STRATEGIC BUSINESS ANALYSIS threats and to recognize its internal resources, capabilities, and core competencies.

The
▸ Topic 1 | Strategic Management and Strategic Competitiveness results of these analyses influence the selection of the firm’s strategy or strategies. The
‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒‒ strategy portion of the model entails strategy formulation and strategy implementation.
Firms achieve strategic competitiveness by formulating and implementing a With the information gained from external and internal analyses, the firm
value-creating strategy. A strategy is an integrated and coordinated set of commitments develops its vision and mission and formulates one or more strategies. To implement its
and actions designed to exploit core competencies and gain a competitive advantage. strategies, the firm takes actions to enact each one with the intent of achieving strategic
When choosing a strategy, firms make choices among competing alternatives as the competitiveness and above-average returns (performance). Effective actions that take
pathway for deciding how they will pursue strategic competitiveness. In this sense, the place in the context of integrated strategy formulation and implementation efforts result
chosen strategy indicates what the firm will do as well as what the firm will not do. in positive performance. Firms seek to maintain the quality of what is a dynamic
A firm has a competitive advantage when by implementing a chosen strategy, it strategic management process as a means of dealing successfully with ever-changing
creates superior value for customers and when competitors are not able to imitate the markets and evolving internal conditions 12
value the firm’s products create or find it too expensive to attempt imitation. An
organization can be confident that its strategy yields a competitive advantage after 1.1 The Competitive Landscape
competitors’ efforts to duplicate it have ceased or failed. In addition, firms must The fundamental nature of competition in many of the world’s industries is
understand that no competitive advantage is permanent. The speed with which changing. Digitalization, for example, which is the process of converting something to
competitors are able to acquire the skills needed to duplicate the benefits of a firm’s digital form, is a new competitive dimension that is affecting competition in multiple
value-creating strategy determines how long the competitive advantage will last. industries throughout the world. The Apple watch demonstrates “digitalization at its best
Above-average returns are returns in excess of what an investor expects to earn where technology has taken an ordinary watch and introduced technology into it with
from other investments with a similar amount of risk. Risk is an investor’s uncertainty phone capabilities, messaging, and even Internet capabilities.”17
about the economic gains or losses that will result from a particular investment. The Other characteristics of the current competitive landscape are noteworthy.
most successful companies learn how to manage risk effectively;4 doing so reduces Conventional sources of competitive advantage such as economies of scale and large
investors’ uncertainty about the outcomes of their investment.5 Firms often use advertising budgets are not as effective as they once were (e.g., because of social media
accounting-based metrics, such as return on assets, return on equity, and return on sales advertising) in terms of helping firms earn above-average returns. Moreover, the
to assess their performance. Alternatively, firms can assess their performance in terms of traditional managerial mind-set is unlikely to lead a firm to strategic competitiveness.
stock market returns, even monthly returns. (Monthly returns are the end-of-the-period Managers must adopt a new mind-set that values flexibility, speed, innovation,
stock price minus the beginning stock price divided by the beginning stock price, integration, and the challenges flowing from constantly changing conditions.21 The
yielding a percentage return.) In smaller, new venture firms, returns are sometimes conditions of the competitive landscape result in a perilous business world—a world in
measured in terms of the amount and speed of growth (e.g., in annual sales) rather than which the investments necessary to compete on a global scale are enormous and the
more traditional profitability measures6 because new ventures require time to earn consequences of failure are severe.22 Effective use of the strategic management process
acceptable returns (in the form of return on assets and so forth) for investors.7 reduces the likelihood of failure for firms while competing against their rivals.
Understanding how to exploit a competitive advantage is important for firms Hypercompetition is a condition where competitors engage in intense rivalry,
seeking to earn above-average returns.8 Firms without a competitive advantage or those markets change quickly and often, and entry barriers are low. In these environments,
that do not compete in an attractive industry earn, at best, average returns. Average firms find it difficult to maintain a competitive advantage.23 Rivalry in
returns are returns equal to those an investor expects to earn from other investments hypercompetitive environments tends to occur among global competitors who innovate
possessing a similar amount of risk. Over time, an inability to earn at least average regularly and successfully.24 It is a condition of rapidly escalating competition based on
returns results first in decline and, eventually, failure.9 Failure occurs because investors price-quality positioning, competition to create new know-how and establish first-mover
withdraw their investments from those firms earning less-than-average returns. advantage, and competition to protect or invade established product and/or geographic
The strategic management process is the full set of commitments, decisions, markets. In a hypercompetitive market, firms often challenge their competitors
and actions firms take to achieve strategic competitiveness and earn above-average aggressively to strengthen their market position and ultimately, their performance.25
returns (see Figure 1.1).11 The process involves analysis, strategy, and performance (the Specifically how firms challenge each other in hypercompetitive markets varies across
A-S-P model—see Figure 1.1). The firm’s first step in the process is to analyze its time. Recently, for example, Internet giant Tencent Holdings Ltd. of China has become
external environment and internal organization to identify external opportunities and one of the world’s largest technology inves tors. Between 2013 and mid-2018, the firm

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took stakes in 277 startups. Analysts believe this is a calculated strategy to crowd out new global market.39 In addition, a firm’s performance may suffer by entering too many
rivals and to increase profits.26 global markets either simultaneously or too quickly. When this happens, the overall
Several factors create hypercompetitive environments and influence the nature of organization may lack the skills required to manage effectively all of its diversified
the current competitive landscape. The emergence of a global economy and technology, global operations.4
specifically rapid technological change, are two primary drivers of hypercompetitive
environments and the nature of today’s competitive landscape. 1-1b Technology and Technological Changes
Increasingly, technology affects all aspects of how companies operate and as
1.1a The Global Economy such, the strategies they choose to implement. Boston Consulting Group analysts
A global economy is one in which goods, services, people, skills, and ideas move describe technology’s impact as follows: “No company can afford to ignore the impact
freely across geographic borders. Relatively unfettered by artificial constraints, such as of technology on everything from supply chains to customer engagement, and the advent
tariffs, the global economy significantly expands and complicates a firm’s competitive of even more advanced technologies, such as artificial intelligence (AI) and the Internet
environment.27 of Things, portends more far-reaching change.”46
The global economy, which changes rapidly and constantly,28 increases the There are three categories of technology-related trends and conditions affecting
scope of the competitive environment in which companies compete. Because of this, today’s firms: technology diffusion and disruptive technologies, the information age,
firms must study the global economy carefully as a foundation for learning how to and increasing knowledge intensity. As noted in the paragraph above, these categories
position them selves successfully for competitive purposes. have a significant effect on the nature of competition in many industries.

The March of Globalization Technology Diffusion and Disruptive Technologies

Globalization is the increasing economic interdependence among countries and The rate of technology diffusion, which is the speed at which new technologies
their organizations as reflected in the flow of products, financial capital, and knowledge become available to firms and when firms choose to adopt them, is far greater than was
across country borders.35 Globalization is a product of a large number of firms the case a decade or two ago.
competing against one another in an increasing number of global economies. Perpetual innovation is a term used to describe how rapidly and consistently
In globalized markets and industries, firms might obtain financial capital in one new, information-intensive technologies replace older ones. The shorter product life
national market and use it to buy raw materials in another. Firms might then use cycles resulting from these rapid diffusions of new technologies place a competitive
manufacturing equipment purchased in a third national market to produce and deliver premium on being able to introduce quickly new, innovative products into the
products that it sells in a fourth market. Thus, globalization increases the range of marketplace.4
opportunities for companies competing in the current competitive landscape.36 In fact, when products become hard to distinguish because of the widespread and
Overall, globalization has led to higher performance standards with respect to rapid diffusion of technologies, speed to market with innovative products may be the
multiple competitive dimensions, including quality, cost, productivity, product primary source of competitive advantage (see Chapter 5).49 Indeed, some argue that
introduction time, and operational efficiency. In addition to firms competing in the continuous innovations occurring in the global economy drive much of today’s rapid and
global economy, these standards affect firms competing on a domestic-only basis. substantial change. Not surprisingly, an understanding of global standards and of the
Customers will choose to buy a global competitor’s product when it creates superior expectations customers have regarding a product’s functionality inform the nature of
value for them relative to the value created by the domestic firm’s product. Workers now these innovations. Although some argue that large established firms may have trouble
flow rather freely among global economies. This is important in that employees are a innovating, evidence suggests that today these firms are developing radically new
key source of competitive advantage.37 Firms must learn how to deal with the reality technologies that transform old industries or create new ones.
that in today’s competitive landscape, only companies capable of meeting, if not Another indicator of rapid technology diffusion is that commonly, firms gather
exceeding, global standards typically earn above-average returns. information quickly about their competitors’ research and development (R&D) and
Although globalization offers potential benefits to firms, it is not without risks. product decisions, sometimes even within days.53 In this sense, the rate of technological
“Liability of foreignness” is the term describing the risks of competing outside a firm’s diffusion has reduced the competitive benefits of patents.54 Today, patents may be an
domestic markets.38 The amount of time firms usually require to learn to compete in effective way of protecting proprietary technology in a small number of industries such
markets that are new to them is one risk of entering a global market. A firm’s as pharmaceuticals. Indeed, many firms competing in the electronics industry often do
performance can suffer until it gains the knowledge needed to compete successfully in a

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not apply for patents to prevent competitors from gaining access to the technological because of the common occurrence of knowledge spillovers to competitors. Rival
knowledge included in the patent application. companies hiring personnel from a firm results in the knowledge from one firm spilling
Disruptive technologies—technologies that destroy the value of an existing over to another company.72 Because of the potential for spillovers, firms must move
technology and create new markets55—surface frequently in today’s competitive quickly to use their knowledge productively. In addition, firms must find ways for
markets. Think of the new markets created by the technologies underlying the knowledge to diffuse inside the organization such that it becomes available in all places
development of products such as Wi-Fi, iPads, and the web browser and the markets where its use creates value.73 Strategic flexibility helps firms reach these objectives.
advances in artificial intelligence will create. Some believe that these types of products Strategic flexibility is a set of capabilities firms use to respond to various
represent radical or breakthrough innovations (we discuss radical innovations in Chapter demands and opportunities existing in today’s dynamic and uncertain competitive
13).56 A disruptive or radical technology can create what is essentially a new industry or environment. Strategic flexibility involves coping with uncertainty and its accompanying
can harm industry incumbents. However, some industry incumbents adapt to radical risks.74 Firms should try to develop strategic flexibility in all areas of their operations.
innovations from competitors based on their superior resources, experience, and ability However, building strategic flexibility is not an easy task, largely because of inertia that
to gain access to the new technology through multiple sources (e.g., alliances, can build over time. A firm’s focus and past core competencies may actually slow
acquisitions, and ongoing internal research).57 change and strategic flexibility
To be strategically flexible on a continuing basis and to gain the competitive
The Information Age benefits of such flexibility, a firm must develop the capacity to learn. Continuous
Dramatic changes in information technology (IT) continue occurring in the global learning pro vides the firm with new and up-to-date skill sets, which allow it to adapt to
economy. Personal computers, cellular phones, artificial intelligence, virtual reality, its environment as it encounters changes.76 Firms capable of applying quickly what they
massive databases (“big data”), data analytics, and multiple social networking sites are a have learned exhibit the strategic flexibility and the capacity to change in ways that will
few examples of how technological developments permit different uses of information. increase the probability of dealing successfully with uncertain, hypercompetitive
Data and information are vital to firms’ efforts today to understand customers and their environments.
needs and to implement strategies in ways that satisfy those needs as well as the interests
of all other stakeholders. For today’s firms in virtually all industries, IT is an important 1-2 The I/O Model of Above-Average Returns
capability that contributes positively to product innovation efforts58 and may be a The industrial organization (I/O) model of above-average returns explains the
source of competitive advantage as well. Firms failing to harness the power of data and external environment’s dominant influence on the choice of strategy and the actions
information are disadvantaged compared to their competitors.59 associated with it. The logic of the I/O model is that a set of industry characteristics,
including economies of scale, barriers to market entry, diversification, product
Increasing Knowledge Intensity differentiation, the degree of concentration of firms in the industry, and market frictions,
Knowledge (information, intelligence, and expertise) is the basis of technology determine the profitability potential of an industry or a segment of it as well as the
and its application. Today, knowledge is a critical organizational resource and an actions firms should take to operate profitably.78
increasingly valuable source of competitive advantage.63 The shifting of the basis of Grounded in economics, four underlying assumptions explain the I/O model.
competition being on tangible assets to intangible ones such as knowledge began in the First, the model assumes that the external environment imposes pressures and constraints
early 1980s. that determine the strategies that would result in above-average returns. Second, most
Individuals acquire knowledge through experience, observation, and inference. firms competing within an industry or within a segment of that industry are assumed to
Knowledge is an intangible resource (we describe tangible and intangible resources fully control similar strategically relevant resources and to pursue similar strategies in light of
in Chapter 3). The value of firms’ intangible resources, including knowledge, continues those resources. Third, firms assume that their resources are highly mobile, meaning that
increasing as a proportion of total shareholder value.66 Therefore, firms must develop any resource differences that might develop between firms will be short-lived. Fourth,
(e.g., through training programs) and acquire (e.g., by hiring educated and experienced the model assumes that organizational decision makers are rational individuals who are
employees) knowledge, integrate it into the organization to create capabilities, and then committed to acting in the firm’s best interests, as shown by their profit-maximizing
apply it to gain a competitive advantage. behaviors.79
A strong knowledge base is necessary to create innovations. In fact, firms lacking The I/O model challenges firms to find the most attractive industry in which to
appropriate internal knowledge resources are less likely to allocate sufficient financial compete. An assumption supporting the need to find the most attractive industry is that
resources to R&D.71 Firms must continue to use learning to build their knowledge base firms possess the same types of resources with value and that these resources are mobile

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across companies. This means that a firm is able to increase its performance only when it
competes in the industry with the highest profit potential and learns how to use its
resources to implement the strategy required by the industry’s structural characteristics.
The competitive realities associated with the I/O model find firms imitating each other’s
strategies and actions taken to implement them.8
The five forces model of competition is an analytical tool firms use to find the
industry that is the most attractive for them. The model (explained in Chapter 2)
encompasses several variables and tries to capture the complexity of competition. The
five forces model suggests that an industry’s profitability (i.e., its rate of return on
invested capital relative to its cost of capital) is a function of interactions among five
forces: suppliers, buyers, com petitive rivalry among firms currently in the industry,
product substitutes, and potential entrants to the industry.8
Firms use the five forces model to identify the attractiveness of an industry (as
measured by its profitability potential) as well as the most advantageous position for the
firm to take in that industry, given the industry’s structural characteristics.82 The model
suggests that firms can earn above-average returns by producing either standardized
products at costs below those of competitors (a cost leadership strategy) or by producing
differentiated products for which customers are willing to pay a price premium (a
differentiation strategy). We discuss the cost leadership and product differentiation
strategies fully in Chapter 4.
As shown in Figure 1.2, the I/O model suggests that firms earn above-average firm chose to compete. The resource-based model, discussed next, takes a different view
returns by studying the external environment effectively as the foundation for of the major influences on a firm’s choice of strategy.
identifying an attractive industry and implementing an appropriate strategy in it. For
example, in some industries, firms can reduce competitive rivalry and erect barriers to
entry by forming joint ventures. In turn, reduced rivalry increases the profitability
potential of firms that are collaborating.83 Companies that develop or acquire the
internal skills needed to implement strategies required by the external environment are 1-3 The Resource-Based Model of Above-Average Returns
likely to succeed, while those that do not are likely to fail.84 Hence, this model suggests The resource-based model of above-average returns assumes that each
that the characteristics of the external environment influence returns more so than do a organization is a collection of unique resources and capabilities. The uniqueness of
firm’s unique internal resources and capabilities. resources and capabilities is the basis of a firm’s strategy and its ability to earn above-
Research findings support the I/O model because the industry in which a firm average returns.87
competes explains approximately 20 percent of its profitability. However, research also Resources are inputs into a firm’s production process, such as capital equipment,
shows that the firm’s resources and capabilities and the actions taken by using them the skills of individual employees, patents, finances, and talented managers. Firms use
accounts for 36 percent of the variance in firm profitability.85 Thus, managers’ strategic three categories to classify their resources: physical, human, and organizational capital.
actions affect the firm’s performance as do the characteristics of the environment in Described fully in Chapter 3, resources are either tangible or intangible in nature.
which the firm competes.86 These findings suggest that the external environment and a Individual resources alone may not yield a competitive advantage; resources have
firm’s resources, capabilities, core competencies, and competitive advantages (see a greater likelihood of being a source of competitive advantage when integrated to form
Chapter 3) influence the company’s ability to achieve strategic competitiveness and earn a capability. A capability is the capacity for a set of resources to perform a task or an
above-average returns. activity in an integrative manner.88 Core competencies are capabilities that serve as a
As shown in Figure 1.2, the I/O model assumes that a firm’s strategy is a set of source of competitive advantage for a firm over its rivals.89 Core competencies are often
commitments and actions flowing from the characteristics of the industry in which the visible in the form of organizational functions. For example, Apple’s R&D function is
one of its core competencies, as is its ability to produce innovative new products that

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create value for customers. Amazon’s distribution function is a core competence while potential competitors. Resources are costly to imitate when other firms either cannot
information technology is a core competence for Walmart. obtain them or are at a cost disadvantage in obtaining them compared with the firm that
According to the resource-based model, differences in firms’ performances across already possesses them. They are non-substitutable when they have no structural
time are due primarily to their unique resources and capabilities rather than the equivalents. Over time, competitors find ways to imitate value-creating resources or to
industry’s structural characteristics. This model also assumes that firms acquire different create new resources that yield a different type of value that creates value for customers.
resources and develop unique capabilities based on how they combine and use the Therefore, it is difficult to achieve and sustain a competitive advantage based on
resources; that resources and certainly capabilities are not highly mobile across firms; resources alone. Firms integrate individual resources to develop configurations of
resources with the potential to build capabilities. Capabilities developed in this manner
have a stronger likelihood of becoming a core competence and of leading to a source of
competitive advantage.93
Previously, we noted that research shows that both the industry environment and
a firm’s internal assets affect its performance over time.94 Thus, to form a vision and
mission, and subsequently to select one or more strategies and determine how to
implement them, firms use both the I/O and resource-based models. In fact, these models
complement each other in that one (I/O) focuses outside the firm while the other
(resource-based) focuses inside the firm. Next, we discuss the formation of a firm’s
vision and mission—actions taken after the firm understands the realities of its external
environment (Chapter 2) and internal organization (Chapter 3).

1-4 Vision and Mission

1-4a Vision
Vision is a picture of what the firm wants to be and, in broad terms, what it wants
to achieve.95 Thus, a vision statement articulates the ideal description of an organization
and gives shape to its intended future. In other words, a vision statement points the firm
in the direction of where it would like to be in the years to come. An effective vision
stretches and challenges people as well.
As a reflection of values and aspiration, firms hope that their vision statement
and that the differences in resources and capabilities are the basis of competitive will capture the heart and mind of each employee and, hopefully, other stakeholders as
advantage.90 Through continued use, capabilities become stronger and more difficult for well. A firm’s vision tends to be enduring while its mission can change with new
competitors to under stand and imitate. As a source of competitive advantage, a environmental conditions. A vision statement tends to be relatively short and concise,
capability must not be easily imitated but also not too complex to understand and making it easily remembered.
manage. As a firm’s most important and prominent strategic leader, the CEO is
We show the resource-based model of superior returns in Figure 1.3. This model responsible for working with others to form the firm’s vision. Experience shows that the
suggests that the strategy the firm chooses should allow it to use its competitive most effective vision statement results when the CEO involves a host of stakeholders
advantages in an attractive industry (firms use the I/O model to identify an attractive (e.g., other top level managers, employees working in different parts of the organization,
industry). suppliers, and customers) to develop it.97 Conditions in the firm’s external environment
Not all of a firm’s resources and capabilities have the potential to be the and internal organization influence the forming of a vision statement. Moreover, the
foundation for a competitive advantage. This potential is realized when resources and decisions and actions of those involved with developing the vision, especially the CEO
capabilities are valuable, rare, costly to imitate, and non-substitutable.92 Resources are and the other top-level managers, must be consistent with it.
valuable when they allow a firm to take advantage of opportunities or neutralize threats 1-4b Mission
in its external environment. They are rare when possessed by few, if any, current and
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 The vision is the foundation for the firm’s mission. A mission specifies the Managers must find ways to either accommodate or insulate the organization from the
businesses in which the firm intends to compete and the customers it intends to serve.98 demands of stakeholders controlling critical resources.106
The firm’s mission is more concrete than its vision. However, similar to the vision, a
mission should establish a firm’s individuality and should be inspiring and relevant to all 1-5a Classifications of Stakeholders
stakeholders. Together, the vision and mission provide the foundation the firm needs to Firms can separate the parties involved with their operations into at least three
choose and implement one or more strategies. The probability of forming an effective groups.107 As shown in Figure 1.4, these groups are the capital market stakeholders
mission increases when employees have a strong sense of the ethical standards that (shareholders and the major suppliers of a firm’s capital), the product market
guide their behaviors as they work to help the firm reach its vision.99 Thus, business stakeholders (the firm’s primary customers, suppliers, host communities, and unions
ethics are a vital part of the firm’s discussions to decide what it wants to become (its representing the workforce), and the organizational stakeholders (all of a firm’s
vision) as well as who it intends to serve and how it desires to serve those individuals employees, including both non-managerial and managerial personnel).
and groups (its mission).100 The most obvious stakeholders, at least in U.S. organizations, are shareholders—
Even though the final responsibility for forming the firm’s mission rests with the individuals and groups who have invested capital in a firm in the expectation of earning
CEO, the CEO and other top-level managers often involve other people to develop the a positive return on their investments. Laws governing private property and private
mission statement. The main reason for this is that the mission deals more directly with enterprise are the source of shareholders’ rights.
product markets and customers. Compared to a firm’s senior-level leaders, middle- and In contrast to shareholders, another group of stakeholders—the firm’s customers
first-level managers and other employees interact frequently with customers and the — prefers that investors receive a minimum return on their investments. Customers
markets the firm serves. could have their interests maximized when the quality and reliability of a firm’s products
Clearly, ineffectively developed vision and mission statements fail to provide the are improved, but without high prices. High returns to customers, therefore, might come
direction a firm needs to take appropriate strategic actions. This is undesirable in that as at the expense of lower returns for capital market stakeholders.
shown in Figure 1.1, a firm’s vision and mission are critical aspects of the analysis and Because of potential conflicts, firms seek to manage stakeholders’ expectations.
the base required to engage in strategic actions that help the firm achieve strategic
competitiveness and earn above-average returns. Therefore, firms must accept the
challenge of forming effective vision and mission statements.

1-5 Stakeholders
Every organization involves a system of primary stakeholder groups with whom
it establishes and manages relationships.101 Stakeholders are individuals, groups, and
organizations that can affect the firm’s vision and mission, are affected by the strategic
out comes achieved, and have enforceable claims on the firm’s performance.102 Their
ability to withhold participation that is essential to the firm’s survival, competitiveness,
and profitability is the source of stakeholders’ ability to enforce their claims against an
organization. Stakeholders continue to support an organization when its performance
meets or exceeds their expectations. Research suggests that firms managing relationships
with their stakeholders effectively outperform those that do not.103 Stakeholder
relationships and the firm’s overall reputation among stakeholders can therefore be a
source of competitive advantage.1
Although organizations have dependency relationships with their stakeholders,
firms are not equally dependent on all stakeholders at all times. Unequal dependencies
means that stakeholders possess different degrees of ability to influence an
organization.105 The more critical and valued is a stakeholder’s participation, the First, a firm must identify and then seek to understand fully each stakeholder group’s
greater is a firm’s dependency on that stakeholder. Greater dependence, in turn, gives the interests. Second, it must prioritize those interests in case it cannot satisfy all of them.
stakeholder more potential influence over a firm’s commitments, decisions, and actions. Power is the most critical criterion in prioritizing stakeholders; that is to say, the

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stakeholder group with whom the firm has the greatest dependence for its commitment of debt used). Large shareholders often prefer that the firm minimize its use of debt
has the greatest amount of power to influence the firm’s actions.109 because of its risk, its cost, and the possibility that debt holders have first call on the
When earning above-average returns, the firm is in a better position to manage firm’s assets relative to share holders in case of default.112 Because of their importance
stakeholder relationships effectively. With the capability and flexibility provided by in terms of supporting needs for capital, firms typically seek to find ways to better
above-average returns, a firm can satisfy multiple stakeholders more easily. When the satisfy the expectations of capital market stakeholders.
firm earns only average returns, it is unable to maximize the interests of all stakeholders.
The objective then becomes that of satisfying each stakeholder group’s minimal Product Market Stakeholders
expectations. Some might think that product market stakeholders (customers, suppliers, host
Stakeholders receive different levels of attention in light of how dependent the com munities, and unions) share few common interests. However, these four groups can
firm is on their support at a point in time. For example, environmental groups may be benefit as firms engage in competitive battles. For example, depending on product and
very important to firms in the energy Africa Studio/[Link] As a firm industry characteristics, marketplace competition may result in lower product prices for
formulates its strategy, it must consider all of its primary stakeholders in the product and a firm’s customers and higher prices for its suppliers (the firm might be willing to pay
capital markets as well as organizational shareholders. industry but less important to higher supplier prices to ensure delivery of the products linked to its competitive
professional service firms. A firm earning below-average returns lacks the capacity to success).113
satisfy the minimal expectations of all stakeholder groups. The managerial challenge in Customers, as stakeholders, seek reliable products at the lowest possible prices.
this case is to make trade-offs that minimize the amount of support lost from Suppliers seek loyal customers who are willing to pay the highest sustainable prices for
stakeholders. Societal values also influence the general weightings allocated among the the products they receive. Although all product market stakeholders are important,
three stakeholder groups shown in Figure 1.4; that is to say that cultural norms and without customers, the other product market stakeholders are of little value. Therefore,
institutional rules, regulations, and laws influence how firms inter act with stakeholders the firm must try to learn about and understand current and potential customers.
in different countries and regions of the world. Next, we present additional details about Host communities include the national (home and abroad), state/province, and
each of the three major stakeholder groups. local government entities with which the firm interacts. Governments want companies
willing to be long-term employers and providers of tax revenue without placing
Capital Market Stakeholders excessive demands on public support services. These stakeholders also influence the
Shareholders and lenders both expect a firm to preserve and enhance the wealth firm through laws and regulations. In fact, firms must deal with laws and regulations
they have entrusted to it. The returns they expect are commensurate with the degree of developed and enforced at the national, state, and local levels (the influence is
risk they accept with those investments (i.e., lower returns are expected with low-risk polycentric—multiple levels of power and influence). This means that firms encounter
investments while higher returns are expected with high-risk investments). Dissatisfied influence attempts from multiple regulatory sources with power.114 The interests of
lenders may impose stricter covenants on subsequent borrowing of capital. Dissatisfied unions include secure jobs and desirable working conditions for members.
share holders may reflect their concerns through several means, including selling their In an overall sense, product market stakeholders are generally satisfied when a
stock. Institutional investors too (e.g., pension funds, mutual funds) may choose to sell firm’s profit margin reflects at least a balance between the returns to capital market
their stock if the returns fail to meet their expectations. stakeholders (i.e., the returns lenders and shareholders will accept and retain their
Alternatively, as stakeholders, these investors might take actions to improve the interests in the firm) and the returns in which they share.
firm’s performance. Communicating clearly their expectations regarding performance to
the firm’s board of directors and top-level managers is an example of such actions.110 Organizational Stakeholders
Some institutions owning major shares of a firm’s stock may have conflicting views of Employees—the firm’s organizational stakeholders—expect the firm to provide a
the actions needed, which can be challenging for the firm’s managers. This is because dynamic, stimulating, and rewarding work environment. Employees generally prefer to
some may want an increase in returns in the short-term while the others desire a focus on work for a company that is growing and in which they can develop their skills,
building long term competitiveness.111 In these instances, managers may need to especially those required to be effective team members and to meet or exceed global
balance their desires with those of other shareholders or prioritize the importance of the work standards. Workers who learn how to use new knowledge productively are critical
institutional owners with different goals. Clearly, shareholders who hold a large share of to organizational success. In a collective sense, the education and skills of a firm’s
stock (sometimes referred to as blockholders, see Chapter 10) are influential, especially workforce are competitive weapons affecting strategy implementation and firm
in determining the firm’s capital structure (i.e., the amount of equity versus the amount performance.115

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 Those leading a firm bear responsibility for serving stakeholders’ needs on a day- unique and valuable. Its culture encourages employees to work hard but also to have fun
to-day basis. Using the firm’s human capital successfully supports leaders’ efforts to do while doing so. Moreover, its culture entails respect for others—employees and
this.116 International assignments facilitate efforts to help a firm’s employees customers alike. The firm also places a premium on service, as suggested by its
understand competition in the global competitive landscape. “Expats” is the title given to commitment to provide POS (Positively Outrageous Service) to each customer.
individuals engaged in an international assignment for their company. The process of
managing expatriate employees so they develop knowledge while work ing 1-6a The Work of Effective Strategic Leaders
internationally and understand how to bring that knowledge with them upon return has Perhaps not surprisingly, hard work, thorough analyses, a willingness to be
the potential to enhance the firm’s performance at the domestic and inter national brutally honest, a penchant for wanting the firm and its people to achieve success, and
levels.117 tenacity are prerequisites to an individual’s success as a strategic leader. Individuals
become top-level leaders because of their capabilities (their accumulation of human
1-6 Strategic Leaders capital and skills over time). Effective top management teams (those with better human
Strategic leaders are people located in different areas and levels of the firm capital, management skills, and cognitive abilities) make better strategic decisions.124 In
using the strategic management process to select actions that help the firm achieve its addition, strategic leaders must have a strong strategic orientation while embracing
vision and fulfill its mission. Regardless of their location in the firm, successful strategic change in today’s dynamic competitive landscape.125 To deal with change effectively,
leaders are decisive, committed to nurturing those around them, and committed to strategic leaders must be innovative thinkers and promote innovation in their
helping the firm create value for all stakeholder groups.118 In this vein, research organization.126 A top management team representing different types of expertise and
evidence suggests that employees who perceive that their CEO is a visionary leader also leveraging relationships with external parties promotes firm innovation.127 Strategic
believe that the CEO leads the firm to operate in ways that are consistent with the values leaders can best leverage partnerships with external parties and organizations when their
of all stakeholder groups rather than emphasizing only maximizing profits for organizations are ambidextrous; that is, when they are both innovative and skilled at
shareholders. In turn, visionary leadership motivates employees to expend extra effort, execution.128 In addition, strategic leaders need to have a global mind-set; some
thereby helping to increase firm performance. consider this mind-set as an ambicultural approach to management.129 Strategic leaders,
When identifying strategic leaders, most of us tend to think of CEOs and other regardless of their location in the organization, often work long hours, and ambiguous
top level managers. Clearly, these people are strategic leaders. In the final analysis, decision situations dominate the nature of their work. However, the opportunities
CEOs are responsible for making certain their firm uses the strategic management afforded by this work are appealing and offer exciting chances to dream and to act.
process success fully. The pressure on CEOs today to manage strategically is stronger As a term, vision describes a dream that challenges and energizes a company.
than ever.119 However, many others help choose a firm’s strategy and the actions to The most effective strategic leaders provide a vision as the foundation for the firm’s
implement it.120 The reason for this is that the realities of twenty-first century mission and subsequent choice and use of one or more strategies.131
competition mentioned earlier in this chapter (e.g., the global economy, globalization, We describe the work of some strategic leaders in the Strategic Focus. While
rapid technological change, and the increasing importance of knowledge and people as reading this material, notice the relationship between the points mentioned in this part of
sources of competitive advantage) create a need for those “closest to the action” to play a the chapter about strategic leaders and the actions highlighted in the Strategic Focus.
role in choosing and implementing the firm’s strategy. In fact, all managers (as strategic Strategic leaders work in all parts of an organization; however, in this Strategic Focus,
leaders) must think globally and act locally.121 Thus, the most effective CEOs and top- top-level leaders are the focus of the discussion.
level managers understand how to delegate strategic responsibilities to people As you will see, the work of upper-level strategic leaders is indeed challenging,
throughout the firm who influence the use of organizational resources. Delegation also com plex, and ambiguous in nature. On the other hand, these individuals play a major
helps to avoid managerial hubris at the top and the problems it causes, especially in role in the making of a firm’s competitive decisions—the types of decisions that are a
situations allowing significant managerial discretion.122 part of their use of the strategic management process.
Organizational culture also affects strategic leaders and their work. In turn,
strategic leaders’ decisions and actions shape a firm’s culture. Organizational culture
refers to the complex set of ideologies, symbols, and core values that individuals
throughout the firm share and that influence how the firm conducts business.
Organizational culture is the social energy that drives—or fails to drive—the
organization.123 For example, many believe that the culture at Southwest Airlines is

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