleClick.29 In the real world, as a company is formulating strategy, so are its competitors. As a result, the process must be continually evolving through contingency planning. The more uncertainty that exists in the external environment, the more the strategy needs to focus on building internal capabilities through practices such as knowledge sharing and continuous process improvement.31 Yet, at a basic level, strategy formulation moves from analysis to devising a coherent course of action, such as Microsoft's plan to purchase (and eventually operate) DoubleClick. In this way, the organization's corporate, business, and functional strategies will begin to take shape.

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Management Close-Up

TAKING ACTION

When Olli-Pekka Kallasvuo became CEO in 2006, Nokia was viewed as stodgy and slow to react to changes in the cell phone marketplace. What's more, critics characterized its product lineup as “tired.” Kallasvuo told the press that despite Nokia's dominant position in most of the world, it could not afford to be overconfident. The company, he said, needed to become flexible and responsive to customer needs and wants.

   Kallasvuo also spoke about the importance of humility as a trait in a manager—and a company. He defined a humble company as one that listens to its customers and uses the information in its planning—one whose management teams embrace diversity of opinion. Said Kallasvuo, management teams need to “resist the safe conformity of benchmarking” and embrace change. Kallasvuo also declared that he wanted to move Nokia to a management structure that would better reflect its global presence.

   Making these adjustments could be a tall order for a company that, in many respects, already seemed to be doing many things right. Field research has enabled Nokia to learn what consumers in developing economies want and need—for example, a built-in flashlight on the low-cost models Nokia sells in sub-Saharan Africa, where the power grid is often down or spotty. Through high-volume parts purchasing, Nokia has been able to manage unit costs well enough that its competitors can't touch it in the low-end market. Kallasvuo also issued an edict regarding product development: projects must be ready in months, not years.30

  

Olli-Pekka Kallasvuo says, as a CEO, he can accomplish very little on his own. However, with the Nokia workforce numbering about 100,000, he says there's much that can be accomplished with teams. Do you agree? How does teamwork relate to strategic planning?

  

When Google announced it was pioneering software technology to bring Internet capability to cell phones, Nokia's first reaction was that Google did not represent a threat. What do you think of this analysis?

   Before we continue our strategy discussion, we note that many individuals seeking a job or a career change can find a “self-SWOT analysis” helpful. What are you particularly good at? What weaknesses might you need to overcome to improve your employment chances? What firms offer the best opportunity to market your skills to full advantage? Will you have a lot of competition from other job seekers? As with companies, this kind of analysis can be the beginning of a plan of action and can improve the plan's effectiveness.

Corporate Strategy  A corporate strategy The set of businesses, markets, or industries in which an organization competes and the distribution of resources among those entities. identifies the set of businesses, markets, or industries in which the organization competes and the distribution of resources among those businesses. Figure 4.6 shows four basic alternatives for a corporate strategy, ranging from very specialized to highly diverse. A concentration A strategy employed for an organization that operates a single business and competes in a single industry. strategy focuses on a single business competing in a single industry. In the food-retailing industry, Kroger, Safeway, and A&P all pursue concentration strategies. Frequently, companies pursue concentration strategies to gain entry into an industry when industry growth is good, or when the company has a narrow range of competencies. An example is the Chinese company Baidu.com, described in the BusinessWeek box. C. F. Martin & Company pursues a concentration strategy by focusing on making the best possible guitars and guitar strings, a strategy that has enabled the family-owned business to operate successfully for more than 150 years.

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FIGURE 4.6

Summary of Corporate Strategies

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A vertical integration The acquisition or development of new businesses that produce parts or components of the organization's product. strategy involves expanding the domain of the organization into supply channels or to distributors. At one time, Henry Ford had fully integrated his company from the ore mines needed to make steel all the way to the showrooms where his cars were sold. Vertical integration generally is used to eliminate uncertainties and reduce costs associated with suppliers or distributors. <a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077347366/student/809254/lo5.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (11.0K)</a>

   A strategy of concentric diversification A strategy used to add new businesses that produce related products or are involved in related markets and activities. involves moving into new businesses that are related to the company's original core business. William Marriott expanded his original restaurant business outside Washington, D.C., by moving into airline catering, hotels, and fast food. Each of these businesses within the hospitality industry is related in terms of the services it provides, the skills necessary for success, and the customers it attracts. Often companies such as Marriott pursue a strategy of concentric diversification to take advantage of their strengths in one business to gain advantage in another. Because the businesses are related, the products, markets, technologies, or capabilities used in one business can be transferred to another. Success in a concentric diversification strategy requires adequate management and other resources for operating more than one business. Guitar maker C. F. Martin once tried expanding through purchases of other instrument companies, but management was stretched too thin to run them all well, so the company eventually divested the acquisitions and returned to its concentration strategy.32

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General Electric's ownership of NBC is an example of conglomerate diversification. Shown from left to right during the giant merger announcement in 1986 are Grant Tinker, outgoing Chairman of NBC; Jack Welch, CEO of GE during the takeover; and Bob Wright, incoming Chairman of NBC.

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FIGURE 4.7

The BCG Matrix

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   In contrast to concentric diversification, conglomerate diversification A strategy used to add new businesses that produce unrelated products or are involved in unrelated markets and activities. is a corporate strategy that involves expansion into unrelated businesses. For example, General Electric Corporation has diversified from its original base in electrical and home appliance products to such wide-ranging industries as health, finance, insurance, truck and air transportation, and even media, with its ownership of NBC. Typically, companies pursue a conglomerate diversification strategy to minimize risks due to market fluctuations in one industry.

   The diversified businesses of an organization are sometimes called its business portfolio. One of the most popular techniques for analyzing a corporation's strategy for managing its portfolio is the BCG matrix, developed by the Boston Consulting Group. The BCG matrix is shown in Figure 4.7. Each business in the corporation is plotted on the matrix on the basis of the growth rate of its market and the relative strength of its competitive position in that market (market share). The business is represented by a circle whose size depends on the business's contribution to corporate revenues.

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Baidu Thinks It Can Play in Japan

   

Facing slower growth and increased competition at home, Baidu.com, the dominant search engine in China, is making its first foray overseas. Baidu Chairman and Chief Executive Officer Robin Li said the company will spend $15 million trying to replicate its at-home success in Japan this year.

   The company started investing in Japan last year, and management argues that the same magic that made Baidu.com tops in China will give Baidu.jp an edge in Japan. “We are very confident” about Baidu's ability to make an impact in the Japanese market, Li said in a conference call from Beijing.

   Baidu certainly has had an impressive run in China. The company reported profits for 2006 of $38.7 million, up 533.9 percent from a year earlier, on sales of $107.4 million, an increase of 162.5 percent from the year before. Baidu has more than half of the total search market in China, and it has formed partnerships with some of the top names in the tech world, from IBM to Intel to Microsoft.

   Baidu's accomplishments are all the more impressive given the attempts by both Google and Yahoo to become more competitive in the Chinese search market. Even Baidu, though, can't keep that kind of torrential growth going in China. In the fourth quarter of the previous year, Baidu only added 6,000 new customers on a base of more than 100,000 advertisers. Google and Yahoo aren't the only ones going after Baidu's core business. Local players such as portal Sohu.com and Shenzhen-based instant-messaging provider Tencent are also boosting their Chinese-language search offerings.

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   That's one reason Baidu is expanding to Japan. Some people who follow the industry believe that Baidu's strengths—especially its ability to cope with tens of thousands of Chinese characters—will help there. Written Japanese uses many of the same characters as written Chinese, and that plays to Baidu's biggest advantage over Western rivals, says Gerhard Fasol, CEO of Tokyo-based consulting firm Eurotechnology Japan. “They may be able to exploit their knowledge of Chinese characters better,” he says.

   Fasol also believes that Baidu has an opportunity to establish itself in Japan's mobile search market, which is in its infancy. “The momentum on development is moving from fixed-line to mobile,” he says, pointing out that search via mobile phones is only about six months old in Japan. “You know, it's very early, so it's not mature at all. The dice have not fallen yet.”

   Still, some people who follow Chinese companies have their doubts about Baidu's ability to do well in Japan. There are several big-name competitors vying for the same market as Baidu. The field is dominated by Yahoo Japan. Google is stronger in Japan than in China, too. And Japanese cellular operator NTT DoCoMo operates a mobile search service of its own.

   Li said Baidu has plenty of experience in coming from behind to take over a market. “Baidu wasn't number one in China from Day One,” he said. “We started quite late. So we are familiar with how to play the catch-up game.”

SOURCE: Excerpted from Bruce Einhorn, “Baidu Thinks It Can Play in Japan,” BusinessWeek, February 15, 2007, http://www.businessweek.com.

   High-growth, weak-competitive-position businesses are called question marks. They require substantial investment to improve their position; otherwise, divestiture is recommended. High-growth, strong-competitive-position businesses are called stars. These businesses require heavy investment, but their strong position allows them to generate the needed revenues. Low-growth, strong-competitive-position businesses are called cash cows. These businesses generate revenues in excess of their investment needs and therefore fund other businesses. Finally, low-growth, weak-competitive-position businesses are called dogs. The remaining revenues from these businesses are realized, and then the businesses are divested.

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Companies that integrate vertically often do so to reduce their costs.

Concentric diversification can melt national boundaries. Internet search giant Google recently acquired a portion of the rapidly growing Chinese Web site Xunlei.com, which allows users to download music and video clips from the Internet. Google's investment in—and partnership with—Xunlei.com will allow the Chinese site to use Google's search capabilities, while giving Google direct access to China's 130 million Internet users. Google has also formed an alliance with China Mobile, the country's largest mobile phone carrier, to offer mobile Internet search service to Chinese consumers.

   Despite its ranking as the world's largest search engine, in China Google is dwarfed by the Chinese search engine Baidu.com, which claims about 63 percent of China's market share. (Google claims only about 19 percent.) In addition, China is filled with tiny start-ups that have, thus far, shut out U.S. Internet firms. So, Google's strategy is to diversify within that country to capture more of the market. Because of government and cultural restraints in China, Google would have a much more difficult time entering the market there alone. By creating alliances with Chinese firms, Google will have a better chance of gaining the attention of Chinese consumers who are in the market for downloads of videos, music, games, software, and cell phone ringtones.33

 

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   The BCG matrix is not intended as a substitute for management judgment, creativity, insight, or leadership. But it is a tool that can, along with other techniques, help managers of the firm as a whole and of its individual businesses evaluate their strategy alternatives.34 This type of thinking has recently helped Abbott Laboratories succeed. When Miles White took over as Abbott's CEO, he began restructuring the company's portfolio to emphasize growth. He sold off much of the company's diagnostics business, which was earning low returns, and purchased businesses with higher risks but the potential to be stars, including Guidant Corporation's vascular division, which makes drug-coated stents, and Kos Pharmaceuticals, which is working on drugs for raising “good” cholesterol. White says his goal is to have a portfolio of businesses that are innovative, growing, and delivering high returns.35

Trends in Corporate Strategy  Corporate America is periodically swept by waves of mergers and acquisitions (M&As). The targets chosen for mergers and acquisitions depend on the organization's corporate strategy of either concentrating in one industry or diversifying its portfolio. Many of the most recent deals, including AT&T's acquisition of BellSouth, have been aimed at helping the companies enjoy the cost advantages of consolidating their marketing, customer service, and other operations. In contrast, during the 1990s, many deals—including the merger of America Online and Time Warner—were made to help traditional businesses enter the hot Internet market.

The past two decades have seen waves of mergers and acquisitions.36

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   The value of implementing a diversified corporate strategy depends on individual circumstances. Many critics have argued that unrelated diversification hurts a company more often than it helps it. In recent years, many diversified companies have sold their peripheral businesses so that they could concentrate on a more focused portfolio. In contrast, the diversification efforts of an organization competing in a slow-growth, mature, or threatened industry often are applauded.

   Although the merits of diversification are an issue for continued study, most observers agree that organizations usually perform better if they implement a more concentric diversification strategy, in which businesses are related somehow or similar to one another. For example, near the beginning of the chapter, we saw that IBM has a successful strategy of acquiring small software companies. This strategy succeeds because IBM has a competitive advantage in selling software (including a brand with a strong reputation), has expertise in the product category that can help it appreciate the technical applications sold by these sometimes-obscure companies, and uses the acquisitions to grow faster than it could by hiring its programmers to create similar products. The acquired companies benefit because sales of their products increase—by an average of 25 percent in the first year.37

Business Strategy  After the top management team and board make the corporate strategic decisions, executives must determine how they will compete in each business area. Business strategy The major actions by which a business competes in a particular industry or market. defines the major actions by which an organization builds and strengthens its competitive position in the marketplace. A competitive advantage typically results from one of two generic business strategies introduced here and elaborated in Chapter 7.38 <a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077347366/student/809254/lo6.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (11.0K)</a>

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   First, organizations such as Wal-Mart and Southwest Airlines pursue competitive advantage through low-cost strategies A strategy an organization uses to build competitive advantage by being efficient and offering a standard, no-frills product. . Businesses using a low-cost strategy attempt to be efficient and offer a standard, no-frills product. Southwest Airlines' low-cost strategy is simply stated: “to be the low-fare airline.” That strategy helps with operational planning; when someone suggested offering passengers chicken salad instead of peanuts on some flights, the chief executive simply asked whether chicken salad would help Southwest be “the low-fare airline.”39 Companies that succeed with a low-cost strategy often are large and try to take advantage of economies of scale in production or distribution. In many cases, their scale allows them to buy and sell their goods and services at a lower price, which leads to higher market share, volume, and, ultimately, profits. To succeed, an organization using this strategy generally must be the cost leader in its industry or market segment. However, even a cost leader must offer a product that is acceptable to customers compared with competitors' products.

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Low-price strategies usually require low production costs

   Second, an organization may pursue a differentiation strategy A strategy an organization uses to build competitive advantage by being unique in its industry or market segment along one or more dimensions.. With a differentiation strategy, a company attempts to be unique in its industry or market segment along some dimensions that customers value. This unique or differentiated position within the industry often is based on high product quality, excellent marketing and distribution, or superior service.

   Nordstrom's commitment to quality and customer service in the retail apparel industry is an excellent example of a differentiation strategy. For example, Nordstrom's personal shoppers are available online, by phone, or in stores to select items for shoppers' consideration at no charge. Innovation, too, is an important ingredient of a differentiation strategy. In the market for toilet paper, Scott Paper Company once determined that it could not afford to compete for institutional sales based on price. Instead, the company began offering institutions a free dispenser that would hold larger rolls of paper, saving its customers the labor cost of replacing empty rolls more frequently. Scott initially was the only company selling the larger rolls, so it gained market share while competitors scrambled to catch up.40

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Nordstrom differentiates itself from its competitors with superior customer service and broad product selection.

   Whatever strategy managers adopt, the most effective strategy is one that competitors are unwilling or unable to imitate. If the organization's strategic plan is one that could easily be adopted by industry competitors, it may not be sufficiently distinctive or, in the long run, contribute significantly to the organization's competitiveness. For example, a strategy to gain market share and, ultimately, profits by being the “first mover” to offer an innovative product may or may not succeed, depending in part on competitive responses. In some industries, such as computers, technology advances so fast that the first company to provide a new product is quickly challenged by later entrants offering superior products.41

   

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A high-quality strategy is often more difficult for competitors to imitate

Functional Strategy  The final step in strategy formulation is to establish the major functional strategies. Functional strategies Strategies implemented by each functional area of the organization to support the organization's business strategy. are implemented by each functional area of the organization to support the business strategy. The typical functional areas include production, human resources, marketing, research and development, finance, and distribution. For example, IBM's plan to grow through acquisitions of software companies requires functional strategies for training its sales force to understand the new products and for training the acquired company's employees to understand IBM's culture and procedures. Part of the functional strategy includes assigning each new employee to an experienced IBM mentor. At Wells Fargo, the strategy to grow through cross-selling requires functional strategies for advertising, training employees to cross-sell, and developing systems for sharing information across department boundaries. And at Boeing, the strategy to grow at a steady pace, rather than ramping-up production until high costs force cutbacks, requires functional strategies related to hiring and training employees, scheduling production, and negotiating sales.42

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   Functional strategies typically are developed by functional area executives with input of and approval from the executives responsible for business strategy. Senior strategic decision makers review the functional strategies to ensure that each major department is operating consistent with the business strategies of the organization. For example, automated production techniques—even if they saved money—would not be appropriate for a piano company like Steinway, whose products are strategically positioned (and priced) as high-quality and hand-crafted. At companies that compete based on product innovation, strategies for research and development are especially critical. But in the recession that occurred at the beginning of this decade, General Electric cut back on research in lighting technology just as other companies were making advances in LED lighting. When the economy recovered, customers were looking for innovative lighting, but GE had fallen behind. Based on that experience, GE committed itself to an R&D strategy of maintaining budgets even when sales slow down. In the latest economic downturn, the company continued to fund a project in which it is developing new aircraft engines with Honda Motor Company.43

Step 5: Strategy Implementation

As with any plan, simply formulating a good strategy is not enough. Strategic managers also must ensure that the new strategies are implemented effectively and efficiently. Recently, corporations and strategy consultants have been paying more attention to implementation. They realize that clever techniques and a good plan do not guarantee success. This greater appreciation is reflected in two major trends. <a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077347366/student/809254/lo7.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (11.0K)</a>

   First, organizations are adopting a more comprehensive view of implementation. The organization structure, technology, human resources, employee reward systems, information systems, organization culture, and leadership style must all support the strategy. Just as an organization's strategy must be matched to the external environment, so must it also fit the multiple factors through which it is implemented. The remainder of this section discusses these factors and the ways they can be used to implement strategy.

   Second, many organizations are extending the more participative strategic management process to implementation. Managers at all levels are involved with formulating strategy and identifying and executing ways to implement it. Senior executives still may oversee the implementation process, but they are placing much greater responsibility and authority in the hands of others. In general, strategy implementation involves four related steps:

  

   Step 1: Define strategic tasks. Articulate in simple language what a particular business must do to create or sustain a competitive advantage. Define strategic tasks to help employees understand how they contribute to the organization, including redefining relationships among the parts of the organization.

  

   Step 2: Assess organization capabilities. Evaluate the organization's ability to implement the strategic tasks. A task force typically interviews employees and managers to identify specific issues that help or hinder effective implementation. Then the results are summarized for top management. In the course of your career, you will likely be asked to participate in a task force. We discuss working effectively in teams in Chapter 14.

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   Step 3: Develop an implementation agenda. Management decides how it will change its own activities and procedures; how critical interdependencies will be managed; what skills and individuals are needed in key roles; and what structures, measures, information, and rewards might ultimately support the needed behavior. A philosophy statement, communicated in terms of value, is the outcome of this process.

  

   Step 4: Create an implementation plan. The top management team, the employee task force, and others develop the implementation plan. The top management team then monitors progress. The employee task force continues its work by providing feedback about how others in the organization are responding to the changes.

   This process, though straightforward, does not always go smoothly. Table 4.3 shows six different barriers to strategy implementation and provides a description of some key principles for overcoming these “silent killers.” By paying closer attention to the processes by which strategies are implemented, executives, managers, and employees can make sure that strategic plans are actually carried out.44

Step 6: Strategic Control

The final component of the strategic management process is strategic control. A strategic control system A system designed to support managers in evaluating the organization's progress regarding its strategy and, when discrepancies exist, taking corrective action. is designed to support managers in evaluating the organization's progress with its strategy and, when discrepancies exist, taking corrective action. The system must encourage efficient operations that are consistent with the plan while allowing flexibility to adapt to changing conditions. As with all control systems, the organization must develop performance indicators, an information system, and specific mechanisms to monitor progress. At Boeing, one obvious measure of its strategy to partner with suppliers is whether suppliers are keeping up with Boeing's need for components that meet its quality standards. In fact, as orders flowed in for the 787 Dreamliner, several suppliers began missing deadlines. Boeing dispatched teams of experts from various functions to visit the suppliers, diagnose the reasons for their difficulties, and help them catch up. It also has modified its strategy by having its own employees do more of the final assembly work in order to avoid falling further behind.45

TABLE 4.3

Attacking the Six Barriers to Strategy Implementation

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SOURCE: Reprinted from M. Beer and R. A Eisenstat, “The Silent Killers of Strategy Implementation and Learning,” MIT Sloan Management Review 4, no. 4 (Summer 2000), pp. 29–40, by permission of the publisher. Copyright © 2000 by Massachusetts Institute of Technology. All rights reserved.

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   Most strategic control systems include a budget to monitor and control major financial expenditures. In fact, as a first-time manager, you will most likely confront your work unit's budget—a key aspect of your organization's strategic plan. Your executive team may give you budget assumptions and targets for your area, reflecting your part in the overall plan, and you may be asked to revise your budget once all the budgets in your organization have been consolidated and reviewed.

   The dual responsibilities of a control system—efficiency and flexibility—often seem contradictory with respect to budgets. The budget usually establishes spending limits, but changing conditions or the need for innovation may require different financial commitments during the period. To solve this dilemma, some companies have created two budgets: strategic and operational. For example, managers at Texas Instruments control two budgets under the OST (objectives-strategies-tactics) system. The strategic budget is used to create and maintain long-term effectiveness, and the operational budget is tightly monitored to achieve short-term efficiency. The topic of control in general—and budgets in particular—is discussed in more detail in Chapter 16. In the “Management Close-Up: Assessing Outcomes and Seizing Opportunities” feature, consider what performance measures indicate the success of Nokia's strategy. What trade-offs, if any, do you see between innovation and efficiency?

 

Management Close-Up

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ASSESSING OUTCOMES AND SEIZING OPPORTUNITIES

After Apple's introduction of the iPhone and its growing multitude of Web applications, how did Nokia respond? Favorably, say industry observers, who have since shifted their outlook on Nokia's prospects. Under Kallasvuo's leadership, they say the company is looking to the future and introducing more interesting phones and services. For example, after Apple introduced its App Store, Nokia upped the ante by launching its Ovi Store on the Internet. The Ovi service, launched in 2007, permits Nokia phone users to access music, games, maps, videos, and more. Ovi applications also provide information targeted to a cell phone user's geographic location.

   Nokia's newly launched high-end model, the N97, competes head to head with Apple's iPhone and Research in Motion's BlackBerry. The N97 boasts a slide-out alphabetic keyboard and a 3.5-inch touch screen with 50 percent greater resolution than the iPhone's. What's more, it comes preloaded with Ovi Store.

   In another expansion of product capability, Nokia invested $35 million in Obopay, a mobile payment service. Located in India, Obopay enables users to send and receive money using their cell phone. Such services are particularly useful in developing countries, where consumers have little access to banks or credit cards and where holding large amounts of cash can be dangerous.

   Nokia is also aggressively building a presence in the United States. Through a joint venture with Siemens AG, it is seeking to buy pieces of bankrupt Canadian carrier Nortel, which had a significant U.S. network and a robust research and development pipeline.

   The company also announced it will produce a “green” phone made with recycled steel and environmentally friendly biomaterials. Called the “Remade,” the phone has a thin, silver handset whose case is made of renewable materials instead of petroleum-based plastic.46

  

Olli-Pekka Kallasvuo says that in the mobile-devices industry, one size will not fit all for wireless communications. How does this statement affect strategic planning at Nokia?

  

A technology-driven industry like the one in which Nokia operates can be quite fluid. From the discussion in the case, how well do you think Nokia responded to its competition? Do you think its strategic planning has improved overall?




12Bower and Gilbert, “Managers' Everyday Decisions”; and “Business: Fading Fads,” The Economist, April 22, 2000, pp. 60–61.

13S. W. Floyd and P. J. Lane, “Strategizing throughout the Organization: Management Role Conflict in Strategic Renewal,” Academy of Management Review 25, no. 1 (January 2000), pp. 154–77.

14Mission statements quoted from the corporate Web sites: McDonald's, “Student Research,” http://www.mcdonalds.com; Microsoft, “Mission and Values,” http://www.microsoft.com; and Allstate, Corporate Press Kit, http://www.allstate.com, all accessed April 3, 2007.

15Vision statements quoted from the organizations' Web sites: DuPont, “Our Company: DuPont Vision,” http://www2.dupont.com; City of Redmond, “City of Redmond Vision Statement,” http://www.ci.redmond.wa.us; and Great Lakes Naval Museum Association, “Vision Statement,” http://www.greatlakesnavalmuseum.org, all accessed April 3, 2007.

16Andrew Martin, “The Happiest Meal: Hot Profits,” New York Times, January 11, 2009, http://www.nytimes.com.

17A. A. Thompson and A. J. Strickland III, Strategic Management: Concepts and Cases, 8th ed. (New York: Richard D. Irwin, 1995), p. 23; R. Edward Freeman, J. S. Harrison, and A. C. Wicks, Managing for Stakeholders (New Haven, CT: Yale University Press, 2007).

18Reyna Gobel, “Inspiring Innovation,” Success, April 2009, pp. 24–26.

19M. Kanelios, “Full Steam Ahead for Nevada Solar Project,” CNet News.com, March 20, 2007, http://news.com.com.

20David Porter, “One Man's Garbage Becomes Another's Power Plant,” Yahoo News, October 28, 2008, http://news.yahoo.com.

21D. Michaels, “Pact Ushers in Competitive Skies,” The Wall Street Journal, March 23, 2007, http://online.wsj.com.

22D. J. Collis and C. A. Montgomery, Corporate Strategy: A Resource-Based Approach, 2nd ed. (New York, McGraw-Hill/Irwin, 2005).

23R. L. Priem, “A Consumer Perspective on Value Creation,” Academy of Management Review 32, no. 1 (2007), pp. 219–35.

24Farrell, “CEO Profile.”

25A. Wilcox King, “Disentangling Interfirm and Intrafirm Causal Ambiguity: A Conceptual Model of Causal Ambiguity and Sustainable Competitive Advantage,” Academy of Management Review 32, no. 1 (2007), pp. 156–78.

26S. Hamm and W. C. Symonds, “Mistakes Made on the Road to Innovation,” BusinessWeek, November 27, 2006, http://www.businessweek.com.

27G. Naik, “A Hospital Races to Learn Lessons of Ferrari Pit Stop,” The Wall Street Journal, November 14, 2006, http://online.wsj.com.

28R. A. Guth, “Microsoft May Shift Strategy to Keep Up,” The Wall Street Journal, March 29, 2007, http://online.wsj.com.

29R. A. Guth, D. K. Berman, and K. J. Delaney, “Google Joins Race to Buy DoubleClick,” The Wall Street Journal, April 2, 2007, http://online.wsj.com.

30Scott Moritz, “Nokia's Back on Its Feet,” TheStreet.com, March 26, 2009, http://www.thestreet.com; Andrew Nusca, “How Nokia Ovi Store Will Trump Apple on Global Stage,” The ToyBox, March 25, 2009, http://blogs.zdnet.com; “Moments of Truth: Global Executives Talk about the Challenges That Shaped Them as Leaders,” Harvard Business Review, December 1, 2008, http://www.hbrideacast.org; Lionel Laurent, “Nokia's Trickle-Up Success,” Forbes, June 16, 2008, http://www.forbes.com; Marguerite Reardon, “Nokia's Success Tied to Emerging Markets,” CNET News, January 24, 2008, http://news.cnet.com.

31D. G. Sirmon, M. A. Hitt, and R. D. Ireland, “Managing Firm Resources in Dynamic Environments to Create Value: Looking inside the Black Box,” Academy of Management Review 32, no. 1 (2007), pp. 273–92.

32Adam Bluestein, “The Success Gene,” Inc., April 2008, pp. 83–94.

33D. Barboza, “Google Acquires Stake in Chinese Web Site,” The New York Times, January 5, 2007, http://www.nytimes.com.

34P. Haspeslagh, “Portfolio Planning: Uses and Limits,” Harvard Business Review 60, no.1 (1982), pp. 58–67; R. Hamermesh, Making Strategy Work (New York: John Wiley & Sons, 1986); and R. A. Proctor, “Toward a New Model for Product Portfolio Analysis,” Management Decision 28, no. 3 (1990), pp. 14–17.

35A. Johnson, “Abbott's Makeover Attracts Investors,” The Wall Street Journal, January 19, 2007, http://online.wsj.com.

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