\f \f11TH EDITION STRATEGIC MANAGEMENT THEORY 11TH EDITION Strategic Management THEORY Charles W. L. Hill University of Washington - Foster School of Business Gareth R. Jones Melissa A. Schilling New York University - Stern School of Business Australia Brazil Japan Korea Mexico Singapore Spain United Kingdom United States This is an electronic version of the print textbook. Due to electronic rights restrictions, some third party content may be suppressed. Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it. For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest. Copyright 2013 Cengage Learning. All Rights Reserved. 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Brief Contents PART ONE INTRODUCTION TO STRATEGIC MANAGEMENT 1 2 Strategic Leadership: Managing the Strategy-Making Process for Competitive Advantage External Analysis: The Identification of Opportunities and Threats 1 43 PART TWO THE NATURE OF COMPETITIVE ADVANTAGE 3 4 Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability Building Competitive Advantage Through Functional-Level Strategies 80 116 PART THREE STRATEGIES 5 6 7 8 9 0 1 Business-Level Strategy Business-Level Strategy and the Industry Environment Strategy and Technology Strategy in the Global Environment Corporate-Level Strategy: Horizontal Integration, Vertical Integration, and Strategic Outsourcing Corporate-Level Strategy: Related and Unrelated Diversification 153 178 210 246 286 318 PART FOUR IMPLEMENTING STRATEGY 1 1 2 1 3 1 Corporate Performance, Governance, and Business Ethics Implementing Strategy in Companies That Compete in a Single Industry Implementing Strategy in Companies That Compete Across Industries and Countries 359 395 439 Glossary\tG-1 Index\tI-1 v Contents Prefacexix Acknowledgementsxxiii Dedicationxxvii PART one INTRODUCTION TO STRATEGIC MANAGEMENT Chapter 1 \u0007 trategic Leadership: Managing the Strategy-Making S Process for Competitive Advantage 1 Opening Case 1 Overview3 Strategic Leadership, Competitive Advantage, and Superior Performance4 Superior Performance 5 Competitive Advantage and a Company's Business Model 6 Industry Differences in Performance 7 Performance in Nonprofit Enterprises 8 Strategic Managers 9 Corporate-Level Managers 10 Business-Level Managers 10 Functional-Level Managers 11 The Strategy-Making Process 11 A Model of the Strategic Planning Process 11 Mission Statement 12 Major Goals 16 External Analysis 17 Internal Analysis 17 SWOT Analysis and the Business Model 17 Strategy in Action 1.1: Strategic Analysis at Time Inc. 18 Strategy Implementation 19 The Feedback Loop 20 Strategy as an Emergent Process 20 Strategy Making in an Unpredictable World 20 Autonomous Action: Strategy Making by Lower-Level Managers21 Strategy in Action 1.2: Starbucks' Music Business 21 Serendipity and Strategy 22 Intended and Emergent Strategies 22 vii viii Contents Strategy in Action 1.3: A Strategic Shift at Charles Schwab 23 Strategic Planning in Practice 25 Scenario Planning 25 Decentralized Planning 26 Strategic Decision Making 27 Cognitive Biases and Strategic Decision Making 27 Techniques for Improving Decision Making 29 Strategic Leadership 29 Vision, Eloquence, and Consistency 30 Articulation of the Business Model 30 Commitment30 Being Well Informed 31 Willingness to Delegate and Empower 31 The Astute Use of Power 32 Emotional Intelligence 32 Chapter 2 \u0007 xternal Analysis: The Identification of Opportunities E and Threats Opening Case 43 Overview44 Defining an Industry 45 Industry and Sector 46 Industry and Market Segments 47 Changing Industry Boundaries 47 Competitive Forces Model 47 Risk of Entry by Potential Competitors 48 Rivalry Among Established Companies 50 Strategy in Action 2.1: Circumventing Entry Barriers into the Soft Drink Industry 51 Strategy in Action 2.2: Price Wars in the Breakfast Cereal Industry 53 The Bargaining Power of Buyers 55 The Bargaining Power of Suppliers 56 Substitute Products 58 Complementors58 Summary: Why Industry Analysis Matters 59 Strategic Groups Within Industries 60 Implications of Strategic Groups 61 The Role of Mobility Barriers 62 Industry Life-Cycle Analysis 63 Embryonic Industries 63 Growth Industries 64 Industry Shakeout 64 Mature Industries 65 Declining Industries 66 Summary66 43 Contents Limitations of Models for Industry Analysis 67 Life-Cycle Issues 67 Innovation and Change 67 Company Differences 69 The Macroenvironment 69 Macroeconomic Forces 69 Global Forces 71 Technological Forces 71 Demographic Forces 72 Social Forces 72 Political and Legal Forces 72 PART two THE NATURE OF COMPETITIVE ADVANTAGE Chapter 3\t\u0007 Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability\b Opening Case 80 Overview82 The Roots of Competitive Advantage 82 Distinctive Competencies 83 Competitive Advantage, Value Creation, and Profitability85 The Value Chain 89 Primary Activities 89 Strategy in Action 3.1: Value Creation at Burberry 91 Support Activities 91 Strategy in Action 3.2: Competitive Advantage at Zara 92 The Building Blocks of Competitive Advantage 93 Efficiency93 Quality as Excellence and Reliability 94 Innovation96 Customer Responsiveness 96 Business Models, the Value Chain, and Generic Distinctive Competencies97 Analyzing Competitive Advantage and Profitability 98 The Durability of Competitive Advantage 103 Barriers to Imitation 103 Capability of Competitors 105 Industry Dynamism 106 Summary106 Avoiding Failure and Sustaining Competitive Advantage106 Why Companies Fail 106 Steps to Avoid Failure 108 Strategy in Action 3.3: The Road to Ruin at DEC 109 80 ix x Contents Chapter 4 \u0007 uilding Competitive Advantage Through B Functional-Level Strategies\b 116 Opening Case 116 Overview\t117 Achieving Superior Efficiency 119 Efficiency and Economies of Scale 119 Efficiency and Learning Effects 120 Strategy in Action 4.1: Learning Effects in Cardiac Surgery 122 Efficiency and the Experience Curve 122 Efficiency, Flexible Production Systems, and Mass Customization124 Marketing and Efficiency 125 Strategy in Action 4.2: Pandora: Mass Customizing Internet Radio 126 Materials Management, Just-in-Time Systems, and Efficiency 128 R&D Strategy and Efficiency 129 Human Resource Strategy and Efficiency 129 Information Systems and Efficiency 132 Infrastructure and Efficiency 132 Summary133 Achieving Superior Quality 134 Attaining Superior Reliability 134 Strategy in Action 4.3: General Electric's Six Sigma Quality Improvement Process 135 Implementing Reliability Improvement Methodologies 136 Improving Quality as Excellence 138 Achieving Superior Innovation 139 The High Failure Rate of Innovation 140 Reducing Innovation Failures 141 Strategy in Action 4.4: Corninglearning from Innovation Failures142 Achieving Superior Responsiveness to Customers 144 Focusing on the Customer 144 Satisfying Customer Needs 145 PART Three STRATEGIES Chapter 5 \u0007Business-Level Strategy\b Opening Case 153 Overview154 Low Cost and Differentiation 155 Lowering Costs 155 153 Contents Strategy in Action 5.1: Low Costs at Southwest Airlines 156 Who are Our Customers? Market Segmentation 161 Business-Level Strategy Choices 164 Business-Level Strategy, Industry and Competitive Advantage 166 Strategy in Action 5.2: Microsoft Office versus Google Apps 167 Implementing Business-Level Strategy 168 Competing Differently: Searching for a Blue Ocean 171 Chapter 6 Business-Level Strategy and the Industry Environment\b 178 Opening Case 178 Overview179 Strategy in a Fragmented Industry 180 Reasons for Fragmentation 180 Consolidating a Fragmented Industry Through Value Innovation181 Chaining and Franchising 182 Horizontal Mergers 183 Strategies in Embryonic and Growth Industries 184 The Changing Nature of Market Demand 185 Strategic Implications: Crossing the Chasm 188 Strategy in Action 6.1: Crossing the Chasm in the Smartphone Market 189 Strategic Implications of Differences in Market Growth Rates 190 Strategy in Mature Industries 191 Strategies to Deter Entry 192 Strategies to Manage Rivalry 194 Strategy in Action 6.2: Toyota Uses Market Development to Become the Global Leader 198 Strategy in Action 6.3: Non-Price Competition at Nike 199 Strategies in Declining Industries 201 The Severity of Decline 201 Choosing a Strategy 202 Chapter 7 Strategy and Technology\b Opening Case 210 Overview211 Technical Standards and Format Wars 213 Strategy in Action 7.1: \"Segment Zero\"A Serious Threat to Microsoft? 213 Examples of Standards 216 Benefits of Standards 217 210 xi xii Contents Establishment of Standards 218 Network Effects, Positive Feedback, and Lockout 219 Strategies for Winning a Format War 222 Ensure a Supply of Complements 222 Leverage Killer Applications 222 Aggressive Pricing and Marketing 223 Cooperate with Competitors 223 License the Format 224 Costs in High-Technology Industries 224 Comparative Cost Economics 225 Strategic Significance 226 Strategy in Action 7.2: Lowering the Cost of Ultrasound Equipment Through Digitalization 227 Capturing First-Mover Advantages 227 First-Mover Advantages 229 First-Mover Disadvantages 229 Strategies for Exploiting First-Mover Advantages 230 Technological Paradigm Shifts 233 Paradigm Shifts and the Decline of Established Companies234 Strategy in Action 7.3: Disruptive Technology in Mechanical Excavators238 Strategic Implications for Established Companies 238 Strategic Implications for New Entrants 240 Chapter 8 Strategy in the Global Environment\b Opening Case 246 Overview247 The Global and National Environments 248 The Globalization of Production and Markets 248 National Competitive Advantage 250 Increasing Profitability and Profit Growth Through Global Expansion253 Expanding the Market: Leveraging Products 253 Realizing Cost Economies from Global Volume 255 Realizing Location Economies 256 Leveraging the Skills of Global Subsidiaries 257 Cost Pressures and Pressures for Local Responsiveness 258 Pressures for Cost Reductions 259 Pressures for Local Responsiveness 259 Strategy in Action 8.1: Local Responsiveness at MTV Networks260 Choosing a Global Strategy 261 Global Standardization Strategy 262 Localization Strategy 263 Transnational Strategy 264 246 Contents International Strategy 265 Changes in Strategy over Time 265 Strategy in Action 8.2: The Evolving Strategy of Coca-Cola 267 The Choice of Entry Mode 268 Exporting268 Licensing269 Franchising270 Joint Ventures 271 Wholly Owned Subsidiaries 272 Choosing an Entry Strategy 273 Global Strategic Alliances 275 Advantages of Strategic Alliances 275 Disadvantages of Strategic Alliances 276 Making Strategic Alliances Work 276 Chapter 9 \u0007 orporate-Level Strategy: Horizontal Integration, C Vertical Integration and Strategic Outsourcing\b Opening Case 286 Overview287 Corporate-Level Strategy and the Multibusiness Model 288 Horizontal Integration: Single-Industry Corporate Strategy 289 Benefits of Horizontal Integration 290 Strategy in Action 9.1: Larry Ellison Wants Oracle to Become the Biggest and the Best 293 Problems with Horizontal Integration 294 Vertical Integration: Entering New Industries to Strengthen the \"Core\" Business Model 295 Increasing Profitability Through Vertical Integration 297 Strategy in Action 9.2: Specialized Assets and Vertical Integration in the Aluminum Industry 299 Problems with Vertical Integration 301 Alternatives to Vertical Integration: Cooperative Relationships 302 Short-Term Contracts and Competitive Bidding 303 Strategic Alliances and Long-Term Contracting 303 Strategy in Action 9.3: Apple, Samsung, and Nokia Battle in the Smartphone Market 304 Building Long-Term Cooperative Relationships 305 Strategy in Action 9.4: Ebay's Changing Commitment to Its Sellers 306 Strategic Outsourcing 307 Strategy in Action 9.5: Apple Tries to Protect Its New Products and the Workers Who Make Them 308 Benefits of Outsourcing 310 Risks of Outsourcing 311 286 xiii xiv Contents Chapter 10 Corporate-Level Strategy: Related and Unrelated Diversification\b 318 Opening Case 318 Overview322 Increasing Profitability Through Diversification 322 Transferring Competencies Across Businesses 323 Leveraging Competencies to Create a New Business 324 Sharing Resources and Capabilities 325 Using Product Bundling 326 Utilizing General Organizational Competencies 327 Strategy in Action 10.1: United Technologies Has an \"ACE\" in Its Pocket 329 Two Types of Diversification 331 Related Diversification 331 Unrelated Diversification 331 The Limits and Disadvantages of Diversification 333 Changes in the Industry or Company 333 Diversification for the Wrong Reasons 334 The Bureaucratic Costs of Diversification 335 Strategy in Action 10.2: How Bureaucratic Costs Rose Then Fell at Pfizer 337 Choosing a Strategy 338 Related Versus Unrelated Diversification 338 The Web of Corporate-Level Strategy 338 Strategy in Action 10.3: Sony's \"Gaijin\" CEO Is Changing the Company's Strategies 340 Entering New Industries: Internal New Ventures 341 The Attractions of Internal New Venturing 341 Pitfalls of New Ventures 342 Guidelines for Successful Internal New Venturing 344 Entering New Industries: Acquisitions 345 The Attraction of Acquisitions 345 Acquisition Pitfalls 346 Guidelines for Successful Acquisition 348 Entering New Industries: Joint Ventures 349 Restructuring350 Why Restructure? 350 PART four IMPLEMENTING STRATEGY Chapter 11 Corporate Performance, Governance, \u0007 and Business Ethics\b Opening Case 359 Overview361 359 Contents Stakeholders and Corporate Performance 362 Stakeholder Impact Analysis 363 The Unique Role of Stockholders 363 Profitability, Profit Growth, and Stakeholder Claims 364 Strategy in Action 11.1: Price Fixing at Sotheby's and Christie's 366 Agency Theory 367 Principal-Agent Relationships 367 The Agency Problem 367 Strategy in Action 11.2: Self-Dealing at Hollinger International Inc. 371 Governance Mechanisms 372 The Board of Directors 372 Stock-Based Compensation 373 Financial Statements and Auditors 374 The Takeover Constraint 375 Governance Mechanisms Inside a Company 376 Ethics and Strategy 378 Strategy in Action 11.3: Nike-the Sweatshop Debate 379 Ethical Issues in Strategy 380 The Roots of Unethical Behavior 383 Behaving Ethically 384 Chapter 12 Implementing Strategy in Companies That Compete in a Single Industry\b Opening Case 395 Overview396 Implementing Strategy Through Organizational Design 397 Building Blocks of Organizational Structure 398 Grouping Tasks, Functions, and Divisions 399 Allocating Authority and Responsibility 399 Strategy in Action 12.1: Bob Iger Flattens Walt Disney 402 Integration and Integrating Mechanisms 403 Strategy in Action 12.2: Centralization and Decentralization at Union Pacific and Yahoo! 404 Strategic Control Systems 405 Levels of Strategic Control 407 Types of Strategic Control Systems 407 Strategic Reward Systems 410 Organizational Culture 410 Culture and Strategic Leadership 411 Traits of Strong and Adaptive Corporate Cultures 413 Building Distinctive Competencies at the Functional Level 414 Functional Structure: Grouping by Function 414 The Role of Strategic Control 415 395 xv xvi Contents Developing Culture at the Functional Level 416 Functional Structure and Bureaucratic Costs 418 The Outsourcing Option 419 Implementing Strategy in a Single Industry 419 Implementing Cost Leadership 421 Implementing Differentiation 421 Product Structure: Implementing a Wide Product Line 422 Market Structure: Increasing Responsiveness to Customer Groups424 Geographic Structure: Expanding by Location 424 Strategy in Action 12.3: The HISD Moves from a Geographic to a Market Structure 426 Matrix and Product-Team Structures: Competing in High-Tech Environments426 Focusing on a Narrow Product Line 429 Restructuring and Reengineering 430 Chapter 13 Implementing Strategy in Companies That Compete Across Industries and Countries\b Opening Case 439 Overview440 Corporate Strategy and the Multidivisional Structure 441 Advantages of a Multidivisional Structure 443 Problems in Implementing a Multidivisional Structure 444 Strategy in Action 13.1: Organizational Change at Avon 446 Structure, Control, Culture, and Corporate-Level Strategy447 Implementing Strategy Across Countries 451 The International Division 451 Worldwide Area Structure 452 Worldwide Product Divisional Structure 454 Global Matrix Structure 455 Strategy in Action 13.2: Dow Chemical's Matrix Structure 457 Entry Mode and Implementation 458 Internal New Venturing 458 Joint Ventures 459 Mergers and Acquisitions 460 PART five \u0007Analyzing a Case Study and Writing a Case Study Analysis What is Case Study Analysis C-2 Analyzing a Case Study C-3 Writing A Case Study Analysis C-8 439 Contents The Role of Financial Analysis in Case Study Analysis C-9 Profit RatiosC-10 Liquidity RatiosC-11 Activity RatiosC-11 Leverage RatiosC-12 Shareholder-Return RatiosC-12 Cash FlowC-13 ConclusionC-14 Glossary G-1 Index I-1 xvii Preface Consistent with our mission to provide students with the most current and up-to-date account of the changes taking place in the world of strategy and management, there have been some significant changes in the 11th edition of Strategic Management: Theory. First, we have a new co-author, Melissa Shilling. Melissa is a Professor of Management and Organization at the Leonard Stern School of Business at New York University, where she teaches courses on strategic management, corporate strategy, and technology and innovation management. She has published extensively in top-tier academic journals and is recognized as one of the leading experts on innovation and strategy in high-technology industries. We are very pleased to have Melissa on the book team. Melissa made substantial contributions to this edition, including revising several chapters and writing seven highcaliber case studies. We believe her input has significantly strengthened the book. Second, several chapters have been extensively revised. Chapter 5: Business-Level Strategy has been rewritten from scratch. In addition to the standard material on Porter's generic strategies, this chapter now includes discussion of value innovation and blue ocean strategy following the work of W. C. Kim and R. Mauborgne. Chapter 6: Business-Level Strategy and the Industry Environment has also been extensively rewritten and updated to clarify concepts and bring it into the 21st century. Despite the addition of new materials, both chapters are shorter than in prior editions. Substantial changes have been made to many other chapters, and extraneous material has been cut. For example, in Chapter 13 the section on implementing strategy across countries has been entirely rewritten and updated. This chapter has also been substantially shortened. Third, the examples and cases contained in each chapter have been revised. We have a new Running Case for this edition, Wal-Mart. Every chapter has a new Opening Case and a new Closing Case. There are also many new Strategy in Action features. In addition, there has been significant change in the examples used in the text to illustrate content. In making these changes, our goal has been to make the book relevant for students reading it in the second decade of the 21st century. Practicing Strategic Management: An Interactive Approach We have received a lot of positive feedback about the usefulness of the end-of-chapter exercises and assignments in the Practicing Strategic Management sections of our book. They offer a wide range of hands-on and digital learning experiences for students. Following the Chapter Summary and Discussion Questions, each chapter contains the following exercises and assignments: Ethical Dilemma. This feature has been developed to highlight the importance of ethical decision making in today's business environment. With today's current examples of questionable decision making (as seen in companies like Countrywide Financial during the 2007-2009 global financial crisis), we hope to equip students with the tools they need to be strong ethical leaders. Small-Group Exercise. This short (20-minute) experiential exercise asks students to divide into groups and discuss a scenario concerning some aspect of strategic manage- xix xx Preface ment. For example, the scenario in Chapter 11 asks students to identify the stakeholders of their educational institution and evaluate how stakeholders' claims are being and should be met. The Strategy Sign-On section presents an opportunity for students to explore the latest data through digital research activities. First, the Article File requires students to search business articles to identify a company that is facing a particular strategic management problem. For instance, students are asked to locate and research a company pursuing a low-cost or a differentiation strategy, and to describe this company's strategy, its advantages and disadvantages, and the core competencies required to pursue it. Students' presentations of their findings lead to lively class discussions. Then, the Strategic Management Project: Developing Your Portfolio asks students to choose a company to study through the duration of the semester. At the end of every chapter, students analyze the company using the series of questions provided at the end of each chapter. For example, students might select Ford Motor Co. and, using the series of chapter questions, collect information on Ford's top managers, mission, ethical position, domestic and global strategy and structure, and so on. Students write a case study of their company and present it to the class at the end of the semester. In the past, we also had students present one or more of the cases in the book early in the semester, but now in our classes, we treat the students' own projects as the major class assignment and their case presentations as the climax of the semester's learning experience. Closing Case. A short closing case provides an opportunity for a short class discussion of a chapter-related theme. In creating these exercises, it is not our intention to suggest that they should all be used for every chapter. For example, over a semester, an instructor might combine a group of Strategic Management Projects with 5 to 6 Article File assignments while incorporating 8 to 10 Small-Group Exercises in class. We have found that our interactive approach to teaching strategic management appeals to students. It also greatly improves the quality of their learning experience. Our approach is more fully discussed in the Instructor's Resource Manual. Teaching and Learning Aids Taken together, the teaching and learning features of Strategic Management provide a package that is unsurpassed in its coverage and that supports the integrated approach that we have taken throughout the book. For the Instructor The Instructor's Resource Manual: Theory. For each chapter, we provide a clearly focused synopsis, a list of teaching objectives, a comprehensive lecture outline, teaching notes for the Ethical Dilemma feature, suggested answers to discussion questions, and comments on the end-of-chapter activities. Each Opening Case, Strategy in Action boxed feature, and Closing Case has a synopsis and a corresponding teaching note to help guide class discussion. Preface Case Teaching Notes include a complete list of case discussion questions as well as a comprehensive teaching notes for each case, which gives a complete analysis of case issues. Cognero Test Bank: A completely online test bank allows the instructor the ability to create comprehensive, true/false, multiple-choice and essay questions for each chapter in the book. The mix of questions has been adjusted to provide fewer factbased or simple memorization items and to provide more items that rely on synthesis or application. PowerPoint Presentation Slides: Each chapter comes complete with a robust PowerPoint presentation to aid with class lectures. These slides can be downloaded from the text website. CengageNow. This robust online course management system gives you more control in less time and delivers better student outcomesNOW. CengageNow includes teaching and learning resources organized around lecturing, creating assignments, casework, quizzing, and gradework to track student progress and performance. Multiple types of quizzes, including video quizzes are assignable and gradable. Flexible assignments, automatic grading, and a gradebook option provide more control while saving you valuable time. CengageNow empowers students to master concepts, prepare for exams, and become more involved in class. Cengage Learning Write Experience 2.0. This new technology is the first in higher education to offer students the opportunity to improve their writing and analytical skills without adding to your workload. Offered through an exclusive agreement with V antage Learning, creator of the software used for GMAT essay grading, Write Experience evaluates students' answers to a select set of writing assignments for voice, style, format, and originality. For the Student CengageNow includes learning resources organized around assignments, casework, and quizzing, and allows you to track your progress and performance. A Personalized Study diagnostic tool empowers students to master concepts, prepare for exams, and become more involved in class. xxi Acknowledgments This book is the product of far more than two authors. We are grateful to our Senior Product Managers, Michele Rhoades and Scott Person; our Senior Content Developer, Mike Guendelsberger; our Content Project Manager, Cliff Kallemeyn; and our Marketing Manager, Emily Horowitz, for their help in developing and promoting the book and for providing us with timely feedback and information from professors and reviewers, which allowed us to shape the book to meet the needs of its intended market. We are also grateful to the case authors for allowing us to use their materials. We also want to thank the departments of management at the University of Washington and New York University for providing the setting and atmosphere in which the book could be written, and the students of these universities who react to and provide input for many of our ideas. In addition, the following reviewers of this and earlier editions gave us valuable suggestions for improving the manuscript from its original version to its current form: Andac Arikan, Florida Atlantic University Ken Armstrong, Anderson University Richard Babcock, University of San Francisco Kunal Banerji, West Virginia University Kevin Banning, Auburn University- Montgomery Glenn Bassett, University of Bridgeport Thomas H. Berliner, The University of Texas at Dallas Bonnie Bollinger, Ivy Technical Community College Richard G. Brandenburg, University of Vermont Steven Braund, University of Hull Philip Bromiley, University of Minnesota Geoffrey Brooks, Western Oregon State College Jill Brown, Lehigh University Amanda Budde, University of Hawaii Lowell Busenitz, University of Houston Sam Cappel, Southeastern Louisiana University Charles J. Capps III, Sam Houston State University Don Caruth, Texas A&M Commerce Gene R. Conaster, Golden State University Steven W. Congden, University of Hartford Catherine M. Daily, Ohio State University Robert DeFillippi, Suffolk University Sawyer School of Management Helen Deresky, SUNYPlattsburgh Fred J. Dorn, University of Mississippi xxiii xxiv Acknowledgments Gerald E. Evans, The University of Montana John Fahy, Trinity College, Dublin Patricia Feltes, Southwest Missouri State University Bruce Fern, New York University Mark Fiegener, Oregon State University Chuck Foley, Columbus State Community College Isaac Fox, Washington State University Craig Galbraith, University of North Carolina at Wilmington Scott R. Gallagher, Rutgers University Eliezer Geisler, Northeastern Illinois University Gretchen Gemeinhardt, University of Houston Lynn Godkin, Lamar University Sanjay Goel, University of MinnesotaDuluth Robert L. Goldberg, Northeastern University James Grinnell, Merrimack College Russ Hagberg, Northern Illinois University Allen Harmon, University of MinnesotaDuluth Ramon Henson, Rutgers University David Hoopes, California State UniversityDominguez Hills Todd Hostager, University of WisconsinEau Claire David Hover, San Jose State University Graham L. Hubbard, University of Minnesota Tammy G. Hunt, University of North Carolina at Wilmington James Gaius Ibe, Morris College W. Grahm Irwin, Miami University Homer Johnson, Loyola UniversityChicago Jonathan L. Johnson, University of Arkansas Walton College of Business Administration Marios Katsioloudes, St. Joseph's University Robert Keating, University of North Carolina at Wilmington Geoffrey King, California State UniversityFullerton Rico Lam, University of Oregon Robert J. Litschert, Virginia Polytechnic Institute and State University Franz T. Lohrke, Louisiana State University Paul Mallette, Colorado State University Daniel Marrone, SUNY Farmingdale Lance A. Masters, California State UniversitySan Bernardino Robert N. McGrath, Embry-Riddle Aeronautical University Charles Mercer, Drury College Van Miller, University of Dayton Tom Morris, University of San Diego Acknowledgments Joanna Mulholland, West Chester University of Pennsylvania James Muraski, Marquette University John Nebeck, Viterbo University Jeryl L. Nelson, Wayne State College Louise Nemanich, Arizona State University Francine Newth, Providence College Don Okhomina, Fayetteville State University Phaedon P. Papadopoulos, Houston Baptist University John Pappalardo, Keen State College Paul R. Reed, Sam Houston State University Rhonda K. Reger, Arizona State University Malika Richards, Indiana University Simon Rodan, San Jose State Stuart Rosenberg, Dowling College Douglas Ross, Towson University Ronald Sanchez, University of Illinois Joseph A. Schenk, University of Dayton Brian Shaffer, University of Kentucky Leonard Sholtis, Eastern Michigan University Pradip K. Shukla, Chapman University Mel Sillmon, University of MichiganDearborn Dennis L. Smart, University of Nebraska at Omaha Barbara Spencer, Clemson University Lawrence Steenberg, University of Evansville Kim A. Stewart, University of Denver Ted Takamura, Warner Pacific College Scott Taylor, Florida Metropolitan University Thuhang Tran, Middle Tennessee University Bobby Vaught, Southwest Missouri State Robert P. Vichas, Florida Atlantic University John Vitton, University of North Dakota Edward Ward, St. Cloud State University Kenneth Wendeln, Indiana University Daniel L. White, Drexel University Edgar L. Williams, Jr., Norfolk State University Jun Zhao, Governors State University Charles W. L. Hill Gareth R. Jones Melissa A. Schilling xxv Dedication To my children, Elizabeth, Charlotte, and Michelle - Charles W. L. Hill For Nicholas and Julia and Morgan and Nia - Gareth R. Jones For my children, Julia and Conor - Melissa A. Schilling xxvii iStockPhoto.com/Chepko Danil 1 Strategic Leadership: Managing the Strategy-Making Process for Competitive Advantage Opening iStockPhoto.com/shaunl Wal-Mart's Competitive Advantage Wal-Mart is one of the most extra ordinary success stories in business history. Started in 1962 by Sam W alton, Wal-Mart has grown to become the world's largest corporation. In 2012, the discount retailerwhose mantra is \"everyday low prices\" had sales of $440 billion, close to 10,000 stores in 27 countries, and 2.2 illion employees. Some 8% of m all retail sales in the United States are Case made at a Wal-Mart store. Wal-Mart is not only large; it is also very profitable. Between 2003 and 2012 the company's average return on invested capital was 12.96%, better than its well- anaged rivals Costco and m Target, which earned 10.74% and 9.6%, respectively (see Figure 1.1). Wal-Mart's persistently superior profitability reflects a competitive advantage that is based upon a number of strategies. Back in 1962, Wal-Mart was one of the first companies to apply the self-service supermarket business model developed by grocery chains to general merchandise. Unlike its rivals such as K-Mart and Target that focused on urban and suburban locations, Sam Walton's Wal-Mart concentrated on small southern towns that were ignored by its rivals. Wal-Mart grew quickly by pricing its products lower than those of local retailers, often putting them out of business. By the time its rivals realized that small towns could support a large discount general merchandise store, Wal-Mart had already pre-empted them. These LEARNING Objectives After reading this chapter you should be able to: 1-1 Explain what is meant by \"competitive advantage\" 1-2 Discuss the strategic role of managers at different levels within an organization 1-3 Identify the primary steps in a strategic planning process 1-4 Discuss the common pitfalls of planning, and how those pitfalls can be avoided 1-5 Outline the cognitive biases that might lead to poor strategic decisions, and explain how these biases can be overcome 1-6 Discuss the role strategic leaders play in the strategy-making process 1 iStockPhoto.com/Chepko Danil O PENING towns, which were large enough to support one discount retailer but not two, provided a secure profit base for Wal-Mart. The company was also an innovator in information systems, logistics, and human resource practices. These strategies resulted in higher productivity and lower costs as compared to rivals, which enabled the company to earn a high profit while charging low prices. Wal-Mart led the way among U.S. retailers in developing and implementing sophisticated product tracking systems using bar-code technology and checkout scanners. This information technology enabled Wal-Mart to track what was selling and adjust its inventory accordingly so that the products found in each store matched local demand. By avoiding overstocking, Wal-Mart did not have to hold periodic sales to shift unsold inventory. Over time, Wal-Mart linked this information system to a nationwide network of distribution centers in which inventory was stored and then shipped to stores within a 400-mile radius on a daily basis. The combination of distribution centers and information centers Figure 1.1 C ASE enabled Wal-Mart to reduce the amount of inventory it held in stores, thereby devoting more of that valuable space to selling and reducing the amount of capital it had tied up in inventory. With regard to human resources, Sam Walton set the tone. He held a strong belief that employees should be respected and rewarded for helping to improve the profitability of the company. Underpinning this belief, Walton referred to employees as \"associates.\" He established a profit-sharing scheme for all employees, and after the company went public in 1970, a program that allowed employees to purchase Wal-Mart stock at a discount to its market value. Wal-Mart was rewarded for this approach by high employee productivity, which translated into lower operating costs and higher profitability. As Wal-Mart grew larger, the sheer size and purchasing power of the company enabled it to drive down the prices that it paid suppliers, passing on those saving to customers in the form of lower prices, which enabled Wal-Mart to gain more market share and hence lower prices even further. To take the Profitability of Wal-Mart and Competitors, 2003-2012 16 14 12 ROIC % 10 8 6 4 2 0 2003 2004 2005 2006 2007 Wal-Mart Source: Calculated by the author from Morningstar data. 2 2008 Targct 2009 2010 Costco 2011 2012 sting out of the persistent demands for lower prices, Wal-Mart shared its sales information with suppliers on a daily basis, enabling them to gain efficiencies by configuring their own production schedules for sales at Wal-Mart. By the time the 1990s came along, Wal-Mart was already the largest seller of general merchandise in the United States. To keep its growth going, Wal-Mart started to diversify into the grocery business, opening 200,000-square-foot supercenter stores that sold groceries and general merchandise under the same roof. Wal-Mart also diversified into the warehouse club business with the C ASE establishment of Sam's Club. The company began expanding internationally in 1991 with its entry into Mexico. For all its success, however, Wal-Mart is now encountering very real limits to profitable growth. The U.S. market is saturated, and growth overseas has proved more difficult than the company hoped. The company was forced to exit Germany and South Korea after losing money there, and it has faced difficulties in several other developed nations. Moreover, rivals Target and Costco have continued to improve their performance, and Costco in particular is now snapping at Wal-Mart's heals. iStockPhoto.com/Chepko Danil O PENING Sources: \"How Big Can It Grow?\" The Economist (April 17, 2004): 74-78; \"Trial by Checkout,\" The Economist ( June 26, 2004): 74-76; Wal-Mart 10-K, 200, information at Wal-Mart's website, www.walmartstores.com; Robert Slater, The Wal-Mart Triumph (New York: Portfolio Trade Books, 2004); and \"The Bulldozer from Bentonville Slows; Wal-Mart,\" The Economist (February 17, 2007): 70. Overview Why do some companies succeed, whereas others fail? Why has Wal-Mart been able to persistently outperform its well-managed rivals? In the airline industry, how has Southwest Airlines managed to keep increasing its revenues and profits through both good times and bad, whereas rivals such as United Airlines have had to seek bankruptcy protection? What explains the persistent growth and profitability of Nucor Steel, now the largest steelmaker in the United States, during a period when many of its once-larger rivals disappeared into bankruptcy? In this book, we argue that the strategies that a company's managers pursue have a major impact on the company's performance relative to that of its competitors. A strategy is a set of related actions that managers take to increase their company's performance. For most, if not all, companies, achieving superior performance relative to rivals is the ultimate challenge. If a company's strategies result in superior performance, it is said to have a competitive advantage. Wal-Mart's strategies produced superior performance from 2003 to 2012; as a result, Wal-Mart has enjoyed competitive advantage over its rivals. How did Wal-Mart achieve this competitive advantage? As explained in the opening case, it was due to the successful pursuit of a number of strategies by Wal-Mart's managers, including, most notably, the company's founder, Sam Walton. These strategies enabled the company to lower its cost structure, charge low prices, gain market share, and become more profitable than its rivals. (We will return to the example of Wal-Mart several times throughout this book in the Running Case feature that examines various aspects of Wal-Mart's strategy and performance.) This book identifies and describes the strategies that managers can pursue to achieve superior performance and provide their companies with a competitive advantage. One of its strategy A set of related actions that managers take to increase their company's performance. 3 Part 1 Introduction to Strategic Management strategic leadership Creating competitive advantage through effective management of the strategy-making process. strategy formulation Selecting strategies based on analysis of an organization's external and internal environment. strategy implementation Putting strategies into action. central aims is to give you a thorough understanding of the analytical techniques and skills necessary to identify and implement strategies successfully. The first step toward achieving this objective is to describe in more detail what superior performance and competitive advantage mean and to explain the pivotal role that managers play in leading the strategymaking process. Strategic leadership is about how to most effectively manage a company's s trategy-making process to create competitive advantage. The strategy-making process is the process by which managers select and then implement a set of strategies that aim to achieve a competitive advantage. Strategy formulation is the task of selecting strategies, whereas strategy implementation is the task of putting strategies into action, which includes designing, delivering, and supporting products; improving the efficiency and effectiveness of operations; and designing a company's organizational structure, control systems, and culture. By the end of this chapter, you will understand how strategic leaders can manage the strategy-making process by formulating and implementing strategies that enable a company to achieve a competitive advantage and superior performance. Moreover, you will learn how the strategy-making process can go wrong, and what managers can do to make this process more effective. Strategic Leadership, Competitive Advantage, and Superior Performance Strategic leadership is concerned with managing the strategy-making process to increase the performance of a company, thereby increasing the value of the enterprise to its owners, its shareholders. As shown in Figure 1.2, to increase shareholder value, managers must pursue strategies that increase the profitability of the company and ensure that profits grow (for more details, see the Appendix to this chapter). To do this, a company must be able to outperform its rivals; it must have a competitive advantage. Figure 1.2 Determinants of Shareholder Value Prof itability (ROIC) Ef fectiveness of strategies Shareholder value Prof it growth Cengage Learning 4 Chapter 1 Strategic Leadership: Managing the Strategy-Making Process 5 Superior Performance Maximizing shareholder value is the ultimate goal of profit-making companies, for two reasons. First, shareholders provide a company with the risk capital that enables managers to buy the resources needed to produce and sell goods and services. Risk capital is capital that cannot be recovered if a company fails and goes bankrupt. In the case of Wal-Mart, for example, shareholders provided Sam Walton's company with the capital it used to build stores and distribution centers, invest in information systems, purchase inventory to sell to customers, and so on. Had Wal-Mart failed, its shareholders would have lost their money their shares would have been worthless Thus, shareholders will not provide risk capital unless they believe that managers are committed to pursuing strategies that provide a good return on their capital investment. Second, shareholders are the legal owners of a corporation, and their shares therefore represent a claim on the profits generated by a company. Thus, managers have an obligation to invest those profits in ways that maximize shareholder value. Of course, as explained later in this book, managers must behave in a legal, ethical, and socially responsible manner while working to maximize shareholder value. By shareholder value, we mean the returns that shareholders earn from purchasing shares in a company. These returns come from two sources: (a) capital appreciation in the value of a company's shares and (b) dividend payments. For example, between January 2 and December 31, 2012, the value of one share in Wal-Mart increased from $60.33 to $68.90, which represents a capital appreciation of $8.57. In addition, Wal-Mart paid out a dividend of $1.59 per share during 2012. Thus, if an investor had bought one share of Wal-Mart on January 2 and held on to it for the entire year, the return would have been $10.16 ($8.57 1 $1.59), a solid 16.8% return on the investment. One reason Wal-Mart's shareholders did well during 2012 was that investors believed that managers were pursuing strategies that would both increase the long-term profitability of the company and significantly grow its profits in the future. One way of measuring the profitability of a company is by the return that it makes on the capital invested in the enterprise.1 The return on invested capital (ROIC) that a company earns is defined as its net profit over the capital invested in the firm (profit/capital invested). By net profit, we mean net income after tax. By capital, we mean the sum of money invested in the company: that is, stockholders' equity plus debt owed to creditors. So defined, profitability is the result of how efficiently and effectively managers use the capital at their disposal to produce goods and services that satisfy customer needs. A company that uses its capital efficiently and effectively makes a positive return on invested capital. The profit growth of a company can be measured by the increase in net profit over time. A company can grow its profits if it sells products in markets that are growing rapidly, gains market share from rivals, increases the amount it sells to existing customers, expands overseas, or diversifies profitably into new lines of business. For example, between 1994 and 2012, Wal-Mart increased its net profit from $2.68 billion to $15.7 billion. It was able to do this because the company (a) took market share from rivals, (b) established stores in 27 foreign nations that collectively generated $125 billion in sales by 2012, and (c) entered the grocery business. Due to the increase in net profit, Wal-Mart's earnings per share increased from $0.59 to $4.52, making each share more valuable, and leading in turn to appreciation in the value of Wal-Mart's shares. Together, profitability and profit growth are the principal drivers of shareholder value (see the Appendix to this chapter for details). To both boost profitability and grow profits over time, managers must formulate and implement strategies that give their company a competitive advantage over rivals. Wal-Mart's strategies have enabled the company to maintain a high level risk capital Equity capital for which there is no guarantee that stockholders will ever recoup their investment or earn a decent return. shareholder value Returns that shareholders earn from purchasing shares in a company. profitability The return a company makes on the capital invested in the enterprise. profit growth The increase in net profit over time. 6 Part 1 Introduction to Strategic Management of profitability, and to simultaneously grow its profits over time. As a result, investors who purchased Wal-Mart's stock in January 1994, when the shares were trading at $11, would have made a return of more than 620% if they had held onto them through until December 2012. By pursuing strategies that lead to high and sustained profitability, and profit growth, Wal-Mart's managers have thus rewarded shareholders for their decisions to invest in the company. One of the key challenges managers face is how best to simultaneously generate high profitability and increase the profits of the company. Companies that have high profitability but profits that are not growing will not be as highly valued by shareholders as companies that have both high profitability and rapid profit growth (see the Appendix for details). This was the situation that Dell faced in the later part of the 2000s. At the same time, managers need to be aware that if they grow profits but profitability declines, that too will not be as highly valued by shareholders. What shareholders want to see, and what managers must try to deliver through strategic leadership, is profitable growth: that is, high profitability and sustainable profit growth. This is not easy, but some of the most successful enterprises of our era have achieved itcompanies such as Apple, Google, and Wal-Mart. Competitive Advantage and a Company's Business Model competitive advantage The achieved advantage over rivals when a company's profitability is greater than the average profitability of firms in its industry. sustained competitive advantage A company's strategies enable it to maintain above-average profitability for a number of years. business model The conception of how strategies should work together as a whole to enable the company to achieve competitive advantage. Managers do not make strategic decisions in a competitive vacuum. Their company is competing against other companies for customers. Competition is a rough-and-tumble process in which only the most efficient and effective companies win out. It is a race without end. To maximize shareholder value, managers must formulate and implement strategies that enable their company to outperform rivalsthat give it a competitive advantage. A company is said to have a competitive advantage over its rivals when its profitability is greater than the average profitability and profit growth of other companies competing for the same set of customers. The higher its profitability relative to rivals, the greater its competitive advantage will be. A company has a sustained competitive advantage when its strategies enable it to maintain above-average profitability for a number of years. As discussed in the opening case, Wal-Mart had a significant and sustained competitive advantage over rivals such as Target, Costco, and K-Mart for most of the last two decades. The key to understanding competitive advantage is appreciating how the different strategies managers pursue over time can create activities that fit together to make a company unique or different from its rivals and able to consistently outperform them. A business model is managers' conception of how the set of strategies their company pursues should work together as a congruent whole, enabling the company to gain a competitive advantage and achieve superior profitability and profit growth. In essence, a business model is a kind of mental model, or gestalt, of how the various strategies and capital investments a company makes should fit together to generate above-average profitability and profit growth. A business model encompasses the totality of how a company will: Select its customers. Define and differentiate its product offerings. Create value for its customers. Acquire and keep customers. Produce goods or services. Lower costs. Deliver goods and services to the market. Organize activities within the company. Chapter 1 Strategic Leadership: Managing the Strategy-Making Process Configure its resources. Achieve and sustain a high level of profitability. Grow the business over time. The business model at discount stores such as Wal-Mart, for example, is based on the idea that costs can be lowered by replacing a full-service retail format for with a self-service format and a wider selection of products sold in a large-footprint store that contains minimal fixtures and fittings. These savings are passed on to consumers in the form of lower prices, which in turn grow revenues and help the company to achieve further cost reductions from economies of scale. Over time, this business model has proved superior to the business models adopted by smaller full-service mom-and-pop stores, and by traditional high-service department stores such as Sears. The business modelknown as the self-service supermarket business modelwas first developed by grocery retailers in the 1950s and later refined and improved on by general merchandisers such as Wal-Mart. More recently, the same basic business model has been applied to toys (Toys \"R\" Us), office supplies (Staples, Office epot), D and home-improvement supplies (Home Depot and Lowes). Wal-Mart outperformed close rivals that adopted the same basic business model, such as K-Mart, because of key differences in strategies, and because Wal-Mart implemented the business model more effectively. As a result, over time, Wal-Mart created unique activities that have become the foundation of its competitive advantage. For example, Wal-Mart was one of the first retailers to make strategic investments in distribution centers and information systems, which lowered the costs of managing inventory (see the opening case). This gave Wal-Mart a competitive advantage over rivals such as K-Mart, which suffered from poor inventory controls and thus higher costs. So although Wal-Mart and K-Mart pursued a similar business model, they were not identical. Key differences in the choice of strategies and the effectiveness of implementation created two unique organizationsone that attained a competitive advantage, and one that ended up with a competitive disadvantage. Industry Differences in Performance It is important to recognize that in addition to its business model and associated strategies, a company's performance is also determined by the characteristics of the industry in which it competes. Different industries are characterized by different competitive conditions. In some industries, demand is growing rapidly, and in others it is contracting. Some industries might be beset by excess capacity and persistent price wars, others by strong demand and rising prices. In some, technological change might be revolutionizing competition; others may be characterized by stable technology. In some industries, high profitability among incumbent companies might induce new companies to enter the industry, and these new e ntrants might subsequently depress prices and profits in the industry. In other industries, new entry might be difficult, and periods of high profitability might persist for a considerable time. Thus, the different competitive conditions prevailing in different industries may lead to differences in profitability and profit growth. For example, average profitability might be higher in some industries and lower in other industries because competitive conditions vary from industry to industry. Figure 1.3 shows the average profitability, measured by ROIC, among companies in several different industries between 2002 and 2011. The computer software industry had a favorable competitive environment: demand for software was high and competition was generally not based on price. Just the opposite was the case in the air transport industry, which was extremely price competitive. Exactly how industries differ is discussed in detail 7 8 Part 1 Introduction to Strategic Management Figure 1.3 Return on Invested Capital (ROIC) in Selected Industries, 2002-2011 30 25 ROIC (%) 20 15 10 5 0 2002 2003 2004 2005 Air Transport 2006 2007 2008 Computer Software Hotel/Gaming 2009 2010 2011 Drug Retail Source: Value Line Investment Survey. in Chapter 2. For now, it is important to remember that the profitability and profit growth of a company are determined by two main factors: its relative success in its industry and the overall performance of its industry relative to other industries.2 Performance in Nonprofit Enterprises A final point concerns the concept of superior performance in the nonprofit sector. By d efinition, nonprofit enterprises such as government agencies, universities, and charities are not in \"business\" to make profits. Nevertheless, they are expected to use their resources e fficiently and operate effectively, and their managers set goals to measure their performance. The performance goal for a business school might be to get its programs ranked among the best in the nation. The performance goal for a charity might be to prevent childhood illnesses in poor countries. The performance goal for a government agency might be to improve its services while not exceeding its budget. The managers of nonprofits need to map out strategies to attain these goals. They also need to understand that nonprofits compete with each other for scarce resources, just as businesses do. For example, charities compete for scarce donations, and their managers must plan and develop strategies that lead to high performance and demonstrate a track record of meeting performance goals. A successful strategy gives potential donors a compelling message about why they should contribute additional donations. Thus, planning and thinking strategically are as important for managers in the nonprofit sector as they are for managers in profit-seeking firms. Chapter 1 Strategic Leadership: Managing the Strategy-Making Process 9 Strategic Managers Managers are the linchpin in the strategy-making process. It is individual managers who must take responsibility for formulating strategies to attain a competitive advantage and for putting those strategies into effect. They must lead the strategy-making process. The strategies that made Wal-Mart so successful were not chosen by some abstract entity known as \"the company\"; they were chosen by the company's founder, Sam Walton, and the managers he hired. Wal-Mart's success was largely based on how well the company's managers performed their strategic roles. In this section, we look at the strategic roles of different managers. Later in the chapter, we discuss strategic leadership, which is how managers can effectively lead the strategy-making process. In most companies, there are two primary types of managers: general managers, who bear responsibility for the overall performance of the company or for one of its major self-contained subunits or divisions, and functional managers, who are responsible for supervising a particular function, that is, a task, activity, or operation, such as accounting, marketing, research and development (R&D), information technology, or logistics. Put differently, general managers have profit-and-loss responsibility for a product, a business, or the company as a whole. A company is a collection of functions or departments that work together to bring a particular good or service to the market. If a company provides several different kinds of goods or services, it often duplicates these functions and creates a series of self-contained divisions (each of which contains its own set of functions) to manage each different good or service. The general managers of these divisions then become responsible for their particular product line. The overriding concern of general managers is the success of the whole company or the divisions under their direction; they are responsible for deciding how to create a competitive advantage and achieve high profitability with the resources and capital they have at their disposal. Figure 1.4 shows the organization of a multidivisional company, Figure 1.4 Levels of Strategic Management Head Office Corporate Level CEO, Board of Directors, Corporate staff Division A Division B Division C Functional Level Functional managers Business functions Business functions Business functions Market A Market B Market C Cengage Learning Business Level Divisional managers and staff general managers Managers who bear responsibility for the overall performance of the company or for one of its major self-contained subunits or divisions. functional managers Managers responsible for supervising a particular function, that is, a task, activity, or operation, such as accounting, marketing, research and development (R&D), information technology, or logistics. multidivisional company A company that competes in several different businesses and has created a separate self-contained division to manage each. 10 Part 1 Introduction to Strategic Management that is, a company that competes in several different businesses and has created a separate self-contained division to manage each. As you can see, there are three main levels of management: corporate, business, and functional. General managers are found at the first two of these levels, but their strategic roles differ depending on their sphere of responsibility. Corporate-Level Managers The corporate level of management consists of the chief executive officer (CEO), other senior executives, and corporate staff. These individuals occupy the apex of decision making within the organization. The CEO is the principal general manager. In consultation with other senior executives, the role of corporate-level managers is to oversee the development of strategies for the whole organization. This role includes defining the goals of the organization, determining what businesses it should be in, allocating resources among the different businesses, formulating and implementing strategies that span individual businesses, and providing leadership for the entire organization. Consider General Electric (GE) as an example. GE is active in a wide range of businesses, including lighting equipment, major appliances, motor and transportation equipment, turbine generators, construction and engineering services, industrial electronics, medical systems, aerospace, aircraft engines, and financial services. The main strategic responsibilities of its CEO, Jeffrey Immelt, are setting overall strategic goals, allocating resources among the different business areas, deciding whether the firm should divest itself of any of its businesses, and determining whether it should acquire any new ones. In other words, it is up to Immelt to develop strategies that span individual businesses; his concern is with building and managing the corporate portfolio of businesses to maximize corporate profitability. It is the CEO's specific responsibility (in this example, Immelt) to develop strategies for competing in the individual business areas, such as financial services. The development of such strategies is the responsibility of the general managers in these different businesses, or business-level managers. However, it is Immelt's responsibility to probe the strategic thinking of business-level managers to make sure that they are pursuing robust business models and strategies that will contribute to the maximization of GE's long-run profitability, to coach and motivate those managers, to reward them for attaining or exceeding goals, and to hold them accountable for poor performance. Corporate-level managers also provide a link between the people who oversee the strategic development of a firm and those who own it (the shareholders). Corporate-level managers, and particularly the CEO, can be viewed as the agents of shareholders.3 It is their responsibility to ensure that the corporate and business strategies that the company pursues are consistent with maximizing profitability and profit growth. If they are not, then the CEO is likely to be called to account by the shareholders. Business-Level Managers business un