Strategic Management And Business Policy : Globalization, Innovation And Sustainability, 15th Edition Solution Manual
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PART A
SUGGESTIONS FOR TEACHING
STRATEGIC MANAGEMENT
SUGGESTIONS FOR TEACHING
STRATEGIC MANAGEMENT
SUGGESTIONS FOR TEACHING STRATEGIC MANAGEMENT
Strategic management ... Business policy ... Strategy. Whatever its name, it’s typically considered a “capstone”
course in most business schools. Its primary job is to examine a business firm as a whole and to integrate the various
functional disciplines. It generally includes industry analysis and competitive strategy with a healthy dose of SWOT
analysis. It may also include corporate governance and/or social responsibility and ethics, depending upon the
instructor. The course is generally expected to take a practical view of how business corporations actually function
“in the real world.” Nevertheless, there are many ways to teach strategic management. Some people are strong
proponents of “the case method.” Others argue that simulations are the best method of giving students a “hands-on”
understanding of strategic decision making. A number of instructors also use experiential exercises, group projects,
and audio-visual presentations. Very few, if any, argue for a straight lecture/discussion type of strategy course at the
undergraduate and master’s level. Each approach, however, has its strengths and weaknesses.
Lecture/discussion, for example, is a good way to communicate a lot of information and to critically analyze
theoretical concepts. In a strategy course, however, the emphasis is typically on developing integrative and problem-
solving skills. This is a weakness of the lecture/discussion approach.
The simulation, in contrast, is an excellent method to develop these skills and to put learning in the hands of the
student rather than in the hands of the instructor. It also emphasizes strategy implementation, an aspect of strategic
management often receiving little emphasis in most strategy courses. Its weaknesses include turning the instructor
from a teacher into an administrator. If teams are used, there is a strong tendency for students to let the “computer
geeks” take charge of decision making as the objective turns from strategy making to “playing the game.”
The Case Method
The most popular as well as the most perceived effective approach to teaching strategic management is the case
method. Its strengths include a real-world orientation (believed to generate student involvement) and the ability to
focus on developing decision-making skills by taking an integrative and conceptual, yet action-oriented approach.
This method may not go well, however, if the instructor is inexperienced in the use of cases and/or the students are
not motivated to do more than a superficial reading of the cases. A capable case instructor must be able to force the
typical student to go beyond satisficing at a very low level (e.g., “In my opinion, they ought to fire the CEO.”).
If given a free rein, the average undergraduate tends to “Monday morning quarterback” the case. For example, if
everyone knows that Hershey Foods successfully developed and marketed a new type of sugar-free candy this year,
there is a strong tendency to recommend this solution rather than other alternative courses of action. As a result, an
instructor new to the case method must ensure that students truly understand that the best solution to any case
problem is not (a) the one the instructor mentions, (b) what the company actually did, or (c) the most obvious
solution. The best solution comes from the best analysis. This means that the instructor must work hard to ensure
that students don’t take the easy route by merely stating the symptoms as if they were underlying problems and
going immediately to their desired solution without regard for other alternatives.
Possible Course Syllabus and Outlines
A number of policy instructors, including us, have a strong bias in favor of 75-minute classes meeting twice a week.
Open class discussion or oral presentations of complex strategy cases usually require at least an hour’s worth of
time. Given the usual rigmarole involved in starting and ending a class, it is very difficult to handle a case well in a
50-minute period unless the case is analyzed over two class sessions. The course outlines you see below have been
developed with generic activities. Instructors should explore MyManagementLab to review all possible activities in
which students can participate.
One other variable, which complicates the development of a course outline, is the decision concerning the timing of
the lectures on strategic management. Some instructors choose to spend the first part of their course lecturing over
the book while the students quickly read the chapters. Others attempt to intersperse lectures with case discussions or
presentations. The key question seems to be: How much information do students need before they can competently
Strategic management ... Business policy ... Strategy. Whatever its name, it’s typically considered a “capstone”
course in most business schools. Its primary job is to examine a business firm as a whole and to integrate the various
functional disciplines. It generally includes industry analysis and competitive strategy with a healthy dose of SWOT
analysis. It may also include corporate governance and/or social responsibility and ethics, depending upon the
instructor. The course is generally expected to take a practical view of how business corporations actually function
“in the real world.” Nevertheless, there are many ways to teach strategic management. Some people are strong
proponents of “the case method.” Others argue that simulations are the best method of giving students a “hands-on”
understanding of strategic decision making. A number of instructors also use experiential exercises, group projects,
and audio-visual presentations. Very few, if any, argue for a straight lecture/discussion type of strategy course at the
undergraduate and master’s level. Each approach, however, has its strengths and weaknesses.
Lecture/discussion, for example, is a good way to communicate a lot of information and to critically analyze
theoretical concepts. In a strategy course, however, the emphasis is typically on developing integrative and problem-
solving skills. This is a weakness of the lecture/discussion approach.
The simulation, in contrast, is an excellent method to develop these skills and to put learning in the hands of the
student rather than in the hands of the instructor. It also emphasizes strategy implementation, an aspect of strategic
management often receiving little emphasis in most strategy courses. Its weaknesses include turning the instructor
from a teacher into an administrator. If teams are used, there is a strong tendency for students to let the “computer
geeks” take charge of decision making as the objective turns from strategy making to “playing the game.”
The Case Method
The most popular as well as the most perceived effective approach to teaching strategic management is the case
method. Its strengths include a real-world orientation (believed to generate student involvement) and the ability to
focus on developing decision-making skills by taking an integrative and conceptual, yet action-oriented approach.
This method may not go well, however, if the instructor is inexperienced in the use of cases and/or the students are
not motivated to do more than a superficial reading of the cases. A capable case instructor must be able to force the
typical student to go beyond satisficing at a very low level (e.g., “In my opinion, they ought to fire the CEO.”).
If given a free rein, the average undergraduate tends to “Monday morning quarterback” the case. For example, if
everyone knows that Hershey Foods successfully developed and marketed a new type of sugar-free candy this year,
there is a strong tendency to recommend this solution rather than other alternative courses of action. As a result, an
instructor new to the case method must ensure that students truly understand that the best solution to any case
problem is not (a) the one the instructor mentions, (b) what the company actually did, or (c) the most obvious
solution. The best solution comes from the best analysis. This means that the instructor must work hard to ensure
that students don’t take the easy route by merely stating the symptoms as if they were underlying problems and
going immediately to their desired solution without regard for other alternatives.
Possible Course Syllabus and Outlines
A number of policy instructors, including us, have a strong bias in favor of 75-minute classes meeting twice a week.
Open class discussion or oral presentations of complex strategy cases usually require at least an hour’s worth of
time. Given the usual rigmarole involved in starting and ending a class, it is very difficult to handle a case well in a
50-minute period unless the case is analyzed over two class sessions. The course outlines you see below have been
developed with generic activities. Instructors should explore MyManagementLab to review all possible activities in
which students can participate.
One other variable, which complicates the development of a course outline, is the decision concerning the timing of
the lectures on strategic management. Some instructors choose to spend the first part of their course lecturing over
the book while the students quickly read the chapters. Others attempt to intersperse lectures with case discussions or
presentations. The key question seems to be: How much information do students need before they can competently
analyze their first comprehensive strategic management case? This is completely up to the instructor. We believe
that a use of the strategic audit will help students to competently analyze their first comprehensive case even if they
have not gone beyond corporate strategy in Chapter 7. We have found this point to be a good time to begin oral
presentations, for example. The first case should, however, emphasize strategy formulation over implementation and
be reasonably easy to analyze with each following case increasing in difficulty.
that a use of the strategic audit will help students to competently analyze their first comprehensive case even if they
have not gone beyond corporate strategy in Chapter 7. We have found this point to be a good time to begin oral
presentations, for example. The first case should, however, emphasize strategy formulation over implementation and
be reasonably easy to analyze with each following case increasing in difficulty.
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SAMPLE COURSE SYLLABUS
COURSE TITLE: STRATEGIC MANAGEMENT
————————————————————————————————————
Class Times & Location:
Course Web Site:
Instructor Information:
Office & Office Hours:
————————————————————————————————————
COURSE DESCRIPTION:
This course serves as a cohesive map for strategic management. It is designed to integrate the
accepted theories in the area with real-world applications to provide students with the basic
knowledge and skills needed for strategic management. Lecture and class assignments given in
the course are intended to help students understand the needs of modern public and private
organizations, including emerging national and international trends.
COURSE OBJECTIVES
By the end of the course, students should be able to understand the basic elements of planning
and implementing strategy.
RESOURCES
TEXTBOOK: Strategic Management and Business Policy: Globalization, Innovation, and
Sustainability, 15th Edition by T. Wheelen, J. Hunger, A. Hoffman, and C. Bamford.
SOFTWARE: MyManagementLab (This is an optional resource, see
www.mymanagementlab.com for more information.)
LIBRARY & INTERNET RESOURCES: Students are encouraged to use the university library
and the Internet for research and to complete assignments when necessary.
COURSE COMPONENTS
EXAMS: A designated number of exams and a final exam will test students’
understanding of the materials discussed in class and in the assigned readings.
CASE ASSIGNMENTS: Students will answer discussion questions from case applications
assigned in the text. The goal is for students to apply the information discussed to these
real-world situations to the concepts and principles presented in the course.
IN-CLASS EXERCISES: Throughout the semester, students are expected to be prepared to
discuss issues relevant to the course and to participate in team exercises. For these
exercises, students will be required to be actively involved to receive credit—for
example, making substantive comments, answering questions, and preparing short
presentations. Points will be awarded by the instructor based on individual and group
participation. Students should bring their textbook to class as part of their participation
grade. Material for in-class assignments can be found at the conclusion of each
chapter—–see Ethical Dilemmas and Team Exercises.
COURSE TITLE: STRATEGIC MANAGEMENT
————————————————————————————————————
Class Times & Location:
Course Web Site:
Instructor Information:
Office & Office Hours:
————————————————————————————————————
COURSE DESCRIPTION:
This course serves as a cohesive map for strategic management. It is designed to integrate the
accepted theories in the area with real-world applications to provide students with the basic
knowledge and skills needed for strategic management. Lecture and class assignments given in
the course are intended to help students understand the needs of modern public and private
organizations, including emerging national and international trends.
COURSE OBJECTIVES
By the end of the course, students should be able to understand the basic elements of planning
and implementing strategy.
RESOURCES
TEXTBOOK: Strategic Management and Business Policy: Globalization, Innovation, and
Sustainability, 15th Edition by T. Wheelen, J. Hunger, A. Hoffman, and C. Bamford.
SOFTWARE: MyManagementLab (This is an optional resource, see
www.mymanagementlab.com for more information.)
LIBRARY & INTERNET RESOURCES: Students are encouraged to use the university library
and the Internet for research and to complete assignments when necessary.
COURSE COMPONENTS
EXAMS: A designated number of exams and a final exam will test students’
understanding of the materials discussed in class and in the assigned readings.
CASE ASSIGNMENTS: Students will answer discussion questions from case applications
assigned in the text. The goal is for students to apply the information discussed to these
real-world situations to the concepts and principles presented in the course.
IN-CLASS EXERCISES: Throughout the semester, students are expected to be prepared to
discuss issues relevant to the course and to participate in team exercises. For these
exercises, students will be required to be actively involved to receive credit—for
example, making substantive comments, answering questions, and preparing short
presentations. Points will be awarded by the instructor based on individual and group
participation. Students should bring their textbook to class as part of their participation
grade. Material for in-class assignments can be found at the conclusion of each
chapter—–see Ethical Dilemmas and Team Exercises.
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GRADING
Percentage Points
In-Class Exercises/Participation 10% 50
Case Assignments (4 at 25 points each) 20% 100
Exam(s) 50% 250
Final Exam 20% 100
TOTAL POINTS 500
NOTE:
Class attendance and participation in class discussion is expected and absences
will affect your final grade.
The due dates for assignments are non-negotiable and late work will be
penalized.
All assignments are to be professional in appearance and typed to receive full
credit.
COURSE POLICIES
CLASSROOM BEHAVIOR: Classroom behavior that interferes with either the instructor’s ability to
conduct the class or the ability of students to benefit from the instruction is not acceptable.
Students engaging in improper classroom behavior may have points deducted from their total
points in the course, or if the situation warrants, be reprimanded to the university’s committee on
student discipline.
ACADEMIC HONESTY AND APPEALS: Students are expected to maintain the highest standards of
academic integrity. Behavior that violates these standards is not acceptable. Examples are the
use of unauthorized material, communication with fellow students during an examination,
attempting to benefit from the work of another student, and similar behavior that defeats the
intent of an examination or other class work. Cheating on exams, plagiarism, improper
acknowledgement of sources in essays, and the use of a single essay or paper in more than
one course without permission are considered very serious offences and shall be grounds for
disciplinary action as outlined in the current General Catalogue.
Percentage Points
In-Class Exercises/Participation 10% 50
Case Assignments (4 at 25 points each) 20% 100
Exam(s) 50% 250
Final Exam 20% 100
TOTAL POINTS 500
NOTE:
Class attendance and participation in class discussion is expected and absences
will affect your final grade.
The due dates for assignments are non-negotiable and late work will be
penalized.
All assignments are to be professional in appearance and typed to receive full
credit.
COURSE POLICIES
CLASSROOM BEHAVIOR: Classroom behavior that interferes with either the instructor’s ability to
conduct the class or the ability of students to benefit from the instruction is not acceptable.
Students engaging in improper classroom behavior may have points deducted from their total
points in the course, or if the situation warrants, be reprimanded to the university’s committee on
student discipline.
ACADEMIC HONESTY AND APPEALS: Students are expected to maintain the highest standards of
academic integrity. Behavior that violates these standards is not acceptable. Examples are the
use of unauthorized material, communication with fellow students during an examination,
attempting to benefit from the work of another student, and similar behavior that defeats the
intent of an examination or other class work. Cheating on exams, plagiarism, improper
acknowledgement of sources in essays, and the use of a single essay or paper in more than
one course without permission are considered very serious offences and shall be grounds for
disciplinary action as outlined in the current General Catalogue.
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COURSE OUTLINE 16-WEEK COURSE: SEMESTER
Week Assigned Reading Generic Activities—see
MyManagementLab for actual
activities that correspond with this
text
1
Chapter 1 Basic Concepts of Strategic
Management
Module Management Strategy
In-class discussion: Strategy (Chapter 1)
2 Chapter 2 Corporate Governance In-class exercise: Building Constraints
(Chapter 2)
3 Chapter 3 Social Responsibility and Ethics in
Strategic Management
Case #1 (Chapter 3)
4 Chapter 4 Environmental Scanning and
Industry Analysis
In-class discussion: Scanning (Chapter
4)
5 Chapter 5 Organizational Analysis and
Competitive Advantage
In-class discussion: Working with Apple
6 Chapter 6 Strategy Formulation and
Business Strategy
Case #2 (Chapter 6)
7 Exam 1
8 Chapter 7 Strategy Formulation: Corporate
Strategy
In-class discussion: Corporations Need
Direction (Chapter 7)
9 Chapter 8 Strategy Formulation: Functional
Strategy and Strategic Choice
Case #1 (Chapter 8)
10 Chapter 9 Strategy Implementation: Global
Strategy
In-class discussion: Successful
Expatriates
11 Chapter 10 Strategy Implementation:
Organizing and Structure
In-class exercise: Team Building
(Chapter 10)
12 Chapter 11 Strategy Implementation:
Staffing and Directing
Case #2: Hiring Decisions (Chapter 11)
13 Chapter 12 Evaluation and Control In-class exercise: Evaluating the
Evaluation (Chapter 12)
14 Chapter 13 Suggestions for Case Analysis In-class discussion: Using Financials
(Chapter 13)
15 Putting It All Together Case Presentation
Final Exam
Week Assigned Reading Generic Activities—see
MyManagementLab for actual
activities that correspond with this
text
1
Chapter 1 Basic Concepts of Strategic
Management
Module Management Strategy
In-class discussion: Strategy (Chapter 1)
2 Chapter 2 Corporate Governance In-class exercise: Building Constraints
(Chapter 2)
3 Chapter 3 Social Responsibility and Ethics in
Strategic Management
Case #1 (Chapter 3)
4 Chapter 4 Environmental Scanning and
Industry Analysis
In-class discussion: Scanning (Chapter
4)
5 Chapter 5 Organizational Analysis and
Competitive Advantage
In-class discussion: Working with Apple
6 Chapter 6 Strategy Formulation and
Business Strategy
Case #2 (Chapter 6)
7 Exam 1
8 Chapter 7 Strategy Formulation: Corporate
Strategy
In-class discussion: Corporations Need
Direction (Chapter 7)
9 Chapter 8 Strategy Formulation: Functional
Strategy and Strategic Choice
Case #1 (Chapter 8)
10 Chapter 9 Strategy Implementation: Global
Strategy
In-class discussion: Successful
Expatriates
11 Chapter 10 Strategy Implementation:
Organizing and Structure
In-class exercise: Team Building
(Chapter 10)
12 Chapter 11 Strategy Implementation:
Staffing and Directing
Case #2: Hiring Decisions (Chapter 11)
13 Chapter 12 Evaluation and Control In-class exercise: Evaluating the
Evaluation (Chapter 12)
14 Chapter 13 Suggestions for Case Analysis In-class discussion: Using Financials
(Chapter 13)
15 Putting It All Together Case Presentation
Final Exam
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COURSE OUTLINE 12-WEEK COURSE: SEMESTER
Week Assigned Reading Generic Activities—see
MyManagementLab for actual
activities that correspond with this
text
1
Chapter 1 Basic Concepts of Strategic
Management
Module Management Strategy
In-class discussion: Strategy (Chapter 1)
2 Chapter 2 Corporate Governance In-class exercise: Building Constraints
(Chapter 2)
3 Chapter 3 Social Responsibility and Ethics in
Strategic Management
Case #1 (Chapter 3)
4 Chapter 4 Environmental Scanning and
Industry Analysis
In-class discussion: Scanning (Chapter
4)
5 Chapter 5 Organizational Analysis and
Competitive Advantage
In-class discussion: Working with Apple
6 Chapter 6 Strategy Formulation and
Business Strategy
Case #2 (Chapter 6)
7 Chapter 7 Strategy Formulation: Corporate
Strategy
Exam 1
8 Chapter 8 Strategy Formulation: Functional
Strategy and Strategic Choice
In-class exercise: Developing Synergy
(Chapter 8)
9
Chapter 9 Strategy Implementation: Global
Strategy
Chapter 10 Strategy Implementation:
Organizing and Structure
Case #1 (Chapter 10)
10 Chapter 11 Strategy Implementation:
Staffing and Directing
In-class exercise: Team Building
(Chapter 11)
11 Chapter 12 Evaluation and Control Case #2: Developing Controls (Chapter
12)
12 Chapter 13 Suggestions for Case Analysis Putting It All Together
Final Exam
Week Assigned Reading Generic Activities—see
MyManagementLab for actual
activities that correspond with this
text
1
Chapter 1 Basic Concepts of Strategic
Management
Module Management Strategy
In-class discussion: Strategy (Chapter 1)
2 Chapter 2 Corporate Governance In-class exercise: Building Constraints
(Chapter 2)
3 Chapter 3 Social Responsibility and Ethics in
Strategic Management
Case #1 (Chapter 3)
4 Chapter 4 Environmental Scanning and
Industry Analysis
In-class discussion: Scanning (Chapter
4)
5 Chapter 5 Organizational Analysis and
Competitive Advantage
In-class discussion: Working with Apple
6 Chapter 6 Strategy Formulation and
Business Strategy
Case #2 (Chapter 6)
7 Chapter 7 Strategy Formulation: Corporate
Strategy
Exam 1
8 Chapter 8 Strategy Formulation: Functional
Strategy and Strategic Choice
In-class exercise: Developing Synergy
(Chapter 8)
9
Chapter 9 Strategy Implementation: Global
Strategy
Chapter 10 Strategy Implementation:
Organizing and Structure
Case #1 (Chapter 10)
10 Chapter 11 Strategy Implementation:
Staffing and Directing
In-class exercise: Team Building
(Chapter 11)
11 Chapter 12 Evaluation and Control Case #2: Developing Controls (Chapter
12)
12 Chapter 13 Suggestions for Case Analysis Putting It All Together
Final Exam
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PART B
CHAPTER NOTES
CHAPTER NOTES
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CHAPTER ONE
BASIC CONCEPTS OF STRATEGIC MANAGEMENT
This chapter sets the stage for the study of strategic management and business policy. It summarizes research
supporting the conclusion that those corporations that are able to learn from their experiences and manage
strategically perform at a higher level than corporations that do not. It describes a number of triggering events that
act to initiate strategic change in most organizations. A normative model of strategic management is presented as the
basic structure underlying the book. Key concepts are defined and explained as part of the discussion of the model.
The chapter also introduces the strategic audit as a method of operationalizing strategic decision making.
LEARNING OBJECTIVES
1. Discuss the benefits of strategic management.
2. Explain how globalization, innovation, and environmental sustainability influence strategic management.
3. Discuss the differences between the theories of organizations.
4. Discuss the activities where learning organizations excel.
5. Describe the basic model of strategic management and its components.
6. Identify some common triggering events that act as stimuli for strategic change.
7. Explain strategic decision-making modes.
8. Use the strategic audit as a method of analyzing corporate functions and activities.
TOPICS OUTLINE COVERED
1. The Study of Strategic Management
a. Phases of Strategic Management
b. Benefits of Strategic Management
2. Globalization, Innovation, and Sustainability: Challenges to Strategic Management
a. Impact of Globalization
b. Impact of Innovation
c. Impact of Sustainability
3. Theories of Organizational Adaptation
4. Creating a Learning Organization
5. Basic Model of Strategic Management
a. Environmental Scanning
b. Strategy Formulation
c. Strategy Implementation
d. Evaluation and Control
e. Feedback/Learning Process
6. Initiation of Strategy: Triggering Events
7. Strategic Decision Making
a. What Makes a Decision Strategic
b. Mintzberg’s Modes of Strategic Decision Making
c. Strategic Decision-Making Process: Aid to Better Decisions
8. The Strategic Audit: Aid to Strategic Decision Making
SUGGESTED ANSWERS TO MYMANAGEMENTLAB QUESTIONS
1-1. How do the three elements of globalization, innovation, and sustainability impact your understanding
of strategy?
Globalization is the integrated internationalization of markets and corporations. As more industries become global,
strategic management is becoming more important in keeping track of international developments and positioning a
company for long-term competitive advantage. Innovation is meant to describe new products, services, methods, and
BASIC CONCEPTS OF STRATEGIC MANAGEMENT
This chapter sets the stage for the study of strategic management and business policy. It summarizes research
supporting the conclusion that those corporations that are able to learn from their experiences and manage
strategically perform at a higher level than corporations that do not. It describes a number of triggering events that
act to initiate strategic change in most organizations. A normative model of strategic management is presented as the
basic structure underlying the book. Key concepts are defined and explained as part of the discussion of the model.
The chapter also introduces the strategic audit as a method of operationalizing strategic decision making.
LEARNING OBJECTIVES
1. Discuss the benefits of strategic management.
2. Explain how globalization, innovation, and environmental sustainability influence strategic management.
3. Discuss the differences between the theories of organizations.
4. Discuss the activities where learning organizations excel.
5. Describe the basic model of strategic management and its components.
6. Identify some common triggering events that act as stimuli for strategic change.
7. Explain strategic decision-making modes.
8. Use the strategic audit as a method of analyzing corporate functions and activities.
TOPICS OUTLINE COVERED
1. The Study of Strategic Management
a. Phases of Strategic Management
b. Benefits of Strategic Management
2. Globalization, Innovation, and Sustainability: Challenges to Strategic Management
a. Impact of Globalization
b. Impact of Innovation
c. Impact of Sustainability
3. Theories of Organizational Adaptation
4. Creating a Learning Organization
5. Basic Model of Strategic Management
a. Environmental Scanning
b. Strategy Formulation
c. Strategy Implementation
d. Evaluation and Control
e. Feedback/Learning Process
6. Initiation of Strategy: Triggering Events
7. Strategic Decision Making
a. What Makes a Decision Strategic
b. Mintzberg’s Modes of Strategic Decision Making
c. Strategic Decision-Making Process: Aid to Better Decisions
8. The Strategic Audit: Aid to Strategic Decision Making
SUGGESTED ANSWERS TO MYMANAGEMENTLAB QUESTIONS
1-1. How do the three elements of globalization, innovation, and sustainability impact your understanding
of strategy?
Globalization is the integrated internationalization of markets and corporations. As more industries become global,
strategic management is becoming more important in keeping track of international developments and positioning a
company for long-term competitive advantage. Innovation is meant to describe new products, services, methods, and
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organizational approaches that would position a company to achieve strong returns. Sustainability refers to a set of
business practices that focus on the triple bottom line for an organization. Each of these is a new frontier that is
impacting the way in which businesses develop and implement strategy.
1-2. Organizational strategy can be divided roughly into two categories: a) formulation and b)
implementation. Although there is legitimate crossover between the two, how would you characterize
the issues involved in each effort?
There are four basic phases of strategic management. Phase 1 is basic financial planning, phase 2 is forecast-based
planning, phase 3 is externally oriented strategic planning, and phase 4 is strategic management. Phases 1, 2, and 3
are all considered part of the formulation category. Each of these stages suggests the need to scan the internal and
external environment and develop a plan adapting to projections and forecast. The last phase, strategic management,
is about the choices an organization makes to implement the planned strategy. In this stage, everyone across the
organization is enlisted to support the strategic goals.
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
1-3. Why has strategic management become so important in business?
Research indicates that organizations that engage in strategic management generally outperform those that do not.
The attainment of an appropriate match or fit between an organization’s environment and its strategy, structure, and
processes has positive effects on the organization’s performance. The three most highly rated benefits of strategic
management are a clearer sense of a firm’s strategic vision, a sharper focus on what is strategically important, and an
improved understanding of a rapidly changing environment. As the world’s environment continually changes and
becomes increasingly complex, strategic management is used by today’s corporations as one way to make the
environment more manageable.
1-4. How does strategic management typically evolve in a company?
Strategic management in a corporation appears to evolve through four sequential phases according to Gluck,
Kaufman, and Walleck. Beginning with basic financial planning, it develops into forecast-based planning, then into
externally oriented planning, and finally into a full-blown strategic management system. The evolution is most likely
caused by increasing change and complexity in the corporation’s external environment. The phases are thus likely to
be characterized by a change from primarily an inward-looking orientation in the first phase to primarily an
outward-looking orientation in the third phase, and to a more integrative orientation in the final strategic
management phase with equal emphasis on both the external and internal environments.
1-5. What is a learning organization? Is this approach to strategic management better than the more
traditional top-down approach in which strategic planning is primarily done by top management?
Simply put, a learning organization is one that is able to learn from its experiences. In reality, it is much more
complicated. The text points out that learning organizations are skilled at four main activities: (1) systematic
problem solving; (2) experimenting with new approaches; (3) learning from their own experience and past history as
well as from the experiences of others; and (4) transferring knowledge quickly and efficiently throughout the
organization. This means that people at all levels, not just top management, need to be involved in strategic
management—by helping to scan the environment for critical information, suggesting changes to strategies and
programs to take advantage of environmental shifts, and working with others to continuously improve work
methods, procedures, and evaluation techniques. Research indicates that those organizations that are willing to
experiment and able to learn from their experiences are more successful than those that do not.
Top-down strategic management assumes that only top management is in a position to contribute to strategic
planning. This approach can work reasonably well in a bureaucratic organization with very little horizontal
communication. Top-down strategic planning forces all units to get involved in the planning process and makes sure
that all units fit into the overall corporate mission, objectives, strategies, and policies. A limitation of the top-down
business practices that focus on the triple bottom line for an organization. Each of these is a new frontier that is
impacting the way in which businesses develop and implement strategy.
1-2. Organizational strategy can be divided roughly into two categories: a) formulation and b)
implementation. Although there is legitimate crossover between the two, how would you characterize
the issues involved in each effort?
There are four basic phases of strategic management. Phase 1 is basic financial planning, phase 2 is forecast-based
planning, phase 3 is externally oriented strategic planning, and phase 4 is strategic management. Phases 1, 2, and 3
are all considered part of the formulation category. Each of these stages suggests the need to scan the internal and
external environment and develop a plan adapting to projections and forecast. The last phase, strategic management,
is about the choices an organization makes to implement the planned strategy. In this stage, everyone across the
organization is enlisted to support the strategic goals.
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
1-3. Why has strategic management become so important in business?
Research indicates that organizations that engage in strategic management generally outperform those that do not.
The attainment of an appropriate match or fit between an organization’s environment and its strategy, structure, and
processes has positive effects on the organization’s performance. The three most highly rated benefits of strategic
management are a clearer sense of a firm’s strategic vision, a sharper focus on what is strategically important, and an
improved understanding of a rapidly changing environment. As the world’s environment continually changes and
becomes increasingly complex, strategic management is used by today’s corporations as one way to make the
environment more manageable.
1-4. How does strategic management typically evolve in a company?
Strategic management in a corporation appears to evolve through four sequential phases according to Gluck,
Kaufman, and Walleck. Beginning with basic financial planning, it develops into forecast-based planning, then into
externally oriented planning, and finally into a full-blown strategic management system. The evolution is most likely
caused by increasing change and complexity in the corporation’s external environment. The phases are thus likely to
be characterized by a change from primarily an inward-looking orientation in the first phase to primarily an
outward-looking orientation in the third phase, and to a more integrative orientation in the final strategic
management phase with equal emphasis on both the external and internal environments.
1-5. What is a learning organization? Is this approach to strategic management better than the more
traditional top-down approach in which strategic planning is primarily done by top management?
Simply put, a learning organization is one that is able to learn from its experiences. In reality, it is much more
complicated. The text points out that learning organizations are skilled at four main activities: (1) systematic
problem solving; (2) experimenting with new approaches; (3) learning from their own experience and past history as
well as from the experiences of others; and (4) transferring knowledge quickly and efficiently throughout the
organization. This means that people at all levels, not just top management, need to be involved in strategic
management—by helping to scan the environment for critical information, suggesting changes to strategies and
programs to take advantage of environmental shifts, and working with others to continuously improve work
methods, procedures, and evaluation techniques. Research indicates that those organizations that are willing to
experiment and able to learn from their experiences are more successful than those that do not.
Top-down strategic management assumes that only top management is in a position to contribute to strategic
planning. This approach can work reasonably well in a bureaucratic organization with very little horizontal
communication. Top-down strategic planning forces all units to get involved in the planning process and makes sure
that all units fit into the overall corporate mission, objectives, strategies, and policies. A limitation of the top-down
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approach is that all motivation comes from the top and lower units may simply go through the motions in order to
please the boss. The likelihood of fresh, new strategic concepts at lower levels of the organization becomes less, the
more the stimulus for strategic planning comes from above.
1-6. Why are strategic decisions different from other kinds of decisions?
Strategic decisions deal with the long-run future of the entire organization and have three characteristics that
differentiate them from other types of decisions: (1) they are rare—strategic decisions are unusual and typically
have no precedent to follow; (2) they are consequential—strategic decisions commit substantial resources and
demand a great deal of commitment; and (3) they are directive—strategic decisions set precedents for lesser
decisions and future actions throughout the organization. See Top Decisions: Strategic Decision-Making in
Organizations by Hickson, Butler, Cray, Mallory, and Wilson for further discussion.
1-7. When is the planning mode of strategic decision making superior to the entrepreneurial and adaptive
modes?
The planning mode is generally superior to the entrepreneurial and adaptive modes when the organization is fairly
large, when knowledge is spread throughout the organization, and when the organization has at least a moderate
amount of time to engage in strategic planning. The book proposes that the planning mode is more rational and thus
a better way of making most strategic decisions. It may not, however, always be possible. The entrepreneurial mode
can be very useful when time is short, when one person or group is able to grasp the essentials of the business and its
environment, and that person or group is able to influence the rest of the organization to accept its strategic decision.
The adaptive mode is generally not considered to be very effective in most situations, but seems to be the fallback
mode when entrepreneurial or planning modes can’t operate effectively because of political infighting or lethargy.
ADDITIONAL DISCUSSION QUESTIONS FOR INSTRUCTORS
These are not found in the text and may be used by the instructor for classroom discussion or exams.
A1-1. Describe the triple bottom line.
The term used to describe a business’ sustainability is the triple bottom line. John Elkington coined the phrase in
1994 to suggest that organizations do pay attention to three different bottom lines. These include: (1) Traditional
profit/loss; (2) People Account—social responsibility of the organization; and (3) Planet Account—the
environmental responsibility of the organization. This has become increasingly important for organizations today.
For instance, companies seek LEED certification for their buildings and mold a reputation for being friendly to the
world. LEED certification is available to buildings that are created to be self-sustaining, with little impact on the
environment.
A1-2. What is meant by a hierarchy of strategy?
A hierarchy of strategy is a term used to describe the interrelationships among the three levels of strategy (corporate,
business, and functional) typically found in large business corporations. Beginning with the corporate level, each
level of strategy forms the strategic environment of the next level in the corporation. This means that corporate level
objectives, strategies, and policies form a key part of the environment of a division or business unit. The objectives,
strategies, and policies of the division or unit must therefore be formulated so as to help achieve the plans of the
corporate level. The same is true of functional departments that must operate within the objectives, strategies, and
policies of a division or unit.
A1-3. Does every business firm have business strategies?
Every business firm should have a business strategy for every industry or market segment it serves. A business
strategy aims at improving the competitive position of a business firm’s products or services in a specific industry or
market segment. Firms must therefore have business strategies even if they are not organized on the basis of
operating divisions. Nevertheless, it is still possible that some business firms do not have clearly stated business
please the boss. The likelihood of fresh, new strategic concepts at lower levels of the organization becomes less, the
more the stimulus for strategic planning comes from above.
1-6. Why are strategic decisions different from other kinds of decisions?
Strategic decisions deal with the long-run future of the entire organization and have three characteristics that
differentiate them from other types of decisions: (1) they are rare—strategic decisions are unusual and typically
have no precedent to follow; (2) they are consequential—strategic decisions commit substantial resources and
demand a great deal of commitment; and (3) they are directive—strategic decisions set precedents for lesser
decisions and future actions throughout the organization. See Top Decisions: Strategic Decision-Making in
Organizations by Hickson, Butler, Cray, Mallory, and Wilson for further discussion.
1-7. When is the planning mode of strategic decision making superior to the entrepreneurial and adaptive
modes?
The planning mode is generally superior to the entrepreneurial and adaptive modes when the organization is fairly
large, when knowledge is spread throughout the organization, and when the organization has at least a moderate
amount of time to engage in strategic planning. The book proposes that the planning mode is more rational and thus
a better way of making most strategic decisions. It may not, however, always be possible. The entrepreneurial mode
can be very useful when time is short, when one person or group is able to grasp the essentials of the business and its
environment, and that person or group is able to influence the rest of the organization to accept its strategic decision.
The adaptive mode is generally not considered to be very effective in most situations, but seems to be the fallback
mode when entrepreneurial or planning modes can’t operate effectively because of political infighting or lethargy.
ADDITIONAL DISCUSSION QUESTIONS FOR INSTRUCTORS
These are not found in the text and may be used by the instructor for classroom discussion or exams.
A1-1. Describe the triple bottom line.
The term used to describe a business’ sustainability is the triple bottom line. John Elkington coined the phrase in
1994 to suggest that organizations do pay attention to three different bottom lines. These include: (1) Traditional
profit/loss; (2) People Account—social responsibility of the organization; and (3) Planet Account—the
environmental responsibility of the organization. This has become increasingly important for organizations today.
For instance, companies seek LEED certification for their buildings and mold a reputation for being friendly to the
world. LEED certification is available to buildings that are created to be self-sustaining, with little impact on the
environment.
A1-2. What is meant by a hierarchy of strategy?
A hierarchy of strategy is a term used to describe the interrelationships among the three levels of strategy (corporate,
business, and functional) typically found in large business corporations. Beginning with the corporate level, each
level of strategy forms the strategic environment of the next level in the corporation. This means that corporate level
objectives, strategies, and policies form a key part of the environment of a division or business unit. The objectives,
strategies, and policies of the division or unit must therefore be formulated so as to help achieve the plans of the
corporate level. The same is true of functional departments that must operate within the objectives, strategies, and
policies of a division or unit.
A1-3. Does every business firm have business strategies?
Every business firm should have a business strategy for every industry or market segment it serves. A business
strategy aims at improving the competitive position of a business firm’s products or services in a specific industry or
market segment. Firms must therefore have business strategies even if they are not organized on the basis of
operating divisions. Nevertheless, it is still possible that some business firms do not have clearly stated business
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strategies. If they hope to be successful, however, they must have at least some rudimentary (even though unstated)
position they take in terms of getting and keeping customers or clients.
A1-4. What information is needed for the proper formulation of strategy? Why?
In order to properly formulate strategy, it is essential to have information on the important variables in both the
external and internal environments of the corporation. This includes general forces in the societal environment as
well as the more easy-to-identify groups such as customers and competitors in the task environment. A corporation
needs to have this information in order to identify a need it can fulfill via its corporate mission. It is also important to
have information on the corporation’s structure, culture, and resources. A corporation needs to have this information
in order to assess its capabilities to satisfy a customer’s need by making and/or distributing a product or service.
Information on both the internal and external environments can also help a corporation predict likely opportunities
and threats. Long-term strategies can be designed with these in mind.
A1-5. Reconcile the strategic decision-making process depicted in Fig. 1.5 with the strategic management
model depicted in Fig. 1.2.
The strategic management model depicts the key input variables (internal and external environments) and the key
output factors (mission, objectives, strategy, and policies). It shows how strategy formulation, implementation, and
evaluation and control are related, and how a change in any one factor (e.g., corporate objectives) affects other
factors (e.g., strategies, policies, programs, budgets, procedures, evaluation and control techniques). This model,
however, does not depict how these output factors are generated. In contrast, the strategic decision-making model
depicts how the process of strategic management happens in the form of strategic decisions. It is a series of
interrelated activities depicted as eight distinct steps. These two models therefore complement each other and are
very useful in increasing one’s understanding of strategic management.
SUGGESTIONS FOR STRATEGIC PRACTICE EXERCISE
This end of chapter exercise is a good way to motivate students to apply some of the concepts in the chapter,
particularly those from the strategic management model. Decisions are made every day, but not all decisions are
seen as strategic ones.
The text states that strategic decisions are (1) rare, (2) consequential, and (3) directive. These deal with the long-
term future of the entire organization. To aid in the decision making, the authors suggest an eight step decision-
making process. Found on page 25 in the text, these include: (1) evaluating current performance results; (2)
reviewing corporate governance; (3) scanning and assessing the external environment; (4) scanning and assessing
the internal corporate environment; (5) analyzing the strategic factors; (6) generating and selecting the best
alternative strategy; (7) implementing selected strategies; and (8) evaluating implemented strategies. These
guidelines for making and evaluating decisions at a strategic level can be important for leaders.
Most people in business on most days deal with company tactics and decisions at a level that is not strategic.
However, every decision made by every employee in a company ultimately impacts the success of the strategy for
that company. As pointed out by Malcolm Gladwell in his book The Tipping Point, it is the collection of thousands
of decisions all aimed in relatively the same direction that can lead a company to the achievement of a strategy. How
do you decide what type of decision is strategic?
Open today’s issue of The Wall Street Journal and look for an article about new moves being made by a corporation,
specifically the decisions that are strategic. At what level is each of the decisions that you identified?
Functional/Business/Corporate? Why do you believe this to be the case? What is your assessment of these
decisions? Will they be effective? Why? How have you decided this?
This is a good exercise to encourage students to begin analyzing the strategic decision-making process. This exercise
serves two purposes. It gets everyone up to speed in terms of identifying “real-world” strategic decisions. It also
forces them to re-read Chapter 1 to get a solid understanding of what differentiates a good from a poor strategic
decision. Encourage them to use the models presented in the chapter to justify their reasoning. You can give them
position they take in terms of getting and keeping customers or clients.
A1-4. What information is needed for the proper formulation of strategy? Why?
In order to properly formulate strategy, it is essential to have information on the important variables in both the
external and internal environments of the corporation. This includes general forces in the societal environment as
well as the more easy-to-identify groups such as customers and competitors in the task environment. A corporation
needs to have this information in order to identify a need it can fulfill via its corporate mission. It is also important to
have information on the corporation’s structure, culture, and resources. A corporation needs to have this information
in order to assess its capabilities to satisfy a customer’s need by making and/or distributing a product or service.
Information on both the internal and external environments can also help a corporation predict likely opportunities
and threats. Long-term strategies can be designed with these in mind.
A1-5. Reconcile the strategic decision-making process depicted in Fig. 1.5 with the strategic management
model depicted in Fig. 1.2.
The strategic management model depicts the key input variables (internal and external environments) and the key
output factors (mission, objectives, strategy, and policies). It shows how strategy formulation, implementation, and
evaluation and control are related, and how a change in any one factor (e.g., corporate objectives) affects other
factors (e.g., strategies, policies, programs, budgets, procedures, evaluation and control techniques). This model,
however, does not depict how these output factors are generated. In contrast, the strategic decision-making model
depicts how the process of strategic management happens in the form of strategic decisions. It is a series of
interrelated activities depicted as eight distinct steps. These two models therefore complement each other and are
very useful in increasing one’s understanding of strategic management.
SUGGESTIONS FOR STRATEGIC PRACTICE EXERCISE
This end of chapter exercise is a good way to motivate students to apply some of the concepts in the chapter,
particularly those from the strategic management model. Decisions are made every day, but not all decisions are
seen as strategic ones.
The text states that strategic decisions are (1) rare, (2) consequential, and (3) directive. These deal with the long-
term future of the entire organization. To aid in the decision making, the authors suggest an eight step decision-
making process. Found on page 25 in the text, these include: (1) evaluating current performance results; (2)
reviewing corporate governance; (3) scanning and assessing the external environment; (4) scanning and assessing
the internal corporate environment; (5) analyzing the strategic factors; (6) generating and selecting the best
alternative strategy; (7) implementing selected strategies; and (8) evaluating implemented strategies. These
guidelines for making and evaluating decisions at a strategic level can be important for leaders.
Most people in business on most days deal with company tactics and decisions at a level that is not strategic.
However, every decision made by every employee in a company ultimately impacts the success of the strategy for
that company. As pointed out by Malcolm Gladwell in his book The Tipping Point, it is the collection of thousands
of decisions all aimed in relatively the same direction that can lead a company to the achievement of a strategy. How
do you decide what type of decision is strategic?
Open today’s issue of The Wall Street Journal and look for an article about new moves being made by a corporation,
specifically the decisions that are strategic. At what level is each of the decisions that you identified?
Functional/Business/Corporate? Why do you believe this to be the case? What is your assessment of these
decisions? Will they be effective? Why? How have you decided this?
This is a good exercise to encourage students to begin analyzing the strategic decision-making process. This exercise
serves two purposes. It gets everyone up to speed in terms of identifying “real-world” strategic decisions. It also
forces them to re-read Chapter 1 to get a solid understanding of what differentiates a good from a poor strategic
decision. Encourage them to use the models presented in the chapter to justify their reasoning. You can give them
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this assignment on the first day of class and then use the second day to discuss Chapter 1 and the various strategic
decisions people have found. This is a good way to encourage student participation in the class.
decisions people have found. This is a good way to encourage student participation in the class.
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CHAPTER TWO
CORPORATE GOVERNANCE
This chapter describes the basic governance mechanisms of the corporation: the board of directors and top
management. These are the people who are primarily tasked with the strategic management process if the
corporation is to have long-term success in accomplishing its mission. The responsibilities of both are described and
explained. It proposes a board of directors’ continuum on which boards can be placed in terms of their involvement
in strategic management. Agency theory is contrasted with stewardship theory. The chapter explains how the
composition of the board can affect both its performance and that of the corporation. It also describes the impact of
the Sarbanes-Oxley Act on corporate governance in the United States and trends in corporate governance around the
world. Top management is discussed in terms of executive leadership, strategic vision, and managing the strategic
planning process.
LEARNING OBJECTIVES
1. Describe the role and responsibilities of the board of directors in corporate governance.
2. Explain how the composition of a board can affect its operation.
3. Describe the impact of the Sarbanes-Oxley Act on corporate governance in the United States.
4. Discuss trends in corporate governance.
5. Explain how executive leadership is an important part of strategic management.
TOPICS OUTLINE COVERED
1. Role of the Board of Directors
a. Responsibilities of the Board
b. Board of Directors Composition
c. Nomination and Election of Board Members
d. Organization of the Board
e. Impact of the Sarbanes-Oxley Act on U.S. Corporate Governance
f. Improving Governance
g. Evaluating Governance
h. Avoiding Governance Improvements
i. Trends in Corporate Governance
2. The Role of Top Management
a. Responsibilities of Top Management
SUGGESTED ANSWERS TO MYMANAGEMENTLAB QUESTIONS
2-1. What are the roles and responsibilities of an effective and active board of directors?
The board of directors is required by law to direct the affairs of the corporation, but not to manage them. Stuart has
written that a board is responsible for (1) effective leadership, (2) strategy of the organization, (3) the balance of risk
and initiative, (4) succession planning, and (5) sustainability. The role of the board is to carry out three basic tasks:
(1) monitor; (2) evaluate and influence; and (3) initiate and determine.
2-2. What are the issues that suggest the need for oversight of a particular company’s management team?
The board of directors holds the top management team responsible for implementing and guiding the strategy set
forth. There are several red flags that would indicate the need for oversight of a management team. When the
corporate objectives are not being met, management teams may be at fault. When a clear vision is not articulated,
the CEO must be responsible. Also, when the strategic planning process is not being monitored by the top
management team, oversight may be called for.
CORPORATE GOVERNANCE
This chapter describes the basic governance mechanisms of the corporation: the board of directors and top
management. These are the people who are primarily tasked with the strategic management process if the
corporation is to have long-term success in accomplishing its mission. The responsibilities of both are described and
explained. It proposes a board of directors’ continuum on which boards can be placed in terms of their involvement
in strategic management. Agency theory is contrasted with stewardship theory. The chapter explains how the
composition of the board can affect both its performance and that of the corporation. It also describes the impact of
the Sarbanes-Oxley Act on corporate governance in the United States and trends in corporate governance around the
world. Top management is discussed in terms of executive leadership, strategic vision, and managing the strategic
planning process.
LEARNING OBJECTIVES
1. Describe the role and responsibilities of the board of directors in corporate governance.
2. Explain how the composition of a board can affect its operation.
3. Describe the impact of the Sarbanes-Oxley Act on corporate governance in the United States.
4. Discuss trends in corporate governance.
5. Explain how executive leadership is an important part of strategic management.
TOPICS OUTLINE COVERED
1. Role of the Board of Directors
a. Responsibilities of the Board
b. Board of Directors Composition
c. Nomination and Election of Board Members
d. Organization of the Board
e. Impact of the Sarbanes-Oxley Act on U.S. Corporate Governance
f. Improving Governance
g. Evaluating Governance
h. Avoiding Governance Improvements
i. Trends in Corporate Governance
2. The Role of Top Management
a. Responsibilities of Top Management
SUGGESTED ANSWERS TO MYMANAGEMENTLAB QUESTIONS
2-1. What are the roles and responsibilities of an effective and active board of directors?
The board of directors is required by law to direct the affairs of the corporation, but not to manage them. Stuart has
written that a board is responsible for (1) effective leadership, (2) strategy of the organization, (3) the balance of risk
and initiative, (4) succession planning, and (5) sustainability. The role of the board is to carry out three basic tasks:
(1) monitor; (2) evaluate and influence; and (3) initiate and determine.
2-2. What are the issues that suggest the need for oversight of a particular company’s management team?
The board of directors holds the top management team responsible for implementing and guiding the strategy set
forth. There are several red flags that would indicate the need for oversight of a management team. When the
corporate objectives are not being met, management teams may be at fault. When a clear vision is not articulated,
the CEO must be responsible. Also, when the strategic planning process is not being monitored by the top
management team, oversight may be called for.
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SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
2-3. When does a corporation need a board of directors?
A board of directors is needed to protect the interests of the corporation’s owners, its shareholders. By law, when a
company incorporates, it must have a board of directors—even if the stock is held only by the founder and his/her
spouse. A good case can be made that a small, closely held corporation has no need for a board. Because the owners
are likely to compose both top management and board membership, the board becomes superfluous at best, and may
even create more problems than it solves by getting in the way of management’s quick response to opportunities and
threats. The board meets only to satisfy legal requirements. Even when stock is more widely owned in a publicly
held corporation, the board may be composed of nothing but a few insiders who occupy key executive positions and
a few friendly outsiders who go along with the CEO on all major issues. Nevertheless, the rationale for the board of
directors seems to be changing from simply one of safeguarding stockholder investments to a broader role of
buffering the corporation from its task environment and forcing management to manage strategically. If nothing
else, the board can do the corporation a great service by simply offering top management a different point of view.
The board’s connections to key stakeholders in the corporation’s task environment can also provide invaluable
information for strategic decision making. This is the main reason why advisory boards are often used by companies
that are not incorporated and thus have no shareholders.
2-4. Who should and should not serve on a board of directors? What about environmentalists or union
leaders?
This is a wide-open question with no simple answer. Some may argue that representatives from each stakeholder
group in the corporation’s task environment should be included so as to keep top management aware of key
environmental considerations. Others may argue that only outsiders with no personal stake in the corporation (e.g.,
not a member of a local bank or a key supplier, etc.) would be best able to bring the amount of objectivity needed to
help make strategic decisions. This is the point of view taken in the United States by the Sarbanes-Oxley Act. A
good argument can be started by suggesting that a representative from labor be a director. This is done in Germany.
If this makes some sense, who should it be—a union member who is an employee of the corporation or an employee
of another corporation? If the firm is not unionized, what then? Further discussion can be generated by suggesting
that the composition of the board reflects the key demographics of the corporation’s workforce in terms of race, sex,
and age. Environmentalists could provide excellent information to top management, but could be a problem if they
argue only for environmental considerations without regard to the corporation’s other stakeholders.
This question provides the instructor with the opportunity to get the class involved in a discussion of agency and
stewardship theories. Agency theory suggests that insiders should be kept to a minimum and that the board be
heavily composed of objective outsiders who own large blocks of stock. Because of their stake in corporate
decisions, affiliated directors would not be considered for board membership. This would ensure that the board
would primarily represent shareholder interests and objectively monitor the “hired hands” serving as top
management. This is the point of view taken by the Sarbanes-Oxley Act in the United States. In contrast,
stewardship theory views top management as concerned “stewards” of the corporation—people who may have a
greater concern for the corporation as a whole and its survival than do the shareholders, and who may only be
interested in earnings per share and little else. Stewardship theory suggests that the board should be composed of
people who can provide important information from the task environment and valuable insight to top management.
It would work to consider interests beyond shareholder value.
2-5. Should a CEO be allowed to serve on another company’s board of directors? Why or why not?
The majority of outside directors are active or retired CEOs of other corporations. The chapter states that the average
board member of a U.S. Fortune 500 firm serves on three boards and that only 40% of U.S. boards limit the number
of directorships a board member may hold in other corporations. CEOs from other firms are highly valued because
2-3. When does a corporation need a board of directors?
A board of directors is needed to protect the interests of the corporation’s owners, its shareholders. By law, when a
company incorporates, it must have a board of directors—even if the stock is held only by the founder and his/her
spouse. A good case can be made that a small, closely held corporation has no need for a board. Because the owners
are likely to compose both top management and board membership, the board becomes superfluous at best, and may
even create more problems than it solves by getting in the way of management’s quick response to opportunities and
threats. The board meets only to satisfy legal requirements. Even when stock is more widely owned in a publicly
held corporation, the board may be composed of nothing but a few insiders who occupy key executive positions and
a few friendly outsiders who go along with the CEO on all major issues. Nevertheless, the rationale for the board of
directors seems to be changing from simply one of safeguarding stockholder investments to a broader role of
buffering the corporation from its task environment and forcing management to manage strategically. If nothing
else, the board can do the corporation a great service by simply offering top management a different point of view.
The board’s connections to key stakeholders in the corporation’s task environment can also provide invaluable
information for strategic decision making. This is the main reason why advisory boards are often used by companies
that are not incorporated and thus have no shareholders.
2-4. Who should and should not serve on a board of directors? What about environmentalists or union
leaders?
This is a wide-open question with no simple answer. Some may argue that representatives from each stakeholder
group in the corporation’s task environment should be included so as to keep top management aware of key
environmental considerations. Others may argue that only outsiders with no personal stake in the corporation (e.g.,
not a member of a local bank or a key supplier, etc.) would be best able to bring the amount of objectivity needed to
help make strategic decisions. This is the point of view taken in the United States by the Sarbanes-Oxley Act. A
good argument can be started by suggesting that a representative from labor be a director. This is done in Germany.
If this makes some sense, who should it be—a union member who is an employee of the corporation or an employee
of another corporation? If the firm is not unionized, what then? Further discussion can be generated by suggesting
that the composition of the board reflects the key demographics of the corporation’s workforce in terms of race, sex,
and age. Environmentalists could provide excellent information to top management, but could be a problem if they
argue only for environmental considerations without regard to the corporation’s other stakeholders.
This question provides the instructor with the opportunity to get the class involved in a discussion of agency and
stewardship theories. Agency theory suggests that insiders should be kept to a minimum and that the board be
heavily composed of objective outsiders who own large blocks of stock. Because of their stake in corporate
decisions, affiliated directors would not be considered for board membership. This would ensure that the board
would primarily represent shareholder interests and objectively monitor the “hired hands” serving as top
management. This is the point of view taken by the Sarbanes-Oxley Act in the United States. In contrast,
stewardship theory views top management as concerned “stewards” of the corporation—people who may have a
greater concern for the corporation as a whole and its survival than do the shareholders, and who may only be
interested in earnings per share and little else. Stewardship theory suggests that the board should be composed of
people who can provide important information from the task environment and valuable insight to top management.
It would work to consider interests beyond shareholder value.
2-5. Should a CEO be allowed to serve on another company’s board of directors? Why or why not?
The majority of outside directors are active or retired CEOs of other corporations. The chapter states that the average
board member of a U.S. Fortune 500 firm serves on three boards and that only 40% of U.S. boards limit the number
of directorships a board member may hold in other corporations. CEOs from other firms are highly valued because
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they can provide excellent advice to the CEO. Having a CEO from another firm serve on a corporation’s board of
directors results in an interlocking directorate between the two corporations. The text points out that this is a good
way to obtain inside information about an uncertain environment and objective expertise about potential strategies
and tactics. For these and other reasons, well-interlocked firms are better able to survive in a highly competitive
environment. This is a good reason for allowing a firm’s CEO to serve on the boards of other companies. The CEO
is likely to bring back information and contacts that can be very useful to the corporation.
There is a down side, however, to allowing a CEO to sit on the boards of other firms. For one thing, serving on
another company’s board requires time and energy devoted to something other than the job he/she is paid to fulfill.
Given the increasing pressure placed on board members, such service is becoming increasingly onerous. Because of
this, the typical CEO now sits on only one board in addition to his/her own—down from two additional boards in the
1990s. Consequently, a board should work closely with its CEO to decide which other boards are most useful to the
company for the CEO to join.
2-6. What would be the impact if the only insider on a corporation’s board were the CEO?
One result would be a board composed primarily of outsiders who would be objective, but also dependent upon the
CEO for information about the company and its activities. Thanks to Sarbanes-Oxley and other actions by the New
York Stock Exchange, this appears to be a trend in most U.S. Fortune 500 companies. As of 2007, the typical U.S.
Fortune 500 board had an average of ten directors, only two of whom being insiders. The number of insiders tends
to be higher for boards in other countries. Even when a CEO might be the sole insider on the board, he/she still has a
great deal of influence because the CEO usually also serves as the Chairman of the Board. Nevertheless, an
increasing number of boards are selecting a “lead director” to oversee the evaluation of top management, so this can
counter the dual CEO/Chair’s power. A positive result of the CEO being the only insider on a board is that the board
would be more likely to be objective and serious about its responsibility to oversee the corporation’s management. A
negative result would be the lessened opportunity to view potential successors in action or to obtain alternate points
of view to management decisions.
2-7. Should all CEOs be transformational leaders? Would you like to work for a transformational leader?
According to the text, top management must successfully handle two responsibilities that are crucial to the effective
strategic management of the corporation: (1) provide executive leadership and a strategic vision and (2) manage the
strategic planning process. The text further argues that successful CEOs often provide this executive leadership by
taking on many of the characteristics of the transformational leader by communicating a clear strategic vision,
demonstrating a strong passion for the company, and communicating clear directions to others. Such
transformational leaders, such as Bill Gates at Microsoft, Steve Jobs at Apple, and Anita Roddick at The Body Shop,
have been able to command respect and energize their employees. They not only articulated a strategic vision, but
they also presented a role for others in the company to identify with and follow. Their communication of high
performance standards coupled with their confidence in their fellow employees often raised performance to a high
level. Nevertheless, such transformational leaders can be very difficult to work for and their overconfidence may
even get the firm in trouble. Their forcefulness may drive other competent people away when they fail to allow for
differences of opinion. Hint to the instructor: Once the class has discussed the pros and cons of transformational
leaders, ask them how many would like to work for such an executive? Use Donald Trump as an example (“You’re
fired!”). You may be surprised by the number of people who would not like to work for such a CEO.
ADDITIONAL DISCUSSION QUESTIONS FOR INSTRUCTORS
These are not found in the text and may be used by the instructor for classroom discussion or exams.
A2-1. What recommendations would you make to improve the effectiveness of today’s boards of directors?
The following are among the many suggestions often made:
Add more outsiders (people not affiliated with the corporation) to the board of directors. Keep the
percentage of insiders (typically top management) to less than 50% of board membership.
Separate the positions of CEO and Chairman so that top management cannot unduly influence the board’s
directors results in an interlocking directorate between the two corporations. The text points out that this is a good
way to obtain inside information about an uncertain environment and objective expertise about potential strategies
and tactics. For these and other reasons, well-interlocked firms are better able to survive in a highly competitive
environment. This is a good reason for allowing a firm’s CEO to serve on the boards of other companies. The CEO
is likely to bring back information and contacts that can be very useful to the corporation.
There is a down side, however, to allowing a CEO to sit on the boards of other firms. For one thing, serving on
another company’s board requires time and energy devoted to something other than the job he/she is paid to fulfill.
Given the increasing pressure placed on board members, such service is becoming increasingly onerous. Because of
this, the typical CEO now sits on only one board in addition to his/her own—down from two additional boards in the
1990s. Consequently, a board should work closely with its CEO to decide which other boards are most useful to the
company for the CEO to join.
2-6. What would be the impact if the only insider on a corporation’s board were the CEO?
One result would be a board composed primarily of outsiders who would be objective, but also dependent upon the
CEO for information about the company and its activities. Thanks to Sarbanes-Oxley and other actions by the New
York Stock Exchange, this appears to be a trend in most U.S. Fortune 500 companies. As of 2007, the typical U.S.
Fortune 500 board had an average of ten directors, only two of whom being insiders. The number of insiders tends
to be higher for boards in other countries. Even when a CEO might be the sole insider on the board, he/she still has a
great deal of influence because the CEO usually also serves as the Chairman of the Board. Nevertheless, an
increasing number of boards are selecting a “lead director” to oversee the evaluation of top management, so this can
counter the dual CEO/Chair’s power. A positive result of the CEO being the only insider on a board is that the board
would be more likely to be objective and serious about its responsibility to oversee the corporation’s management. A
negative result would be the lessened opportunity to view potential successors in action or to obtain alternate points
of view to management decisions.
2-7. Should all CEOs be transformational leaders? Would you like to work for a transformational leader?
According to the text, top management must successfully handle two responsibilities that are crucial to the effective
strategic management of the corporation: (1) provide executive leadership and a strategic vision and (2) manage the
strategic planning process. The text further argues that successful CEOs often provide this executive leadership by
taking on many of the characteristics of the transformational leader by communicating a clear strategic vision,
demonstrating a strong passion for the company, and communicating clear directions to others. Such
transformational leaders, such as Bill Gates at Microsoft, Steve Jobs at Apple, and Anita Roddick at The Body Shop,
have been able to command respect and energize their employees. They not only articulated a strategic vision, but
they also presented a role for others in the company to identify with and follow. Their communication of high
performance standards coupled with their confidence in their fellow employees often raised performance to a high
level. Nevertheless, such transformational leaders can be very difficult to work for and their overconfidence may
even get the firm in trouble. Their forcefulness may drive other competent people away when they fail to allow for
differences of opinion. Hint to the instructor: Once the class has discussed the pros and cons of transformational
leaders, ask them how many would like to work for such an executive? Use Donald Trump as an example (“You’re
fired!”). You may be surprised by the number of people who would not like to work for such a CEO.
ADDITIONAL DISCUSSION QUESTIONS FOR INSTRUCTORS
These are not found in the text and may be used by the instructor for classroom discussion or exams.
A2-1. What recommendations would you make to improve the effectiveness of today’s boards of directors?
The following are among the many suggestions often made:
Add more outsiders (people not affiliated with the corporation) to the board of directors. Keep the
percentage of insiders (typically top management) to less than 50% of board membership.
Separate the positions of CEO and Chairman so that top management cannot unduly influence the board’s
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meetings and agenda. This should improve the board’s ability to properly evaluate top management. If the
Chair can’t be separated from the CEO, select a Lead Director from among the outside directors.
Use a committee composed of outsiders to nominate potential new directors. This will help to ensure that
potential members are not friends of top management who may owe more allegiance to the CEO than to the
shareholders.
Nominate people to the board who have knowledge valuable to the board and who have expertise of value
to top management. These should be people who will have the respect of top management and who can
both advise and criticize top management as needed. Make sure that they are diverse in terms of
background and experience.
Require board members to own substantial amounts of stock in the corporation to ensure that they have a
personal as well as professional stake in the welfare of the corporation.
Allow shareholders to nominate people for election to director.
A2-2. Is there a conflict between agency theory and the concept of organizational stakeholders?
Agency theory is concerned with problems that occur in relationships between principals (owners) and their agents
(top management). Because agents are, in effect, “hired hands,” their interests are not usually aligned with those of
the owner (stockholders) of a corporation. Consequently, agency theory is primarily interested in ways to better
align these two sets of interests, such as management owning significant shares of stock or having a strong financial
stake in the long-term performance of the corporation via long-term incentive plans. This helps to ensure that
management looks beyond selfish short-term benefits of a decision to the more strategic issues that concern
stockholders. The concept of organizational stakeholders, in contrast, looks at more than just owners and managers.
It argues that groups other than stockholders and top management have a significant stake in the actions of the
corporation and need to be considered in strategic decisions. What might benefit owners and management might hurt
employees, the local community, or the environment. The concept of stakeholders thus proposes that the suggestions
of agency theory are incomplete and insufficient to ensure that top management deals fairly not only with
stockholders, but also with the needs of all concerned stakeholder groups. As it is currently defined, agency theory is
more in agreement with Milton Friedman’s narrow view of the responsibilities of a corporation than with the
stakeholder view more common to concerns of social responsibility. (See Chapter 3 for Friedman’s view of
corporate responsibility.) This could change if society begins to consider top management not only as direct agents
for stockholders, but also as indirect agents for other groups with a stake in the corporation’s activities. Agency
theory could thus be expanded to include the concerns of other interested groups and thus incorporate the
stakeholder approach.
SUGGESTIONS FOR STRATEGIC PRACTICE EXERCISE
The end of chapter exercise asks the student to evaluate the “best” and the “worst” manager for whom the student
has worked. The questionnaire is based on the concept of French and Raven’s “bases of power.” This concept is
usually discussed in Introduction to Management as well as in Organizational Behavior textbooks as a part of their
discussion of leadership. You may need to briefly explain what each base means as part of your discussion of their
scores. Briefly, reward power is based on someone’s ability to give another something that is valued for doing what
the other person wants. Coercive power is based on someone’s ability to give someone something that is disliked if
the other person does not do what is desired. Legitimate power is like authority in that it is based on one person’s
belief that another person has the right to ask him/her to do something. Referent power is like charisma in that it is
one person’s ability to get others to identify with him/her and to want to be like that person. Expert power is based
on a person’s knowledge or abilities in an area that is important for job performance and that the person is willing to
share with someone else.
List the five bases of power on the board. Ask around five members of the class to provide you with their scores for
their “best manager” on each of the bases. Write their totals under each of the five bases on the board and then
calculate the average for each base. Do the same thing for the same five students for their “worst boss.” In most
instances, the average “best boss” will score higher than the average “worst boss” on referent, expert, and reward
power, and lower on coercive and legitimate power. Because the “best manager” tends to have many of the
characteristics of the transformational leader, this questionnaire provides some interesting information to use in
Chair can’t be separated from the CEO, select a Lead Director from among the outside directors.
Use a committee composed of outsiders to nominate potential new directors. This will help to ensure that
potential members are not friends of top management who may owe more allegiance to the CEO than to the
shareholders.
Nominate people to the board who have knowledge valuable to the board and who have expertise of value
to top management. These should be people who will have the respect of top management and who can
both advise and criticize top management as needed. Make sure that they are diverse in terms of
background and experience.
Require board members to own substantial amounts of stock in the corporation to ensure that they have a
personal as well as professional stake in the welfare of the corporation.
Allow shareholders to nominate people for election to director.
A2-2. Is there a conflict between agency theory and the concept of organizational stakeholders?
Agency theory is concerned with problems that occur in relationships between principals (owners) and their agents
(top management). Because agents are, in effect, “hired hands,” their interests are not usually aligned with those of
the owner (stockholders) of a corporation. Consequently, agency theory is primarily interested in ways to better
align these two sets of interests, such as management owning significant shares of stock or having a strong financial
stake in the long-term performance of the corporation via long-term incentive plans. This helps to ensure that
management looks beyond selfish short-term benefits of a decision to the more strategic issues that concern
stockholders. The concept of organizational stakeholders, in contrast, looks at more than just owners and managers.
It argues that groups other than stockholders and top management have a significant stake in the actions of the
corporation and need to be considered in strategic decisions. What might benefit owners and management might hurt
employees, the local community, or the environment. The concept of stakeholders thus proposes that the suggestions
of agency theory are incomplete and insufficient to ensure that top management deals fairly not only with
stockholders, but also with the needs of all concerned stakeholder groups. As it is currently defined, agency theory is
more in agreement with Milton Friedman’s narrow view of the responsibilities of a corporation than with the
stakeholder view more common to concerns of social responsibility. (See Chapter 3 for Friedman’s view of
corporate responsibility.) This could change if society begins to consider top management not only as direct agents
for stockholders, but also as indirect agents for other groups with a stake in the corporation’s activities. Agency
theory could thus be expanded to include the concerns of other interested groups and thus incorporate the
stakeholder approach.
SUGGESTIONS FOR STRATEGIC PRACTICE EXERCISE
The end of chapter exercise asks the student to evaluate the “best” and the “worst” manager for whom the student
has worked. The questionnaire is based on the concept of French and Raven’s “bases of power.” This concept is
usually discussed in Introduction to Management as well as in Organizational Behavior textbooks as a part of their
discussion of leadership. You may need to briefly explain what each base means as part of your discussion of their
scores. Briefly, reward power is based on someone’s ability to give another something that is valued for doing what
the other person wants. Coercive power is based on someone’s ability to give someone something that is disliked if
the other person does not do what is desired. Legitimate power is like authority in that it is based on one person’s
belief that another person has the right to ask him/her to do something. Referent power is like charisma in that it is
one person’s ability to get others to identify with him/her and to want to be like that person. Expert power is based
on a person’s knowledge or abilities in an area that is important for job performance and that the person is willing to
share with someone else.
List the five bases of power on the board. Ask around five members of the class to provide you with their scores for
their “best manager” on each of the bases. Write their totals under each of the five bases on the board and then
calculate the average for each base. Do the same thing for the same five students for their “worst boss.” In most
instances, the average “best boss” will score higher than the average “worst boss” on referent, expert, and reward
power, and lower on coercive and legitimate power. Because the “best manager” tends to have many of the
characteristics of the transformational leader, this questionnaire provides some interesting information to use in
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answering the fifth discussion question: Would you like to work for a transformational leader?
ADDITIONAL TEACHING MODULE
CORPORATE GOVERNANCE STYLES
Just as boards of directors vary widely on a continuum of involvement in the strategic management process, so do
top management teams. For example, a top management team with a low involvement in strategic management will
tend to be functionally oriented and will focus its energies on day-to-day operational problems; this type of team is
likely either to be disorganized or to have a dominant CEO who continues to identify with his or her old division. In
contrast, a top management team with high involvement will be active in strategic planning. It will try to get division
managers involved in planning so that top management will have more time to scan the environment for challenges
and opportunities.
Both the board of directors and top management can be placed on a matrix that reflects four basic styles of corporate
governance.
Styles of Corporate Governance
Degree of Involvement
by
Top Management
High Entrepreneurship
Management
Partnership
Management
Low
Chaos
Management
Marionette
Management
Low High
Degree of Involvement by Board of Directors
Chaos Management
When both the board of directors and top management have little involvement in the strategic management process,
their style is referred to as chaos management. The board waits for top management to bring it proposals. Top
management is operationally oriented and continues to carry out strategies, policies, and programs specified by the
founding entrepreneur who died years ago. The basic strategic philosophy seems to be, “If it was good enough for
old J.B., it’s good enough for us.” There is no strategic management being done here.
Entrepreneurship Management
A corporation with an uninvolved board of directors but a highly involved top management has entrepreneurship
management. The board is willing to be used as a rubber stamp for top management’s decisions. The CEO,
operating alone or with a team, dominates the corporation and its strategic decisions. An example is Control Data
Corporation under the leadership of its founder, William C. Norris. For twenty-nine years, Norris dominated both
the company’s top management and its board of directors. Insisting that the company could profit by addressing
“society’s unmet needs,” Norris directed corporate investments into the rejuvenation of ghettos and support of wind-
powered generators and tundra farming, among other projects. Although these investments tended to result in losses,
few people were willing to challenge his strategic decisions. Some employees even referred to him as “the Pope.” A
former Control Data executive noted, “More often than not, he’s proven his critics wrong, so now his visions aren’t
challenged.”
ADDITIONAL TEACHING MODULE
CORPORATE GOVERNANCE STYLES
Just as boards of directors vary widely on a continuum of involvement in the strategic management process, so do
top management teams. For example, a top management team with a low involvement in strategic management will
tend to be functionally oriented and will focus its energies on day-to-day operational problems; this type of team is
likely either to be disorganized or to have a dominant CEO who continues to identify with his or her old division. In
contrast, a top management team with high involvement will be active in strategic planning. It will try to get division
managers involved in planning so that top management will have more time to scan the environment for challenges
and opportunities.
Both the board of directors and top management can be placed on a matrix that reflects four basic styles of corporate
governance.
Styles of Corporate Governance
Degree of Involvement
by
Top Management
High Entrepreneurship
Management
Partnership
Management
Low
Chaos
Management
Marionette
Management
Low High
Degree of Involvement by Board of Directors
Chaos Management
When both the board of directors and top management have little involvement in the strategic management process,
their style is referred to as chaos management. The board waits for top management to bring it proposals. Top
management is operationally oriented and continues to carry out strategies, policies, and programs specified by the
founding entrepreneur who died years ago. The basic strategic philosophy seems to be, “If it was good enough for
old J.B., it’s good enough for us.” There is no strategic management being done here.
Entrepreneurship Management
A corporation with an uninvolved board of directors but a highly involved top management has entrepreneurship
management. The board is willing to be used as a rubber stamp for top management’s decisions. The CEO,
operating alone or with a team, dominates the corporation and its strategic decisions. An example is Control Data
Corporation under the leadership of its founder, William C. Norris. For twenty-nine years, Norris dominated both
the company’s top management and its board of directors. Insisting that the company could profit by addressing
“society’s unmet needs,” Norris directed corporate investments into the rejuvenation of ghettos and support of wind-
powered generators and tundra farming, among other projects. Although these investments tended to result in losses,
few people were willing to challenge his strategic decisions. Some employees even referred to him as “the Pope.” A
former Control Data executive noted, “More often than not, he’s proven his critics wrong, so now his visions aren’t
challenged.”
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Marionette Management
Probably the rarest form of strategic management style, marionette management occurs when the board of directors
is deeply involved in strategic decision making, but top management is primarily concerned with operations. Such a
style evolves when a board is composed of key stockholders who refuse to delegate strategic decision making to the
president. The president is forced into a COO role and can do only what the board allows him/her to do. This style
also occurs when a board fires a CEO but is slow to find a replacement. The COO or executive vice-president stays
on as “acting” president or CEO until the selection process is complete. In the meantime, strategic management is
firmly in the hands of the board of directors.
Marionette management occurred at Winnebago Industries when the company’s board of directors, chaired by its
founder, 72-year-old John K. Hanson, took away Ronald Haugen’s title as chief executive officer but left him as
company president. No new CEO was named. Hanson, whose family owned 46% of Winnebago’s stock, had given
up the CEO title in 1983 to President Haugen, a long-time employee. Outside observers noted that although
Chairman Hanson did not also hold the title of CEO, he appeared to have taken on the CEO’s responsibilities once
again.
Partnership Management
Probably the most effective style of strategic management, partnership management is epitomized by a highly
involved board and top management. The board and top management team work closely to establish the corporate
mission, objectives, strategies, and policies. Board members are active in committee work and utilize strategic audits
to provide feedback to top management on its implementation of agreed-upon strategies and policies. This appears
to be the style in a number of successful corporations such as Texas Instruments, Target, and General Electric
Company.
Probably the rarest form of strategic management style, marionette management occurs when the board of directors
is deeply involved in strategic decision making, but top management is primarily concerned with operations. Such a
style evolves when a board is composed of key stockholders who refuse to delegate strategic decision making to the
president. The president is forced into a COO role and can do only what the board allows him/her to do. This style
also occurs when a board fires a CEO but is slow to find a replacement. The COO or executive vice-president stays
on as “acting” president or CEO until the selection process is complete. In the meantime, strategic management is
firmly in the hands of the board of directors.
Marionette management occurred at Winnebago Industries when the company’s board of directors, chaired by its
founder, 72-year-old John K. Hanson, took away Ronald Haugen’s title as chief executive officer but left him as
company president. No new CEO was named. Hanson, whose family owned 46% of Winnebago’s stock, had given
up the CEO title in 1983 to President Haugen, a long-time employee. Outside observers noted that although
Chairman Hanson did not also hold the title of CEO, he appeared to have taken on the CEO’s responsibilities once
again.
Partnership Management
Probably the most effective style of strategic management, partnership management is epitomized by a highly
involved board and top management. The board and top management team work closely to establish the corporate
mission, objectives, strategies, and policies. Board members are active in committee work and utilize strategic audits
to provide feedback to top management on its implementation of agreed-upon strategies and policies. This appears
to be the style in a number of successful corporations such as Texas Instruments, Target, and General Electric
Company.
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CHAPTER THREE
SOCIAL RESPONSIBILITY AND ETHICS IN STRATEGIC MANAGEMENT
The chapter examines the relationship between business firms and society and presents issues in social responsibility
and ethics. It describes the relationship between social responsibility and corporate performance. The chapter
considers stakeholder concerns and presents various responsibilities of business firms as well. Ethics and ethical
behavior are considered in light of the challenge from moral relativism. It describes guidelines for ethical behavior
according to utilitarianism, individual rights, and justice approaches.
LEARNING OBJECTIVES
1. Discuss the relationship between social responsibility and corporate performance.
2. Explain the concept of sustainability.
3. Conduct a stakeholder analysis.
4. Explain why people may act unethically.
5. Describe different views of ethics according to the utilitarian, individual rights, and justice approaches.
TOPICS OUTLINE COVERED
1. Social Responsibilities of Strategic Decision Makers
a. Responsibilities of a Business Firm
b. Sustainability
c. Corporate Stakeholders
2. Stakeholder Analysis
3. Ethical Decision Making
a. Some Reasons for Unethical Behavior
b. Encouraging Ethical Behavior
4. View on Ethical Behavior
SUGGESTED ANSWERS TO MYMANAGEMENTLAB QUESTIONS
3-1. How has moral relativism led to criminal activities by some employees in companies?
Moral relativism suggests that morality is relative to some personal, social, or cultural standard. There is no method
for deciding whether one decision is better than another. For this very reason, many people justify their unethical
positions, arguing that there is not one absolute code of ethics.
3-2. How does a company ensure that its code of ethics is integrated into the daily decision-making process
of the company and is not just a symbolic trophy or plaque hanging on the wall?
When management of a company wants to improve the ethical behavior of employees in the organization, a code of
ethics should be communicated in training programs, in performance appraisal systems, policies and procedures, and
also through their own actions.
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS:
3-3. What is the relationship between corporate governance and social responsibility?
This question is partially answered by the last trend in corporate governance presented in Chapter 2. Quite simply, it
states that society, in the form of special interest groups, increasingly expects boards of directors to balance the
economic goal of profitability with the social needs of society. Issues dealing with workforce diversity and the
environment are now reaching the board level. If business corporations are to avoid increased governmental
restrictions on their activities, management will need to be even more aware of the various needs of their stakeholder
SOCIAL RESPONSIBILITY AND ETHICS IN STRATEGIC MANAGEMENT
The chapter examines the relationship between business firms and society and presents issues in social responsibility
and ethics. It describes the relationship between social responsibility and corporate performance. The chapter
considers stakeholder concerns and presents various responsibilities of business firms as well. Ethics and ethical
behavior are considered in light of the challenge from moral relativism. It describes guidelines for ethical behavior
according to utilitarianism, individual rights, and justice approaches.
LEARNING OBJECTIVES
1. Discuss the relationship between social responsibility and corporate performance.
2. Explain the concept of sustainability.
3. Conduct a stakeholder analysis.
4. Explain why people may act unethically.
5. Describe different views of ethics according to the utilitarian, individual rights, and justice approaches.
TOPICS OUTLINE COVERED
1. Social Responsibilities of Strategic Decision Makers
a. Responsibilities of a Business Firm
b. Sustainability
c. Corporate Stakeholders
2. Stakeholder Analysis
3. Ethical Decision Making
a. Some Reasons for Unethical Behavior
b. Encouraging Ethical Behavior
4. View on Ethical Behavior
SUGGESTED ANSWERS TO MYMANAGEMENTLAB QUESTIONS
3-1. How has moral relativism led to criminal activities by some employees in companies?
Moral relativism suggests that morality is relative to some personal, social, or cultural standard. There is no method
for deciding whether one decision is better than another. For this very reason, many people justify their unethical
positions, arguing that there is not one absolute code of ethics.
3-2. How does a company ensure that its code of ethics is integrated into the daily decision-making process
of the company and is not just a symbolic trophy or plaque hanging on the wall?
When management of a company wants to improve the ethical behavior of employees in the organization, a code of
ethics should be communicated in training programs, in performance appraisal systems, policies and procedures, and
also through their own actions.
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS:
3-3. What is the relationship between corporate governance and social responsibility?
This question is partially answered by the last trend in corporate governance presented in Chapter 2. Quite simply, it
states that society, in the form of special interest groups, increasingly expects boards of directors to balance the
economic goal of profitability with the social needs of society. Issues dealing with workforce diversity and the
environment are now reaching the board level. If business corporations are to avoid increased governmental
restrictions on their activities, management will need to be even more aware of the various needs of their stakeholder
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groups. The board of directors is in a unique position to view the corporation as a whole and to evaluate
management’s performance in terms of stakeholder criteria. To the extent that boards use only shareholder value as
their key criteria, they may not be acting responsibly from society’s point of view. Increasingly, concerns over social
responsibility may be directed through the board of directors. Agency theory defines the board’s interests quite
narrowly. Perhaps it is time for agency theory to be expanded to include stakeholders other than just shareholders.
Stewardship theory may provide the rationale to expand the responsibilities of the board and top management in
terms of the corporation’s overall social responsibilities. This is likely to continue being a controversial issue for
quite some time.
3-4. What is your opinion of Apple having a code of conduct for its suppliers? What would Milton
Friedman say? Contrast his view with that of Archie Carroll’s.
Do a company’s responsibilities end at its boundary, or do its responsibilities extend to include its suppliers and
distributors? This very thorny question has become a point of contention in the area of social responsibility. The
question includes a basic question in organization theory: what is the boundary of an organization? Certainly, one
could argue that a company is composed of its employees and all of its assets, such as land, buildings, and
equipment. These can thus define a company’s boundary. Given this view, everything else may be called a
company’s “environment” and therefore outside of a company’s control or responsibility. One could thus argue that
a company such as Apple or Nike cannot be held responsible for the actions of a separate and independent supplier
company/contractor. The very popularity of outsourcing as a substitute for vertical integration means that more
firms are contracting with other firms to fulfill functions a company no longer wishes to do on its own. If the
contract is long term in nature or if the purchasing company owns a substantial amount of stock in the supplying
company, then the hands-length nature of transactions is compromised and it becomes difficult to discern where one
firm’s boundary begins and another firm’s leaves off. Such a relationship suggests that one company does have
some influence over another company’s actions by nature of the other company’s dependency on the first company.
One could thus argue that a company’s social responsibilities extend beyond what is normally thought of as its
boundary to the extent that it has some control and influence over the other company’s actions. Clearly, Apple’s
management was thinking this way when it drafted its code of conduct.
Milton Friedman would probably be very much against Apple’s meddling with the rights of its suppliers to freely
contract with their employees. Using Carroll’s categories, Friedman would probably argue that the only
responsibilities of a business firm are economic and legal. Friedman does say that business should play “within the
rules of the game.” This can be interpreted as meaning a supplier’s legal responsibilities to follow the rules
established within that country. If a purely economic justification is used, it may be difficult but still possible to
justify ethical and discretionary responsibilities. Carroll points out that a refusal to consider ethical responsibilities is
likely to lead to an increase in a firm’s legal responsibilities—which, considering the usual inefficiencies of
government, will lead to higher costs and lower long-run business efficiency. Either the U.S. federal government or
the United Nations may force companies in developed countries to follow a code like Gap’s or else face sanctions.
Friedman would say that this is foolishness, but Carroll would argue that this is a natural result of ignoring one’s
ethical responsibilities.
3-5. Does a company have to act selflessly to be considered socially responsible? For example, when
building a new plant, a corporation voluntarily invested in additional equipment that enabled it to
reduce its pollution emissions beyond any current laws. Knowing that it would be very expensive for
its competitors to do the same, the firm lobbied the government to make pollution regulations more
restrictive on the entire industry. Is this company socially responsible? Were its managers acting
ethically?
This is a tough question. At first, it seems to be more appropriate to a philosophy class than to a strategic
management class. Should motivation and attitudes be considered when judging a company’s actions? The legal
system normally does this when differentiating between different degrees of guilt: intentionally killing is called
murder and is usually punished severely; unintentional killing is called homicide and may not be punished at all if it
is considered to be an accident or self-defense. Using this approach, one could say that a company is not socially
responsible unless its motives fit its actions. A counterargument could be made, however, by arguing that the
management’s performance in terms of stakeholder criteria. To the extent that boards use only shareholder value as
their key criteria, they may not be acting responsibly from society’s point of view. Increasingly, concerns over social
responsibility may be directed through the board of directors. Agency theory defines the board’s interests quite
narrowly. Perhaps it is time for agency theory to be expanded to include stakeholders other than just shareholders.
Stewardship theory may provide the rationale to expand the responsibilities of the board and top management in
terms of the corporation’s overall social responsibilities. This is likely to continue being a controversial issue for
quite some time.
3-4. What is your opinion of Apple having a code of conduct for its suppliers? What would Milton
Friedman say? Contrast his view with that of Archie Carroll’s.
Do a company’s responsibilities end at its boundary, or do its responsibilities extend to include its suppliers and
distributors? This very thorny question has become a point of contention in the area of social responsibility. The
question includes a basic question in organization theory: what is the boundary of an organization? Certainly, one
could argue that a company is composed of its employees and all of its assets, such as land, buildings, and
equipment. These can thus define a company’s boundary. Given this view, everything else may be called a
company’s “environment” and therefore outside of a company’s control or responsibility. One could thus argue that
a company such as Apple or Nike cannot be held responsible for the actions of a separate and independent supplier
company/contractor. The very popularity of outsourcing as a substitute for vertical integration means that more
firms are contracting with other firms to fulfill functions a company no longer wishes to do on its own. If the
contract is long term in nature or if the purchasing company owns a substantial amount of stock in the supplying
company, then the hands-length nature of transactions is compromised and it becomes difficult to discern where one
firm’s boundary begins and another firm’s leaves off. Such a relationship suggests that one company does have
some influence over another company’s actions by nature of the other company’s dependency on the first company.
One could thus argue that a company’s social responsibilities extend beyond what is normally thought of as its
boundary to the extent that it has some control and influence over the other company’s actions. Clearly, Apple’s
management was thinking this way when it drafted its code of conduct.
Milton Friedman would probably be very much against Apple’s meddling with the rights of its suppliers to freely
contract with their employees. Using Carroll’s categories, Friedman would probably argue that the only
responsibilities of a business firm are economic and legal. Friedman does say that business should play “within the
rules of the game.” This can be interpreted as meaning a supplier’s legal responsibilities to follow the rules
established within that country. If a purely economic justification is used, it may be difficult but still possible to
justify ethical and discretionary responsibilities. Carroll points out that a refusal to consider ethical responsibilities is
likely to lead to an increase in a firm’s legal responsibilities—which, considering the usual inefficiencies of
government, will lead to higher costs and lower long-run business efficiency. Either the U.S. federal government or
the United Nations may force companies in developed countries to follow a code like Gap’s or else face sanctions.
Friedman would say that this is foolishness, but Carroll would argue that this is a natural result of ignoring one’s
ethical responsibilities.
3-5. Does a company have to act selflessly to be considered socially responsible? For example, when
building a new plant, a corporation voluntarily invested in additional equipment that enabled it to
reduce its pollution emissions beyond any current laws. Knowing that it would be very expensive for
its competitors to do the same, the firm lobbied the government to make pollution regulations more
restrictive on the entire industry. Is this company socially responsible? Were its managers acting
ethically?
This is a tough question. At first, it seems to be more appropriate to a philosophy class than to a strategic
management class. Should motivation and attitudes be considered when judging a company’s actions? The legal
system normally does this when differentiating between different degrees of guilt: intentionally killing is called
murder and is usually punished severely; unintentional killing is called homicide and may not be punished at all if it
is considered to be an accident or self-defense. Using this approach, one could say that a company is not socially
responsible unless its motives fit its actions. A counterargument could be made, however, by arguing that the
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essence of the free enterprise system is laissez-faire capitalism in which the selfish motivations of business people
result in a better society in terms of material goods. In this system, it is acceptable for a successful business firm to
selfishly work for its own good, given that its actions result in side effects that are functional for society as a whole.
We do not demand that a firm be altruistic when fulfilling its economic and legal responsibilities. Why should we
then require that a firm be altruistic when fulfilling its ethical and discretionary responsibilities? This is not the type
of question that pragmatic undergraduate business students are used to. Grad students will enjoy playing with the
concepts involved. This question could either result in some interesting class discussion or it could bomb. Hopefully,
it will make the class think on a higher level than simply regurgitating the book.
3-6. Are people living in a relationship-based governance system likely to be unethical in business dealings?
The chapter states that developing nations tend to have relation-based governance. Transactions are based on
personal and implicit agreements, not on formal contracts enforceable by a court. Information about a business is
largely local and private—thus cannot be easily verified by a third party. In contrast, rule-based governance relies on
publicly verifiable information—the type of information that is typically not available in a developing country. The
rule-based system has an infrastructure, based on accounting, auditing, ratings systems, legal cases, and codes, to
provide and monitor this information. If present in a developing nation, the infrastructure is not very sophisticated.
The relation-based system in a developing nation is inherently nontransparent due to the local and nonverifiable
nature of its information. A businessperson needs to develop and nurture a wide network of personal relations. In a
relation-based system, the culture of the country (and the founder’s family) strongly affects corporate culture and
business ethics. What is “fair” depends upon whether one is a family member, a close friend, a neighbor, or a
stranger. Because behavior tends to be less controlled by laws and agreed-upon standards than by tradition, business
people from a rule-based developed nation perceive the relationship-based system in a developing nation to be less
ethical and more corrupt. In contrast, the people living in a relationship-based country see their behavior as
following what to them are well-known traditional guidelines and don’t necessarily understand why foreigners from
developed nations have such difficulty understanding how things are done. What is perceived by one person to be
corruption is simply how things are done in a developing nation.
3-7. Given that people rarely use a company’s code of ethics to guide their decision making, what good
are the codes?
The chapter states that managers tend to ignore codes of ethics and try to solve ethical dilemmas on their own. To
combat this tendency, corporations should not only develop a comprehensive code of ethics, but also communicate
the code in their training programs, performance appraisal systems, and policies and procedures. Developing codes
of ethics can be a useful way to promote ethical behavior, especially for people who are operating at Kohlberg’s
conventional level of moral development. A code of ethics (1) clarifies company expectations of employee conduct
in various situations and (2) makes clear that the company expects its people to recognize the ethical dimensions in
decisions and actions. If nothing else, developing and communicating a comprehensive code of ethics can help
protect a company from lawsuits.
ADDITIONAL DISCUSSION QUESTIONS FOR INSTRUCTORS
These are not found in the text and may be used by the instructor for classroom discussion or exams.
A3-1. How appropriate is the theory of laissez-faire in today’s world?
As indicated in the chapter, Milton Friedman contends that it is very appropriate. The quote from his classic article,
“The Social Responsibility of Business Is to Increase its Profits” does suggest a certain modification, however, to
pure laissez-faire. He states that business should work to increase its profits “so long as it stays within the rules of
the game, which is to say, engages in open and free competition without deception or fraud.” These “rules of the
game” form the crux of the argument. What should these rules be and who should communicate and enforce them?
This leads directly into Archie Carroll’s contention that there are four responsibilities of business corporations:
economic, legal, ethical, and discretionary. Pure laissez-faire argues for economic responsibilities only. Friedman
modifies laissez-faire by presumably adding legal responsibilities. One could make the point that the “rules of the
game” should include ethical responsibilities as well. The problem, of course, is what happens to the concept of
result in a better society in terms of material goods. In this system, it is acceptable for a successful business firm to
selfishly work for its own good, given that its actions result in side effects that are functional for society as a whole.
We do not demand that a firm be altruistic when fulfilling its economic and legal responsibilities. Why should we
then require that a firm be altruistic when fulfilling its ethical and discretionary responsibilities? This is not the type
of question that pragmatic undergraduate business students are used to. Grad students will enjoy playing with the
concepts involved. This question could either result in some interesting class discussion or it could bomb. Hopefully,
it will make the class think on a higher level than simply regurgitating the book.
3-6. Are people living in a relationship-based governance system likely to be unethical in business dealings?
The chapter states that developing nations tend to have relation-based governance. Transactions are based on
personal and implicit agreements, not on formal contracts enforceable by a court. Information about a business is
largely local and private—thus cannot be easily verified by a third party. In contrast, rule-based governance relies on
publicly verifiable information—the type of information that is typically not available in a developing country. The
rule-based system has an infrastructure, based on accounting, auditing, ratings systems, legal cases, and codes, to
provide and monitor this information. If present in a developing nation, the infrastructure is not very sophisticated.
The relation-based system in a developing nation is inherently nontransparent due to the local and nonverifiable
nature of its information. A businessperson needs to develop and nurture a wide network of personal relations. In a
relation-based system, the culture of the country (and the founder’s family) strongly affects corporate culture and
business ethics. What is “fair” depends upon whether one is a family member, a close friend, a neighbor, or a
stranger. Because behavior tends to be less controlled by laws and agreed-upon standards than by tradition, business
people from a rule-based developed nation perceive the relationship-based system in a developing nation to be less
ethical and more corrupt. In contrast, the people living in a relationship-based country see their behavior as
following what to them are well-known traditional guidelines and don’t necessarily understand why foreigners from
developed nations have such difficulty understanding how things are done. What is perceived by one person to be
corruption is simply how things are done in a developing nation.
3-7. Given that people rarely use a company’s code of ethics to guide their decision making, what good
are the codes?
The chapter states that managers tend to ignore codes of ethics and try to solve ethical dilemmas on their own. To
combat this tendency, corporations should not only develop a comprehensive code of ethics, but also communicate
the code in their training programs, performance appraisal systems, and policies and procedures. Developing codes
of ethics can be a useful way to promote ethical behavior, especially for people who are operating at Kohlberg’s
conventional level of moral development. A code of ethics (1) clarifies company expectations of employee conduct
in various situations and (2) makes clear that the company expects its people to recognize the ethical dimensions in
decisions and actions. If nothing else, developing and communicating a comprehensive code of ethics can help
protect a company from lawsuits.
ADDITIONAL DISCUSSION QUESTIONS FOR INSTRUCTORS
These are not found in the text and may be used by the instructor for classroom discussion or exams.
A3-1. How appropriate is the theory of laissez-faire in today’s world?
As indicated in the chapter, Milton Friedman contends that it is very appropriate. The quote from his classic article,
“The Social Responsibility of Business Is to Increase its Profits” does suggest a certain modification, however, to
pure laissez-faire. He states that business should work to increase its profits “so long as it stays within the rules of
the game, which is to say, engages in open and free competition without deception or fraud.” These “rules of the
game” form the crux of the argument. What should these rules be and who should communicate and enforce them?
This leads directly into Archie Carroll’s contention that there are four responsibilities of business corporations:
economic, legal, ethical, and discretionary. Pure laissez-faire argues for economic responsibilities only. Friedman
modifies laissez-faire by presumably adding legal responsibilities. One could make the point that the “rules of the
game” should include ethical responsibilities as well. The problem, of course, is what happens to the concept of
Loading page 23...
laissez-faire when one adds all these responsibilities to it and then expects businesspeople at all levels to accept
them without outside force? Does laissez-faire as proposed by Adam Smith and argued by others include only
economic responsibilities? If legal and ethical responsibilities are also expected by society of business corporations,
is it still “free enterprise” laissez-faire or some other kind of system?
A3-2. Using Carroll’s list of four responsibilities, should a company be concerned about discretionary
responsibilities? Why or why not?
Except for a few die-hard followers of Milton Friedman’s philosophy, few people would agree that a business firm
should fulfill only its economic and legal responsibilities and completely ignore ethical ones. The same is not true of
discretionary responsibilities, however. Because discretionary responsibilities are defined by Carroll as purely
voluntary, there is no pressure by anyone for a business firm to fulfill them. One can argue, nevertheless, that there
are three good reasons to undertake these kinds of responsibilities. The first reason is the morality rationale—it may
be the right thing to do, even though the company may not benefit and may even be hurt in the short run. The second
reason is enlightened self-interest. If a firm undertakes a discretionary activity, it may gain short-run advantages in
the marketplace (e.g., a company offering free day care to its employees may attract more potential workers at lower
wages). It may also serve as a role model for government to legislate if and when that responsibility moves from
discretionary to ethical and finally to legal (and thus the firm is able to do things its way instead of the government’s
way). The third reason is also one of enlightened self-interest. If a company develops a reputation for voluntarily
doing socially useful activities even though it gains little economically in return, it may collect valuable public
relations credit in people’s minds. This may translate into better sales or a willingness on the part of some
government agency to overlook a questionable activity the company might unthinkingly engage in.
SUGGESTIONS FOR STRATEGIC PRACTICE EXERCISE
The end of chapter exercise asks the student to evaluate the position of an organization facing a particular dilemma
and to suggest a course of action to the manager. Students should read the exercise and make the decision in an
ethical manner for the manager. Ideally, students may analyze the problem in three ways: fiduciary duty, stakeholder
analysis, and the Kantian categorical imperative. If students view the manager’s fiduciary duty to the shareholders as
paramount, they will decide to make the gamble. If they see a duty to stakeholders other than shareholders (e.g.,
employees, customers, etc.), they will still choose to act as if the product closer to release is THE ONE. Students
will also reach a conclusion based on the Kantian categorical imperative explained in the chapter.
them without outside force? Does laissez-faire as proposed by Adam Smith and argued by others include only
economic responsibilities? If legal and ethical responsibilities are also expected by society of business corporations,
is it still “free enterprise” laissez-faire or some other kind of system?
A3-2. Using Carroll’s list of four responsibilities, should a company be concerned about discretionary
responsibilities? Why or why not?
Except for a few die-hard followers of Milton Friedman’s philosophy, few people would agree that a business firm
should fulfill only its economic and legal responsibilities and completely ignore ethical ones. The same is not true of
discretionary responsibilities, however. Because discretionary responsibilities are defined by Carroll as purely
voluntary, there is no pressure by anyone for a business firm to fulfill them. One can argue, nevertheless, that there
are three good reasons to undertake these kinds of responsibilities. The first reason is the morality rationale—it may
be the right thing to do, even though the company may not benefit and may even be hurt in the short run. The second
reason is enlightened self-interest. If a firm undertakes a discretionary activity, it may gain short-run advantages in
the marketplace (e.g., a company offering free day care to its employees may attract more potential workers at lower
wages). It may also serve as a role model for government to legislate if and when that responsibility moves from
discretionary to ethical and finally to legal (and thus the firm is able to do things its way instead of the government’s
way). The third reason is also one of enlightened self-interest. If a company develops a reputation for voluntarily
doing socially useful activities even though it gains little economically in return, it may collect valuable public
relations credit in people’s minds. This may translate into better sales or a willingness on the part of some
government agency to overlook a questionable activity the company might unthinkingly engage in.
SUGGESTIONS FOR STRATEGIC PRACTICE EXERCISE
The end of chapter exercise asks the student to evaluate the position of an organization facing a particular dilemma
and to suggest a course of action to the manager. Students should read the exercise and make the decision in an
ethical manner for the manager. Ideally, students may analyze the problem in three ways: fiduciary duty, stakeholder
analysis, and the Kantian categorical imperative. If students view the manager’s fiduciary duty to the shareholders as
paramount, they will decide to make the gamble. If they see a duty to stakeholders other than shareholders (e.g.,
employees, customers, etc.), they will still choose to act as if the product closer to release is THE ONE. Students
will also reach a conclusion based on the Kantian categorical imperative explained in the chapter.
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CHAPTER FOUR
ENVIRONMENTAL SCANNING AND INDUSTRY ANALYSIS
This chapter examines key aspects of the external environment of the corporation with special emphasis on
environmental scanning, industry analysis, and forecasting. Environmental scanning is presented as the first part of
the strategic management model and a crucial task for strategic managers. The emphasis is upon monitoring
strategic factors and utilizing possible sources of information. Porter’s approach to industry analysis is discussed in
some detail. Forecasting is then addressed in terms of assumptions and basic techniques. Industry scenario
construction/writing is explained. The chapter ends with a suggested way to synthesize external factors through the
use of an EFAS Table.
LEARNING OBJECTIVES
1. List the aspects of an organization’s environment that can influence its long-term decisions.
2. Identify the aspects of an organization’s environment that are most strategically important.
3. Conduct an industry analysis to explain the competitive forces that influence the intensity of rivalry within
an industry.
4. Discuss how industry maturity affects industry competitive forces.
5. Categorize international industries based on their pressures for coordination and local responsiveness.
6. Identify key success factors and develop an industry matrix.
7. Construct strategic group maps to assess the competitive positions of firms in an industry.
8. Develop an industry scenario as a forecasting technique.
9. Use publicly available information to conduct competitive intelligence.
10. Construct an EFAS table that summarizes external environmental factors.
TOPICS OUTLINE COVERED
1. Aspects of Environmental Scanning
a. Identifying External Environmental Variables
2. Strategic Importance of the External Environment
a. Scanning the Societal Environment: STEEP Analysis
b. Identifying External Strategic Factors
3. Industry Analysis: Analyzing the Task Environment
a. Porter’s Approach to Industry Analysis
b. Industry Evolution
c. Categorizing International Industries
d. International Risk Assessment
e. Strategic Groups
f. Strategic Types
g. Hypercompetition
4. Using Key Success Factors to Create an Industry Matrix
5. Competitive Intelligence
a. Sources of Competitive Intelligence
b. Monitoring Competitors for Strategic Planning
6. Forecasting
a. Danger of Assumptions
b. Useful Forecasting Techniques
7. The Strategic Audit: A Checklist for Environmental Scanning
8. Synthesis of External Factors—EFAS
SUGGESTED ANSWERS TO MYMANAGEMENTLAB QUESTIONS
4-1. How does STEEP analysis aid in the development of the strategy in a company?
ENVIRONMENTAL SCANNING AND INDUSTRY ANALYSIS
This chapter examines key aspects of the external environment of the corporation with special emphasis on
environmental scanning, industry analysis, and forecasting. Environmental scanning is presented as the first part of
the strategic management model and a crucial task for strategic managers. The emphasis is upon monitoring
strategic factors and utilizing possible sources of information. Porter’s approach to industry analysis is discussed in
some detail. Forecasting is then addressed in terms of assumptions and basic techniques. Industry scenario
construction/writing is explained. The chapter ends with a suggested way to synthesize external factors through the
use of an EFAS Table.
LEARNING OBJECTIVES
1. List the aspects of an organization’s environment that can influence its long-term decisions.
2. Identify the aspects of an organization’s environment that are most strategically important.
3. Conduct an industry analysis to explain the competitive forces that influence the intensity of rivalry within
an industry.
4. Discuss how industry maturity affects industry competitive forces.
5. Categorize international industries based on their pressures for coordination and local responsiveness.
6. Identify key success factors and develop an industry matrix.
7. Construct strategic group maps to assess the competitive positions of firms in an industry.
8. Develop an industry scenario as a forecasting technique.
9. Use publicly available information to conduct competitive intelligence.
10. Construct an EFAS table that summarizes external environmental factors.
TOPICS OUTLINE COVERED
1. Aspects of Environmental Scanning
a. Identifying External Environmental Variables
2. Strategic Importance of the External Environment
a. Scanning the Societal Environment: STEEP Analysis
b. Identifying External Strategic Factors
3. Industry Analysis: Analyzing the Task Environment
a. Porter’s Approach to Industry Analysis
b. Industry Evolution
c. Categorizing International Industries
d. International Risk Assessment
e. Strategic Groups
f. Strategic Types
g. Hypercompetition
4. Using Key Success Factors to Create an Industry Matrix
5. Competitive Intelligence
a. Sources of Competitive Intelligence
b. Monitoring Competitors for Strategic Planning
6. Forecasting
a. Danger of Assumptions
b. Useful Forecasting Techniques
7. The Strategic Audit: A Checklist for Environmental Scanning
8. Synthesis of External Factors—EFAS
SUGGESTED ANSWERS TO MYMANAGEMENTLAB QUESTIONS
4-1. How does STEEP analysis aid in the development of the strategy in a company?
Loading page 25...
STEEP analysis is designed to monitor trends in the society and natural environments. In doing so, this analysis
requires scanning the environment for sociocultural, technological, economic, ecological, and political
environmental forces that may impact the way an organization does business.
4-2. The effects of climate change on companies can be grouped into six categories of risk. Use any two of
these to explain the impact upon the resort hotel industry.
The six types of risk are regulatory risk, supply chain risk, product and technology risk, litigation risk, reputational
risk, and physical risk. Each of these can impact the resort hotel industry. For each of these risks, the student should
be able to give several examples of the impact for the resort hotel industry.
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS:
4-3. Discuss how a development in a corporation’s natural and societal environments can affect the
corporation through its task environment.
Developments or trends in a corporation’s natural or societal environment typically do not affect the corporation
directly but indirectly through their impact on one or more stakeholder groups in the corporation’s task environment.
As mentioned in the text, the trend toward dual-career couples is a recent development in the societal environment
of any company operating in the United States or Canada. Sociocultural forces regarding the changing role of
women, plus the trend toward single family households, combined with the economic forces of high interest rates
and inflation in the 1970s to send both men and women searching for full-time jobs in addition to their being
parents. This development in the societal environment continues to effect companies through its impact on
employee/union groups (who ask for parental leave and/or company-sponsored day care centers), customers
(employed parents who increasingly shop for convenience goods because of time constraints), and special interest
groups and even governments (who ask business firms to help support local schools and deal with community social
problems). As another example, the trend toward global warming may not directly affect a company making toys,
but may affect it indirectly through a sociocultural trend supporting the use of rechargeable batteries and solar cells
as replacements for disposable batteries. Such a sociocultural trend may be reflected in changing customer
preferences or in new government regulations or incentive programs.
4-4. How would you determine the level of competitive intensity in an industry?
The answer to this question can be found in Figure 4.2 in Chapter 4. By this time, students should be able to list the
five forces presented by Michael Porter plus the sixth force (other stakeholders) proposed by Ed Freeman. They are
briefly:
Threat of new entrants
Rivalry among existing firms
Threat of substitute products or services
Bargaining power of buyers
Bargaining power of suppliers
Relative power of other stakeholders
Once they have listed the forces, push the students to explain how each of the forces can affect the level of
competitive intensity within an industry. Use price of the company’s product (i.e., How will a change in each of the
forces affect the average price of the product?) and then look at how changes in each force might affect average
product quality and other characteristics of the product offered in this particular industry. Arbitrarily select for
analysis a well-known industry such as airlines or automobiles. After examining past and present forces operating in
a particular industry, ask the students to try to predict what will happen to each of these forces in the future and how
these developments might affect the future competitive intensity of the industry. Here’s an example of an exercise
you could use in class.
What are the forces driving industry competition in the airline industry?
First, ask each person in the class to individually evaluate each of the forces. Alternatively, form groups to evaluate
requires scanning the environment for sociocultural, technological, economic, ecological, and political
environmental forces that may impact the way an organization does business.
4-2. The effects of climate change on companies can be grouped into six categories of risk. Use any two of
these to explain the impact upon the resort hotel industry.
The six types of risk are regulatory risk, supply chain risk, product and technology risk, litigation risk, reputational
risk, and physical risk. Each of these can impact the resort hotel industry. For each of these risks, the student should
be able to give several examples of the impact for the resort hotel industry.
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS:
4-3. Discuss how a development in a corporation’s natural and societal environments can affect the
corporation through its task environment.
Developments or trends in a corporation’s natural or societal environment typically do not affect the corporation
directly but indirectly through their impact on one or more stakeholder groups in the corporation’s task environment.
As mentioned in the text, the trend toward dual-career couples is a recent development in the societal environment
of any company operating in the United States or Canada. Sociocultural forces regarding the changing role of
women, plus the trend toward single family households, combined with the economic forces of high interest rates
and inflation in the 1970s to send both men and women searching for full-time jobs in addition to their being
parents. This development in the societal environment continues to effect companies through its impact on
employee/union groups (who ask for parental leave and/or company-sponsored day care centers), customers
(employed parents who increasingly shop for convenience goods because of time constraints), and special interest
groups and even governments (who ask business firms to help support local schools and deal with community social
problems). As another example, the trend toward global warming may not directly affect a company making toys,
but may affect it indirectly through a sociocultural trend supporting the use of rechargeable batteries and solar cells
as replacements for disposable batteries. Such a sociocultural trend may be reflected in changing customer
preferences or in new government regulations or incentive programs.
4-4. How would you determine the level of competitive intensity in an industry?
The answer to this question can be found in Figure 4.2 in Chapter 4. By this time, students should be able to list the
five forces presented by Michael Porter plus the sixth force (other stakeholders) proposed by Ed Freeman. They are
briefly:
Threat of new entrants
Rivalry among existing firms
Threat of substitute products or services
Bargaining power of buyers
Bargaining power of suppliers
Relative power of other stakeholders
Once they have listed the forces, push the students to explain how each of the forces can affect the level of
competitive intensity within an industry. Use price of the company’s product (i.e., How will a change in each of the
forces affect the average price of the product?) and then look at how changes in each force might affect average
product quality and other characteristics of the product offered in this particular industry. Arbitrarily select for
analysis a well-known industry such as airlines or automobiles. After examining past and present forces operating in
a particular industry, ask the students to try to predict what will happen to each of these forces in the future and how
these developments might affect the future competitive intensity of the industry. Here’s an example of an exercise
you could use in class.
What are the forces driving industry competition in the airline industry?
First, ask each person in the class to individually evaluate each of the forces. Alternatively, form groups to evaluate
Loading page 26...
the forces. Next, ask the class (or each group) to indicate whether they marked high, medium, or low for each force.
Ask individuals/groups for their rationale to get some discussion going. Next, ask the class which of these forces are
changing and to indicate why. The next step is to ask the class to evaluate the future level of competitive intensity in
the airline industry. Would they invest or look for a job in this industry?
The authors’ opinions regarding the current level of these forces are as follows. The overall level of competitive
intensity is high and bound to get higher. Feel free to disagree.
Threat of new entrants: High. Almost anyone can buy used airplanes and start a charter service. As other
nations privatize their high-cost, state-owned airlines, new low-cost entrants will emerge.
Rivalry among existing firms: High. As more airlines leave their nationally protected areas, they are
entering areas previously controlled by other airlines. Because there are few ways to differentiate airline
service, many carriers become commodities, competing primarily on price. Price wars result from this high
degree of rivalry.
Bargaining power of buyers/distributors: Medium to Low. As more airlines are selling directly to
customers via the Internet, travel agents as the primary distributors have become less important to carrier
sales. The lowered power of travel agents is indicated by the fact that major airlines were able to institute a
cap on travel agent commissions so easily and to emphasize ticket sales via corporate websites.
Bargaining power of suppliers: High. With only two large airframe manufacturers compared to many more
airline companies, supplier bargaining power is quite high.
Relative power of other stakeholders: Medium. Who are the key stakeholders? Pilot and flight attendant
unions are traditionally strong at the established carriers (raising costs). Nonunionized carriers thus gain a
cost advantage (raising the level of competitive intensity). Because airline crashes get major attention,
governments are quick to pass safety regulations (raising costs and thus competitive intensity). However,
national concerns also cause governments to safeguard domestic airlines from strong foreign competition
thus lowering competitive intensity.
4-5. Is Pepsi Cola a substitute for Coca Cola?
This is a good question to check how well students understand the basic concepts of industry analysis. Those with a
very superficial understanding of the topics discussed in this chapter will tend to answer “yes” to this question. They
are using their own common sense understanding of a substitute being another product within the same category.
Because Coke and Pepsi are both colas, most people think of them as substitutes for each other. They have almost
identical product characteristics. According to Porter, however, substitute products are those products that appear to
be different but can satisfy the same need as another product. This means that in Porter’s mind, substitutes do not
have similar product characteristics, but are still able to satisfy the same need. This indicates that Porter would not
view Pepsi and Coke as true substitutes, but two versions/brands of the same product. Thus, Porter would view
coffee and tea (both having caffeine) as being substitutes for a soft drink cola. The whole idea of Porter’s approach
to industry analysis is to get people to go beyond the obvious when considering what affects the level of competitive
intensity within an industry.
4-6. How can a decision maker identify strategic factors in a corporation’s external international
environment?
The chapter suggests that one begin by listing three or more trends emerging in each of the four forces of a firm’s
societal environment in an environmental trend analysis matrix (see Tables 4.1 and 4.3). Then estimate the likely
impact of these general trends upon the primary stakeholders (e.g., communities, creditors, competitors, etc.). These
data form a series of strategic issues—those trends and developments that are very likely to determine the future
environment. Plot these strategic issues on an issues priority matrix (see Fig. 4.2). Those issues judged to have a
high probability of occurring and a high probable impact on the corporation are strategic factors. Categorize these
Ask individuals/groups for their rationale to get some discussion going. Next, ask the class which of these forces are
changing and to indicate why. The next step is to ask the class to evaluate the future level of competitive intensity in
the airline industry. Would they invest or look for a job in this industry?
The authors’ opinions regarding the current level of these forces are as follows. The overall level of competitive
intensity is high and bound to get higher. Feel free to disagree.
Threat of new entrants: High. Almost anyone can buy used airplanes and start a charter service. As other
nations privatize their high-cost, state-owned airlines, new low-cost entrants will emerge.
Rivalry among existing firms: High. As more airlines leave their nationally protected areas, they are
entering areas previously controlled by other airlines. Because there are few ways to differentiate airline
service, many carriers become commodities, competing primarily on price. Price wars result from this high
degree of rivalry.
Bargaining power of buyers/distributors: Medium to Low. As more airlines are selling directly to
customers via the Internet, travel agents as the primary distributors have become less important to carrier
sales. The lowered power of travel agents is indicated by the fact that major airlines were able to institute a
cap on travel agent commissions so easily and to emphasize ticket sales via corporate websites.
Bargaining power of suppliers: High. With only two large airframe manufacturers compared to many more
airline companies, supplier bargaining power is quite high.
Relative power of other stakeholders: Medium. Who are the key stakeholders? Pilot and flight attendant
unions are traditionally strong at the established carriers (raising costs). Nonunionized carriers thus gain a
cost advantage (raising the level of competitive intensity). Because airline crashes get major attention,
governments are quick to pass safety regulations (raising costs and thus competitive intensity). However,
national concerns also cause governments to safeguard domestic airlines from strong foreign competition
thus lowering competitive intensity.
4-5. Is Pepsi Cola a substitute for Coca Cola?
This is a good question to check how well students understand the basic concepts of industry analysis. Those with a
very superficial understanding of the topics discussed in this chapter will tend to answer “yes” to this question. They
are using their own common sense understanding of a substitute being another product within the same category.
Because Coke and Pepsi are both colas, most people think of them as substitutes for each other. They have almost
identical product characteristics. According to Porter, however, substitute products are those products that appear to
be different but can satisfy the same need as another product. This means that in Porter’s mind, substitutes do not
have similar product characteristics, but are still able to satisfy the same need. This indicates that Porter would not
view Pepsi and Coke as true substitutes, but two versions/brands of the same product. Thus, Porter would view
coffee and tea (both having caffeine) as being substitutes for a soft drink cola. The whole idea of Porter’s approach
to industry analysis is to get people to go beyond the obvious when considering what affects the level of competitive
intensity within an industry.
4-6. How can a decision maker identify strategic factors in a corporation’s external international
environment?
The chapter suggests that one begin by listing three or more trends emerging in each of the four forces of a firm’s
societal environment in an environmental trend analysis matrix (see Tables 4.1 and 4.3). Then estimate the likely
impact of these general trends upon the primary stakeholders (e.g., communities, creditors, competitors, etc.). These
data form a series of strategic issues—those trends and developments that are very likely to determine the future
environment. Plot these strategic issues on an issues priority matrix (see Fig. 4.2). Those issues judged to have a
high probability of occurring and a high probable impact on the corporation are strategic factors. Categorize these
Loading page 27...
factors as opportunities or threats. Keep in mind that some strategic factors may be both opportunities and threats,
depending on how they are viewed.
4-7. Compare and contrast trend extrapolation with the writing of scenarios as forecasting techniques.
As indicated in the chapter, extrapolation is simply the extension of present trends into the future. It relies on the
assumption that the environment is reasonably consistent and changes slowly in the short run. As a result,
extrapolation is fairly easy to do, as witnessed by its being the most widely used form of forecasting. Nevertheless,
extrapolation is like driving a car backward without using a mirror or twisting one’s head to look backward.
Everything will be fine until a sudden turn is reached! Like driving backward, extrapolation is fine if the time frame
to be predicted is short and one is lucky. In contrast, scenario writing is based upon a series of historical data plus
informed hunches from key people in the company who have access to environmental information or from a Delphi
panel of outside experts. Like extrapolation, scenario writing is a very popular forecasting technique, but unlike
extrapolation, it can get very complicated and time consuming. One approach to constructing an industry scenario is
suggested by Porter in the chapter. It has at least one clear-cut advantage over extrapolation: it encourages
forecasters to make their assumptions explicit. One is thus more likely to recognize the dangers of driving backward.
Scenario writing, if done conscientiously, could be seen as an attempt to construct a mirror to use in such hazardous
driving!
ADDITIONAL DISCUSSION QUESTIONS FOR INSTRUCTORS
These are not found in the text and may be used by the instructor for classroom discussion or exams.
A4-1. Why is environmental uncertainty an important concept in strategic management?
A key part of strategic management, environmental scanning is a tool used to help avoid strategic surprise and cope
with an uncertain environment. If the environment was certain and predictable, environmental scanning would be a
rather easy chore. Simple extrapolation would be the only type of forecasting needed. In a complex and changing
world, however, those corporations that engage in environmental scanning and strategic planning tend to deal better
with environmental uncertainty and to be more successful than their nonplanning brethren.
A4-2. What can a corporation do to ensure that information about strategic environmental factors gets the
attention of strategy makers?
This is a very real problem in most large corporations given the usual obstacles to good communication. The very
people who are in the best positions to gather this data are often the ones who either fail to pass it on because it’s too
much of a chore, or they fail to notice it because no one told them how important certain developments are to top
management. Because proper information dissemination is an important part of environmental scanning,
corporations attempt to schedule a series of analytical reports for top management’s information. Some of these
reports are depicted in Figure 4.1 in the chapter. The purchasing department, for example, might be tasked with the
job of compiling a quarterly analysis of the availability and reliability of present and future suppliers. The market
research department might prepare analyses of present and future customers for certain products and services with
special attention to demographic shifts. Each report would need to conclude with a list of strategic factors to monitor
in the coming months or years. Other approaches are, of course, possible to get needed information to the attention
of strategy makers. It might be useful to generate some of these ideas in class.
A4-3. If most long-term forecasts are usually incorrect, why bother doing them?
This question is based on the assumption that most long-term forecasts are usually incorrect. One must keep in mind
that some things are easier to forecast than others. For example, a forecasted drop in the demand for tricycles in
three years will very likely occur if it is based on a strong drop in the present birth rate. Nevertheless, most people
would probably agree that forecasts going out five to ten years have a low probability of becoming reality in today’s
dynamic world. The text takes the position that even if predictions prove to be wrong, the very act of scanning and
forecasting the environment helps managers take a broader perspective. It also forces managers to take an active
rather than a passive orientation toward its external environment. It encourages calculated risks over WAHs (wild
depending on how they are viewed.
4-7. Compare and contrast trend extrapolation with the writing of scenarios as forecasting techniques.
As indicated in the chapter, extrapolation is simply the extension of present trends into the future. It relies on the
assumption that the environment is reasonably consistent and changes slowly in the short run. As a result,
extrapolation is fairly easy to do, as witnessed by its being the most widely used form of forecasting. Nevertheless,
extrapolation is like driving a car backward without using a mirror or twisting one’s head to look backward.
Everything will be fine until a sudden turn is reached! Like driving backward, extrapolation is fine if the time frame
to be predicted is short and one is lucky. In contrast, scenario writing is based upon a series of historical data plus
informed hunches from key people in the company who have access to environmental information or from a Delphi
panel of outside experts. Like extrapolation, scenario writing is a very popular forecasting technique, but unlike
extrapolation, it can get very complicated and time consuming. One approach to constructing an industry scenario is
suggested by Porter in the chapter. It has at least one clear-cut advantage over extrapolation: it encourages
forecasters to make their assumptions explicit. One is thus more likely to recognize the dangers of driving backward.
Scenario writing, if done conscientiously, could be seen as an attempt to construct a mirror to use in such hazardous
driving!
ADDITIONAL DISCUSSION QUESTIONS FOR INSTRUCTORS
These are not found in the text and may be used by the instructor for classroom discussion or exams.
A4-1. Why is environmental uncertainty an important concept in strategic management?
A key part of strategic management, environmental scanning is a tool used to help avoid strategic surprise and cope
with an uncertain environment. If the environment was certain and predictable, environmental scanning would be a
rather easy chore. Simple extrapolation would be the only type of forecasting needed. In a complex and changing
world, however, those corporations that engage in environmental scanning and strategic planning tend to deal better
with environmental uncertainty and to be more successful than their nonplanning brethren.
A4-2. What can a corporation do to ensure that information about strategic environmental factors gets the
attention of strategy makers?
This is a very real problem in most large corporations given the usual obstacles to good communication. The very
people who are in the best positions to gather this data are often the ones who either fail to pass it on because it’s too
much of a chore, or they fail to notice it because no one told them how important certain developments are to top
management. Because proper information dissemination is an important part of environmental scanning,
corporations attempt to schedule a series of analytical reports for top management’s information. Some of these
reports are depicted in Figure 4.1 in the chapter. The purchasing department, for example, might be tasked with the
job of compiling a quarterly analysis of the availability and reliability of present and future suppliers. The market
research department might prepare analyses of present and future customers for certain products and services with
special attention to demographic shifts. Each report would need to conclude with a list of strategic factors to monitor
in the coming months or years. Other approaches are, of course, possible to get needed information to the attention
of strategy makers. It might be useful to generate some of these ideas in class.
A4-3. If most long-term forecasts are usually incorrect, why bother doing them?
This question is based on the assumption that most long-term forecasts are usually incorrect. One must keep in mind
that some things are easier to forecast than others. For example, a forecasted drop in the demand for tricycles in
three years will very likely occur if it is based on a strong drop in the present birth rate. Nevertheless, most people
would probably agree that forecasts going out five to ten years have a low probability of becoming reality in today’s
dynamic world. The text takes the position that even if predictions prove to be wrong, the very act of scanning and
forecasting the environment helps managers take a broader perspective. It also forces managers to take an active
rather than a passive orientation toward its external environment. It encourages calculated risks over WAHs (wild
Loading page 28...
a** hunches) and is more likely to result in strategic management instead of reactive management.
SUGGESTIONS FOR STRATEGIC PRACTICE EXERCISE
How far should people in a business firm go in gathering competitive intelligence? Where do you draw the line?
This is an interesting exercise to use not only for covering ethics in Chapter 3, but also for introducing some of the
concepts found in Chapter 4, Environmental Scanning and Industry Analysis. For this reason, you might want to use
this exercise when discussing ethics in Chapter 3 rather than at the end of Chapter 4.
Approach 1: First, ask your students to complete this exercise. Second, list all the items on the blackboard in which a
large percentage of the class rates each of them as 4 or 5. Third, list all the items in which a large percentage of the
class rates each of them a 2 or 1. Fourth, list all the items in which a large majority rates them as a 3. Once these
three sets of items are listed on the board, ask the class what differentiates one group from another. Try to identify
the criteria the class used to rate the items. This provides the rationale the students in your class are using to make
ethical decisions. You might also want to challenge the class as a whole by asking for minority opinions—those who
rated a particular item significantly differently than did the class as a whole.
Approach 2: Have the class complete the exercise and hand in their ratings anonymously on a separate sheet of
paper. Have them keep one copy of their ratings. After class, calculate the means for each item, put them into one of
the three categories mentioned above, and list them on a transparency. Show the class their average responses by
group. Ask them what differentiates one group from another and probe for the criteria they used to rate the items.
Ask them to look again at their personal ratings of the items and identify where they differ from the overall average
class rating. Encourage individual students to challenge the average class ratings. Some interesting discussion is
bound to result. You may want to provide the class with the average responses found in the Jones and Bryan study
cited below.
This exercise was developed from a questionnaire constructed by William Jones, Jr. and Norman Bryan, Jr. of
Georgia State University for their article “Business Ethics and Business Intelligence: An Empirical Study of
Information-Gathering Alternatives,” in the June 1995 issue of the International Journal of Management (pages
204–208). A total of 108 undergraduates in a strategic management class completed the questionnaire during the
early part of the term, prior to a discussion of ethics. The resulting mean responses were as follows:
The business firm should try to get useful information about competitors by:
4.55 Careful study of trade journals.
1.13 Wiretapping the telephones of competitors.
2.59 Posing as a potential customer to competitors.
1.57 Getting loyal customers to put out a phony “request for proposal” soliciting competitors’ bids.
4.21 Buying competitors’ products and taking them apart.
3.54 Hiring management consultants who have worked for competitors.
1.44 Rewarding competitors’ employees for useful “tips.”
4.00 Questioning competitors’ customers and/or suppliers.
1.97 Buying and analyzing competitors’ garbage.
1.37 Advertising and interviewing for nonexistent jobs.
SUGGESTIONS FOR STRATEGIC PRACTICE EXERCISE
How far should people in a business firm go in gathering competitive intelligence? Where do you draw the line?
This is an interesting exercise to use not only for covering ethics in Chapter 3, but also for introducing some of the
concepts found in Chapter 4, Environmental Scanning and Industry Analysis. For this reason, you might want to use
this exercise when discussing ethics in Chapter 3 rather than at the end of Chapter 4.
Approach 1: First, ask your students to complete this exercise. Second, list all the items on the blackboard in which a
large percentage of the class rates each of them as 4 or 5. Third, list all the items in which a large percentage of the
class rates each of them a 2 or 1. Fourth, list all the items in which a large majority rates them as a 3. Once these
three sets of items are listed on the board, ask the class what differentiates one group from another. Try to identify
the criteria the class used to rate the items. This provides the rationale the students in your class are using to make
ethical decisions. You might also want to challenge the class as a whole by asking for minority opinions—those who
rated a particular item significantly differently than did the class as a whole.
Approach 2: Have the class complete the exercise and hand in their ratings anonymously on a separate sheet of
paper. Have them keep one copy of their ratings. After class, calculate the means for each item, put them into one of
the three categories mentioned above, and list them on a transparency. Show the class their average responses by
group. Ask them what differentiates one group from another and probe for the criteria they used to rate the items.
Ask them to look again at their personal ratings of the items and identify where they differ from the overall average
class rating. Encourage individual students to challenge the average class ratings. Some interesting discussion is
bound to result. You may want to provide the class with the average responses found in the Jones and Bryan study
cited below.
This exercise was developed from a questionnaire constructed by William Jones, Jr. and Norman Bryan, Jr. of
Georgia State University for their article “Business Ethics and Business Intelligence: An Empirical Study of
Information-Gathering Alternatives,” in the June 1995 issue of the International Journal of Management (pages
204–208). A total of 108 undergraduates in a strategic management class completed the questionnaire during the
early part of the term, prior to a discussion of ethics. The resulting mean responses were as follows:
The business firm should try to get useful information about competitors by:
4.55 Careful study of trade journals.
1.13 Wiretapping the telephones of competitors.
2.59 Posing as a potential customer to competitors.
1.57 Getting loyal customers to put out a phony “request for proposal” soliciting competitors’ bids.
4.21 Buying competitors’ products and taking them apart.
3.54 Hiring management consultants who have worked for competitors.
1.44 Rewarding competitors’ employees for useful “tips.”
4.00 Questioning competitors’ customers and/or suppliers.
1.97 Buying and analyzing competitors’ garbage.
1.37 Advertising and interviewing for nonexistent jobs.
Loading page 29...
4.09 Taking public tours of competitors’ facilities.
1.58 Releasing false information about the company in order to confuse competitors.
3.70 Questioning competitors’ technical people at trade shows and conferences.
3.29 Hiring key people away from competitors.
3.59 Analyzing competitors’ labor union contracts.
1.46 Having employees date persons who work for competitors.
2.61 Studying aerial photographs of competitors’ facilities.
Jones and Bryan indicated that appropriate actions received mean responses between 3.51 and 5.00. Those items
with a mean between 2.5 and 3.5 reflected student uncertainty about whether the action was appropriate or not.
Items with a mean response of less than 2.5 were judged inappropriate.
Jones and Bryan were surprised to find no statistically significant differences between males and females or on the
basis of age. They suggested that the strong emphasis in the business curriculum on strategic management might
have tended to suppress any gender and age differences.
ADDITIONAL TEACHING MODULE
(Use when discussing forecasting)
THE ROLLING J-CURVE
When current environmental trends (such as the price of oil) look bad or when a new product introduction is not
doing as well as expected, managers and analysts are tempted to use the infamous rolling J-curve style of
forecasting, in which present trends are discounted in the hope that everything will soon improve as hoped. Well-
known among strategic planners, the rolling J-curve forecast is feared with good reason by most executives. For
example, if a new program is not resulting in increased sales as anticipated, the person in charge of the program
simply alters the forecast by announcing that the decrease is only temporary and that the expected increase will
occur sometime soon. Sales can thus be diagramed on a chart with the actual sales figures curving downward over
time and the estimated future sales figures forming the upward curve of the J (while everyone continues to hope for
a “light at the end of the tunnel”). Companies can go bankrupt using these kinds of forecasts in which hope
substitutes for analysis.
1.58 Releasing false information about the company in order to confuse competitors.
3.70 Questioning competitors’ technical people at trade shows and conferences.
3.29 Hiring key people away from competitors.
3.59 Analyzing competitors’ labor union contracts.
1.46 Having employees date persons who work for competitors.
2.61 Studying aerial photographs of competitors’ facilities.
Jones and Bryan indicated that appropriate actions received mean responses between 3.51 and 5.00. Those items
with a mean between 2.5 and 3.5 reflected student uncertainty about whether the action was appropriate or not.
Items with a mean response of less than 2.5 were judged inappropriate.
Jones and Bryan were surprised to find no statistically significant differences between males and females or on the
basis of age. They suggested that the strong emphasis in the business curriculum on strategic management might
have tended to suppress any gender and age differences.
ADDITIONAL TEACHING MODULE
(Use when discussing forecasting)
THE ROLLING J-CURVE
When current environmental trends (such as the price of oil) look bad or when a new product introduction is not
doing as well as expected, managers and analysts are tempted to use the infamous rolling J-curve style of
forecasting, in which present trends are discounted in the hope that everything will soon improve as hoped. Well-
known among strategic planners, the rolling J-curve forecast is feared with good reason by most executives. For
example, if a new program is not resulting in increased sales as anticipated, the person in charge of the program
simply alters the forecast by announcing that the decrease is only temporary and that the expected increase will
occur sometime soon. Sales can thus be diagramed on a chart with the actual sales figures curving downward over
time and the estimated future sales figures forming the upward curve of the J (while everyone continues to hope for
a “light at the end of the tunnel”). Companies can go bankrupt using these kinds of forecasts in which hope
substitutes for analysis.
Loading page 30...
CHAPTER FIVE
ORGANIZATIONAL ANALYSIS AND COMPETITIVE ADVANTAGE
This chapter completes the section on environmental scanning by examining the internal environment of a
corporation. Often called organizational analysis (to contrast it with industry analysis), internal scanning is a key
part of the resource-based view of the firm—the view that a company’s sustained competitive advantage is primarily
determined by its resource endowments. The chapter contrasts the industry value chain from the corporate value
chain. Following the popular functional approach, the chapter breaks the internal environment down into the
corporation’s structure, culture, and resources. The chapter proposes that to the extent that a corporation’s present
structure and culture are compatible with present or potential strategies, they can be considered strengths or
weaknesses. Corporate resources are discussed in terms of marketing, finance, research and development,
operations, human resources, and information systems. The point is made that a corporation’s resources include not
only measurable assets, such as buildings and people, but also the skills and competencies of the people within the
functional areas. The chapter ends with a suggested way to summarize internal factors through the use of an IFAS
Table.
LEARNING OBJECTIVES
1. Apply the resource-based view of the firm and the VRIO framework to determine core and distinctive
competencies.
2. Explain company business models and how they can be imitated.
3. Use value chain to assess the activities of an industry and of an organization.
4. Explain why different organizational structures are utilized in business.
5. Assess a company’s corporate culture and how it might affect a proposed strategy.
6. Construct an IFAS Table that summarizes internal factors.
TOPICS OUTLINE COVERED
1. A Resource-Based Approach to Organizational Analysis—VRIO
a. Core and Distinctive Competencies
b. Using Resources to Gain Competitive Advantage
2. Business Models
3. Value-Chain Analysis
a. Industry Value-Chain Analysis
b. Corporate Value-Chain Analysis
c. Scanning Functional Resources and Capabilities
4. Basic Organizational Structures
a. Corporate Culture: The Company Way
b. Strategic Marketing Issues
c. Strategic Financial Issues
d. Strategic Research and Development (R&D) Issues
e. Strategic Operations Issues
f. Strategic Human Resource Management (HRM) Issues
g. Strategic Information Systems/Technology Issues
5. The Strategic Audit: A Checklist for Organizational Analysis
a. Synthesis of Internal Factors (IFAS)
SUGGESTED ANSWERS TO MYMANAGEMENTLAB QUESTIONS
5-1. How does the resource-based view of the firm provide a superior means of evaluating a company’s
competitive advantage?
A resource-based approach to organizational analysis highlights the resources of the firm with which it can confront
ORGANIZATIONAL ANALYSIS AND COMPETITIVE ADVANTAGE
This chapter completes the section on environmental scanning by examining the internal environment of a
corporation. Often called organizational analysis (to contrast it with industry analysis), internal scanning is a key
part of the resource-based view of the firm—the view that a company’s sustained competitive advantage is primarily
determined by its resource endowments. The chapter contrasts the industry value chain from the corporate value
chain. Following the popular functional approach, the chapter breaks the internal environment down into the
corporation’s structure, culture, and resources. The chapter proposes that to the extent that a corporation’s present
structure and culture are compatible with present or potential strategies, they can be considered strengths or
weaknesses. Corporate resources are discussed in terms of marketing, finance, research and development,
operations, human resources, and information systems. The point is made that a corporation’s resources include not
only measurable assets, such as buildings and people, but also the skills and competencies of the people within the
functional areas. The chapter ends with a suggested way to summarize internal factors through the use of an IFAS
Table.
LEARNING OBJECTIVES
1. Apply the resource-based view of the firm and the VRIO framework to determine core and distinctive
competencies.
2. Explain company business models and how they can be imitated.
3. Use value chain to assess the activities of an industry and of an organization.
4. Explain why different organizational structures are utilized in business.
5. Assess a company’s corporate culture and how it might affect a proposed strategy.
6. Construct an IFAS Table that summarizes internal factors.
TOPICS OUTLINE COVERED
1. A Resource-Based Approach to Organizational Analysis—VRIO
a. Core and Distinctive Competencies
b. Using Resources to Gain Competitive Advantage
2. Business Models
3. Value-Chain Analysis
a. Industry Value-Chain Analysis
b. Corporate Value-Chain Analysis
c. Scanning Functional Resources and Capabilities
4. Basic Organizational Structures
a. Corporate Culture: The Company Way
b. Strategic Marketing Issues
c. Strategic Financial Issues
d. Strategic Research and Development (R&D) Issues
e. Strategic Operations Issues
f. Strategic Human Resource Management (HRM) Issues
g. Strategic Information Systems/Technology Issues
5. The Strategic Audit: A Checklist for Organizational Analysis
a. Synthesis of Internal Factors (IFAS)
SUGGESTED ANSWERS TO MYMANAGEMENTLAB QUESTIONS
5-1. How does the resource-based view of the firm provide a superior means of evaluating a company’s
competitive advantage?
A resource-based approach to organizational analysis highlights the resources of the firm with which it can confront
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