Strategic Management And Business Policy : Globalization, Innovation And Sustainability, 15th Edition Solution Manual

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PART ASUGGESTIONS FOR TEACHINGSTRATEGIC MANAGEMENT

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SUGGESTIONS FOR TEACHING STRATEGIC MANAGEMENTStrategic management...Business policy...Strategy.Whatever its name,it’stypically considered a“capstone”course in most business schools.Its primary job is to examine a businessfirmas a whole and to integrate the variousfunctional disciplines.It generally includes industry analysis and competitive strategy with a healthy dose of SWOTanalysis.It may also include corporate governance and/or social responsibility and ethics, depending upon theinstructor.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 strongproponents 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 theundergraduate 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 analyzetheoretical concepts.In a strategy course, however, the emphasis is typicallyon developing integrative and problem-solving skills.This is a weakness of the lecture/discussion approach.Thesimulation, in contrast, is an excellent method to develop these skills and to put learning in the hands of thestudent rather than in the hands of the instructor.It also emphasizes strategy implementation, an aspect of strategicmanagement often receiving little emphasis in most strategy courses.Its weaknesses include turning the instructorfrom a teacher into an administrator.If teams are used, there is a strong tendency for students to let the“computergeeks”take charge of decision making as the objective turns from strategy making to“playing the game.”The Case MethodThe most popular as well as the most perceived effective approach to teaching strategic management is the casemethod.Its strengths include a real-world orientation (believed to generate student involvement) and the abilitytofocus on developing decision-making skills by taking an integrative and conceptual, yet action-oriented approach.Thismethod may not go well, however,if the instructor is inexperienced in the use of cases and/or the students arenot motivated to do more than a superficial reading of the cases.A capable case instructor must be able to force thetypical 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, ifeveryone 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,aninstructor new to the case method must ensure that students truly understand that the best solution to any caseproblem isnot(a) the one the instructor mentions, (b) what the company actually did, or (c) the most obvioussolution.The best solution comes from the best analysis.This means that the instructor must work hard to ensurethat students don’t take the easy route by merely stating the symptoms as if they were underlying problems andgoing immediately to their desired solution without regard for other alternatives.Possible CourseSyllabusand OutlinesA number of policy instructors, including us, have a strong bias in favor of 75-minuteclasses meeting twice a week.Open class discussion or oral presentations of complex strategy cases usually require at least an hour’s worth oftime.Given the usual rigmarole involved in starting and ending a class, it is very difficult to handle a case well in a50-minute period unless the case is analyzed over two class sessions.The course outlines you see below have beendeveloped with generic activities. Instructors should explore MyManagementLab to review all possible activities inwhich students can participate.One other variable, which complicates the development of a course outline, is the decision concerning the timing ofthe lectures on strategic management.Some instructors choose to spend the first part of theircourse lecturing overthe book while the students quickly read the chapters.Others attempt to intersperse lectures with case discussions orpresentations.The key question seems to be:How much information do students need before they can competently

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analyze their first comprehensive strategic management case?This is completely up to the instructor.We believethat a use of the strategic audit will help students to competently analyze their first comprehensive case even if theyhave not gone beyond corporate strategy in Chapter7.We have found this pointto be a good time to begin oralpresentations, for example.The first caseshould, however, emphasize strategy formulation over implementation andbe reasonably easy to analyze with each following case increasing in difficulty.

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SAMPLECOURSESYLLABUSCOURSETITLE:STRATEGICMANAGEMENT————————————————————————————————————Class Times & Location:Course Web Site:Instructor Information:Office & Office Hours:————————————————————————————————————COURSEDESCRIPTION:This course serves asacohesive map for strategic management.It is designed to integrate theaccepted theories in the area with real-world applications to provide students with the basicknowledge and skills needed forstrategic management. Lecture and class assignments given inthe course are intended to help students understand the needs of modern public and privateorganizations, including emerging national and international trends.COURSEOBJECTIVESBy the end of the course, students should be able tounderstand the basic elements of planningand implementing strategy.RESOURCESTEXTBOOK:Strategic Management and Business Policy:Globalization, Innovation, andSustainability, 15thEdition byT. Wheelen,J. Hunger,A. Hoffman, and C. Bamford.SOFTWARE:MyManagementLab (This is an optional resource, seewww.mymanagementlab.comfor more information.)LIBRARY&INTERNETRESOURCES:Students are encouraged to use the university libraryand theInternet for research and to complete assignments when necessary.COURSECOMPONENTSEXAMS: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 applicationsassigned in the text. The goal is for students to apply the information discussed to thesereal-world situations to the concepts and principles presented in the course.IN-CLASSEXERCISES: Throughout the semester, students are expected to be prepared todiscuss issues relevant to the course and to participate in team exercises.For theseexercises, students will be required to be actively involved to receive credit—forexample,making substantive comments, answering questions, and preparing shortpresentations.Points will be awarded by the instructor based on individual and groupparticipation. Students should bring their textbook to class as part of their participationgrade.Material for in-class assignments can be found at the conclusion of eachchapter—–see Ethical Dilemmas and Team Exercises.

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GRADINGPercentagePointsIn-Class Exercises/Participation10%50Case Assignments(4 at 25 points each)20%100Exam(s)50%250Final Exam20%100TOTAL POINTS500NOTE:Class attendance and participation in class discussion is expected and absenceswill affect your final grade.The due dates for assignments are non-negotiable and late work will bepenalized.All assignments are to be professional in appearance and typed to receive fullcredit.COURSE POLICIESCLASSROOMBEHAVIOR: Classroom behavior that interferes with either the instructor’s ability toconduct 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 totalpoints in the course, or if the situation warrants,be reprimanded to the university’s committee onstudent discipline.ACADEMICHONESTY ANDAPPEALS:Students are expected to maintain the highest standards ofacademic integrity.Behavior that violates these standards is not acceptable. Examples are theuse of unauthorized material, communication with fellow students during an examination,attempting to benefit from the work of another student,and similar behaviorthatdefeats theintent of an examination or other class work. Cheating on exams, plagiarism, improperacknowledgement of sources in essays, and the use of a single essay or paper in more thanone course without permission are considered very serious offences and shall be grounds fordisciplinary action as outlined in the current General Catalogue.

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COURSEOUTLINE16-WEEKCOURSE:SEMESTERWeekAssignedReadingGeneric Activities—seeMyManagementLab for actualactivities that correspond with thistext1Chapter 1Basic Conceptsof StrategicManagementModuleManagementStrategyIn-class discussion:Strategy(Chapter 1)2Chapter 2Corporate GovernanceIn-class exercise:Building Constraints(Chapter 2)3Chapter 3Social Responsibilityand Ethics inStrategic ManagementCase #1 (Chapter 3)4Chapter 4Environmental Scanning andIndustry AnalysisIn-class discussion:Scanning(Chapter4)5Chapter 5Organizational AnalysisandCompetitive AdvantageIn-class discussion: Working with Apple6Chapter 6StrategyFormulationandBusiness StrategyCase #2 (Chapter 6)7Exam 18Chapter 7Strategy Formulation: CorporateStrategyIn-class discussion: Corporations NeedDirection (Chapter 7)9Chapter 8Strategy Formulation: FunctionalStrategyand Strategic ChoiceCase #1 (Chapter8)10Chapter9Strategy Implementation: GlobalStrategyIn-class discussion: SuccessfulExpatriates11Chapter10Strategy Implementation:Organizing and StructureIn-classexercise:TeamBuilding(Chapter10)12Chapter11Strategy Implementation:Staffing and DirectingCase #2:Hiring Decisions(Chapter11)13Chapter12Evaluation and ControlIn-class exercise:Evaluating theEvaluation (Chapter 12)14Chapter13Suggestions for Case AnalysisIn-class discussion:Using Financials(Chapter 13)15Putting It All TogetherCase PresentationFinal Exam

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COURSEOUTLINE12-WEEKCOURSE:SEMESTERWeekAssignedReadingGeneric Activities—seeMyManagementLab for actualactivities that correspond with thistext1Chapter 1Basic Conceptsof StrategicManagementModuleManagementStrategyIn-class discussion:Strategy(Chapter 1)2Chapter 2Corporate GovernanceIn-class exercise:Building Constraints(Chapter 2)3Chapter 3Social Responsibilityand Ethics inStrategic ManagementCase #1 (Chapter 3)4Chapter 4Environmental Scanning andIndustry AnalysisIn-class discussion:Scanning(Chapter4)5Chapter 5Organizational AnalysisandCompetitive AdvantageIn-class discussion: Working with Apple6Chapter 6StrategyFormulationandBusiness StrategyCase #2 (Chapter 6)7Chapter 7Strategy Formulation: CorporateStrategyExam 18Chapter 8Strategy Formulation: FunctionalStrategyand Strategic ChoiceIn-class exercise: Developing Synergy(Chapter 8)9Chapter9Strategy Implementation:GlobalStrategyChapter 10Strategy Implementation:Organizing and StructureCase #1 (Chapter10)10Chapter11Strategy Implementation:Staffing and DirectingIn-class exercise:TeamBuilding(Chapter11)11Chapter12Evaluation and ControlCase #2:Developing Controls(Chapter12)12Chapter13Suggestions for Case AnalysisPuttingIt All TogetherFinal Exam

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PART BCHAPTER NOTES

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CHAPTER ONEBASIC CONCEPTS OF STRATEGIC MANAGEMENTThis chapter sets the stage for the study of strategic managementand business policy.Itsummarizes researchsupporting the conclusion that those corporations thatare able to learn from their experiences andmanagestrategically perform at a higher level than corporationsthatdo not.It describes a number of triggering eventsthatact to initiate strategic change in most organizations.A normative model of strategic management is presented as thebasic 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 OBJECTIVES1.Discussthe 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 theactivities where learning organizations excel.5.Describethe basic model of strategic management and its components.6.Identify some common triggering events that act as stimuli for strategic change.7.Explainstrategicdecision-makingmodes.8.Use the strategic audit as a method of analyzing corporate functions and activities.TOPICS OUTLINE COVERED1.The Study of Strategic Managementa.Phases of Strategic Managementb.Benefits of Strategic Management2.Globalization, Innovation, and Sustainability: Challenges to Strategic Managementa.Impact of Globalizationb.Impact of Innovationc.Impact of Sustainability3.Theories of Organizational Adaptation4.Creating a LearningOrganization5.Basic Model of Strategic Managementa.Environmental Scanningb.Strategy Formulationc.Strategy Implementationd.Evaluation and Controle.Feedback/Learning Process6.Initiation of Strategy: Triggering Events7.Strategic DecisionMakinga.What Makes a Decision Strategicb.Mintzberg’s Modes of Strategic DecisionMakingc.Strategic Decision-Making Process: Aid to Better Decisions8.The Strategic Audit: Aid to Strategic Decision MakingSUGGESTED ANSWERS TOMYMANAGEMENTLABQUESTIONS1-1.How do the three elements of globalization, innovation, and sustainability impact your understandingof 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 acompany 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 ofbusiness practices that focus on the triple bottom line for an organization. Each of these is a new frontier that isimpacting 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.Althoughthere is legitimate crossover between the two, how would you characterizethe issues involved in each effort?There are four basic phases of strategic management. Phase 1 is basic financial planning, phase 2 is forecast-basedplanning, phase 3 is externallyoriented strategic planning, and phase 4 is strategic management. Phases 1, 2, and 3are all considered part of the formulation category. Each of these stages suggests the need to scan the internal andexternal 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 theorganization is enlisted to support the strategic goals.SUGGESTED ANSWERS TO DISCUSSION QUESTIONS1-3.Why has strategic management become so importantin 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, andprocesses has positive effects on the organization’s performance.The three most highlyrated benefits of strategicmanagement are a clearer sense of a firm’s strategic vision, a sharper focus on what is strategically important, and animproved understanding of a rapidly changing environment.As the world’s environmentcontinually changes andbecomes increasingly complex, strategic management is used by today’s corporations as one way to make theenvironment more manageable.1-4.How does strategic management typically evolve in acompany?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 intoexternallyoriented planning, and finally into a full-blown strategic management system.The evolution is most likelycaused by increasing change and complexity in the corporation’s external environment.The phases are thus likely tobe characterized by a change from primarily an inward-looking orientation in the first phase to primarily anoutward-looking orientation in the third phase, and to a more integrative orientation in the final strategicmanagement 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 moretraditional top-down approach in which strategic planning is primarily done by top management?Simply put, a learning organization isone thatis able to learn from its experiences.In reality, it is much morecomplicated.The text points out that learning organizations are skilled at four main activities:(1) systematicproblem solving;(2) experimenting with new approaches;(3) learning from their own experience and past history aswell asfrom the experiences of others;and (4) transferring knowledge quickly and efficiently throughout theorganization.This means that people at all levels, not just top management, need to be involved in strategicmanagement—by helping to scan the environment for critical information, suggesting changes to strategies andprograms to take advantage of environmental shifts, and working with others to continuously improve workmethods, procedures, and evaluation techniques.Research indicates that those organizations that are willing toexperiment and able to learn from their experiences are more successful thanthose thatdo not.Top-down strategic management assumes that only top management is in a position to contribute to strategicplanning.This approach can work reasonably well inabureaucratic organization with very little horizontalcommunication.Top-down strategic planning forces all units to get involved in the planning process and makes surethat 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 toplease the boss.The likelihood of fresh, new strategic concepts at lower levels of the organization becomes less, themore the stimulus for strategic planning comes from above.1-6.Why are strategic decisions different from otherkindsof decisions?Strategic decisions deal with the long-run future of the entire organization and have threecharacteristics thatdifferentiate them from other types of decisions:(1)theyarerare—strategicdecisions are unusual and typicallyhave no precedent to follow; (2)theyareconsequential—strategicdecisions commit substantial resources anddemand a great deal of commitment;and(3)theyaredirective—strategicdecisions set precedents for lesserdecisions and future actions throughout the organization.SeeTop Decisions:Strategic Decision-Making inOrganizationsby 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 adaptivemodes?The planning mode is generally superior to the entrepreneurial and adaptive modes when the organization is fairlylarge, when knowledge is spread throughout the organization, and when the organization has at least a moderateamount of time to engage in strategic planning.The book proposes that the planning mode is more rational and thusa better way of making most strategic decisions.It may not, however, always be possible.The entrepreneurial modecan bevery useful when time is short, whenone person or group is able to grasp the essentials of the business and itsenvironment, 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 fallbackmode when entrepreneurial or planning modes can’t operate effectively because of political infighting or lethargy.ADDITIONAL DISCUSSION QUESTIONSFOR INSTRUCTORSThese 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 in1994 to suggest that organizations do pay attention to three different bottom lines. These include: (1) Traditionalprofit/loss;(2) People Account—social responsibility of the organization;and (3) Planet Account—theenvironmental 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 theworld. LEED certification is available to buildings that are created to be self-sustaining, with little impact on theenvironment.A1-2.What is meant by ahierarchy 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, eachlevel of strategy forms the strategic environment of the next level in the corporation.This means that corporate levelobjectives, 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 thecorporate level.The same is true of functionaldepartments thatmust operate within the objectives, strategies, andpolicies 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 businessstrategy aims at improving the competitive position of a business firm’s products or services in a specific industry ormarket segment.Firms must therefore have business strategies even if they are not organized on the basis ofoperating 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 theexternal and internal environments of the corporation.This includes general forces in the societal environment aswell as the more easy-to-identify groups such as customers and competitors in the task environment.A corporationneeds to have this information in order to identify a need it can fulfill via its corporate mission.It is also important tohave information on the corporation’s structure, culture, and resources.A corporation needs to have this informationin 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 opportunitiesand threats.Long-term strategies can be designed with these in mind.A1-5.Reconcile the strategicdecision-makingprocess depicted in Fig. 1.5 with the strategic managementmodel depicted in Fig. 1.2.The strategic management model depicts the key input variables (internal and external environments) and the keyoutput factors (mission, objectives, strategy, and policies).It shows how strategy formulation, implementation, andevaluation and control are related,and how a change in any one factor (e.g., corporate objectives) affects otherfactors (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 strategicdecision-makingmodeldepicts how the process of strategic management happens in the form of strategic decisions.It is a series ofinterrelated activities depicted as eight distinct steps.These two models therefore complementeach otherand arevery useful in increasing one’s understanding of strategic management.SUGGESTIONS FOR STRATEGIC PRACTICE EXERCISEThis 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 areseen 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 thedecision making, the authors suggest an eight stepdecision-makingprocess.Found on page 25in the text, these include: (1) evaluating current performance results;(2)reviewing corporate governance;(3) scanning and assessing the external environment;(4) scanning and assessingtheinternal corporate environment;(5) analyzing the strategic factors;(6) generating and selectingthe bestalternative strategy;(7) implementing selected strategies;and (8) evaluating implementedstrategies. Theseguidelines formaking 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 forthat company. As pointedout by Malcolm Gladwell in his bookThe Tipping Point, it is the collection of thousandsof decisions all aimed in relatively the same directionthat can lead a company to the achievement ofa strategy. Howdo you decidewhat type of decision is strategic?Open today’s issue ofThe Wall Street Journaland 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 thesedecisions? 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 exerciseserves two purposes.It gets everyone up to speed in terms of identifying “real-world” strategic decisions.It alsoforces them to re-read Chapter1to get a solid understanding of what differentiates a good from a poor strategicdecision.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 thenuse the second day to discuss Chapter1and the various strategicdecisions people have found.This is a good way to encourage student participation in the class.

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CHAPTER TWOCORPORATE GOVERNANCEThis chapter describes the basic governance mechanisms of the corporation: the board of directors and topmanagement.These are the people who are primarily tasked with the strategic management process if thecorporation is to have long-term success in accomplishing its mission.The responsibilities of both are described andexplained.It proposes a board of directors’ continuum on which boards can be placed in terms of their involvementin strategic management.Agency theory is contrasted with stewardship theory.The chapter explainshow thecomposition of the board can affect both its performance and that of the corporation.It also describes the impact ofthe Sarbanes-Oxley Act on corporate governance in the United Statesand trends in corporate governance around theworld.Top management is discussed in terms of executive leadership, strategic vision, and managing the strategicplanning process.LEARNING OBJECTIVES1.Describe the role and responsibilities of the board of directors in corporate governance.2.Explainhow 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 COVERED1.Role of the Board of Directorsa.Responsibilities of the Boardb.Board of DirectorsCompositionc.Nomination and Election of Board Membersd.Organization of the Boarde.Impact of the Sarbanes-Oxley Act on U.S.Corporate Governancef.Improving Governanceg.Evaluating Governanceh.Avoiding Governance Improvementsi.Trends in Corporate Governance2.The Role of Top Managementa.Responsibilities of Top ManagementSUGGESTED ANSWERS TOMYMANAGEMENTLABQUESTIONS2-1.What are the roles and responsibilities of an effective and activeboardofdirectors?The board of directors is required by law to direct the affairs of the corporation, but not to manage them. Stuart haswrittenthat a board is responsible for(1) effective leadership, (2) strategy of the organization, (3) the balance of riskand initiative, (4) succession planning, and (5) sustainability. The role of the board is to carry outthree 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 setforth. There are several red flags that would indicate the need for oversight of a management team. When thecorporate 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 topmanagement team, oversight may be called for.

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SUGGESTED ANSWERS TO DISCUSSION QUESTIONS2-3.When does a corporationneed a board of directors?Aboard of directors is needed to protect the interests of the corporation’s owners, its shareholders.By law, when acompany incorporates, it must have a board of directors—evenif the stock is heldonlyby the founder and his/herspouse.A good case can be made that asmall,closelyheld corporation has no need fora board.Becausethe ownersare likely to compose both top management and board membership, the board becomes superfluous at best,and mayeven create more problems thanit solves by getting in the way ofmanagement’squick response to opportunities andthreats.The board meets only to satisfy legal requirements.Evenwhen stock is more widely ownedin a publiclyheld corporation, the board may be composed of nothing but a few insiders who occupy key executivepositions andafewfriendlyoutsiders who go along with the CEO on all major issues.Nevertheless, the rationale for the board ofdirectors seems to be changing from simply one of safeguarding stockholder investments to a broader role ofbuffering the corporation from its task environment and forcing management to manage strategically.If nothingelse, the board can do the corporation a great service by simply offeringtop management a different point of view.Theboard’sconnections to key stakeholders in thecorporation’stask environment can also provide invaluableinformation for strategicdecision making.This is themainreason why advisory boards are often used by companiesthatare not incorporated and thus have no shareholders.2-4.Who should and should not serve on a board of directors? What about environmentalists or unionleaders?This is a wide-open question with no simple answer.Some may argue that representatives from each stakeholdergroup in thecorporation’stask environment should be included so as to keep top management aware of keyenvironmental 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 tohelp make strategic decisions.This is the point of view taken in the United Statesby the Sarbanes-Oxley Act.Agood 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 memberwhoisan employee of the corporation or an employeeof another corporation?If the firm is not unionized, what then?Further discussion can be generated by suggestingthat the composition of the board reflectsthe key demographics of thecorporation’sworkforce in terms of race, sex,and age.Environmentalists could provide excellent information to top management, but could be a problem if theyargue 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 ofagency andstewardship theories.Agency theorysuggests that insiders should be kept to a minimum and that the board beheavily composed ofobjectiveoutsiders who own large blocks of stock.Because of their stake in corporatedecisions, affiliated directorswould not be considered for board membership.This would ensure that the boardwouldprimarilyrepresent shareholder interests and objectivelymonitor the “hired hands” serving as topmanagement.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 agreater concern for the corporation as a whole and its survival than do the shareholders,andwho may only beinterested in earnings per share and little else.Stewardship theorysuggests that the board should be composed ofpeople 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 averageboard member of a U.S. Fortune 500 firm serveson three boards and that only 40% of U.S. boards limit the numberof directorships a board member may hold in other corporations. CEOs from other firmsare highly valued because

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they can provide excellent advice to theCEO.Having a CEO from another firm serve on a corporation’s board ofdirectors results in aninterlocking directorate betweenthetwo corporations.The text points out that this is a goodway to obtain inside information about an uncertain environment and objective expertise about potential strategiesand tactics.For these and other reasons, well-interlocked firms are better able to survive in a highly competitiveenvironment.This is a good reason for allowing a firm’s CEO to serve onthe boards of other companies.The CEOis likely tobring back information and contacts thatcanbe very useful to the corporation.There is a down side, however,to allowing a CEO to sit on theboardsof other firms.For one thing, serving onanother 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 ofthis, the typical CEO now sits on only one board in addition to his/her own—down from two additional boards in the1990s.Consequently, a board should work closely with its CEO to decide which other boards are most useful to thecompany for the CEO to join.2-6.What would be theimpactif 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 theCEO for information about the company and its activities.Thanks to Sarbanes-Oxley and other actions by the NewYork 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 tendirectors,only two of whom beinginsiders.The number of insiders tendsto be higher for boards in other countries.Even when a CEO might bethe sole insider on the board, he/she still has agreat deal of influence because the CEO usuallyalso serves as the Chairman of the Board.Nevertheless, anincreasing number of boards are selecting a “lead director” to oversee the evaluation of top management, so this cancounter the dual CEO/Chair’s power.A positive result of the CEO being the only insider on a board is that the boardwould be more likely to be objective and serious about its responsibility to oversee the corporation’s management.Anegative result would be the lessened opportunity to view potential successors in action or to obtain alternate pointsof view to management decisions.2-7.Should all CEOs be transformationalleaders?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 effectivestrategic management of the corporation: (1) provide executive leadership and a strategic vision and (2) manage thestrategic planning process.The text further argues that successful CEOs often provide this executive leadership bytaking on many of the characteristics of the transformationalleader by communicating a clear strategic vision,demonstrating a strong passion for the company, and communicating clear directions to others.Suchtransformational leaders,such asBill Gates at Microsoft,Steve Jobs at Apple, and Anita Roddick at The Body Shop,have beenable to command respect and energize their employees.They not only articulateda strategic vision, butthey alsopresenteda role for others in the company to identify with and follow.Their communication of highperformance standards coupled with their confidence in their fellow employees often raisedperformance to a highlevel.Nevertheless, such transformationalleaders can be very difficult to work for and their overconfidence mayeven get the firm in trouble. Their forcefulness may drive other competent people away when they fail to allow fordifferences of opinion.Hint to the instructor: Once the class has discussed the pros and cons of transformationalleaders, ask them how many would like to work for such an executive?Use Donald Trump as an example(“You’refired!”).You may be surprised bythe number of people who wouldnotlike to work for such a CEO.ADDITIONAL DISCUSSION QUESTIONSFOR INSTRUCTORSThese 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 oftoday’sboards 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 thepercentage 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 theboard’s

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meetings and agenda.This should improve theboard’sability to properly evaluate top management.IftheChaircan’t be separatedfromtheCEO, select a Lead Director fromamongthe outside directors.Use a committee composed of outsiders to nominate potential new directors.This will help to ensure thatpotential members are not friends of top management who may owe more allegiance to the CEO than to theshareholders.Nominate people to the board who have knowledge valuable to the board and who have expertise of valueto top management.These should be people who will have the respect of top management and who canboth advise and criticize top management as needed.Make sure that they are diverse in terms ofbackground and experience.Require board members to own substantial amounts of stock in the corporation to ensure that they have apersonal 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 betweenagency theoryand the concept oforganizationalstakeholders?Agency theoryis 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 ofthe owner (stockholders) of a corporation.Consequently, agency theory is primarily interested in ways to betteralign these two sets of interests, such as management owning significant shares of stock or having a strong financialstake in the long-term performance of the corporation via long-term incentive plans.This helps to ensure thatmanagement looks beyond selfish short-term benefits of a decision to the more strategic issues that concernstockholders.Theconcept oforganizationalstakeholders, 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 thecorporation and need to be considered in strategic decisions.What might benefit owners and management might hurtemployees, the local community, or the environment.The concept of stakeholders thus proposes that the suggestionsof agency theory are incomplete and insufficient to ensure that top management deals fairly not only withstockholders, but also with the needs of all concerned stakeholder groups.As it is currently defined, agency theory ismore in agreement with MiltonFriedman’snarrow view of the responsibilities of a corporation than with thestakeholder view more common to concerns of social responsibility.(See Chapter3forFriedman’s view ofcorporate responsibility.)This could change if society begins to consider top management not only as direct agentsfor stockholders, but also as indirect agents for other groups with a stake in thecorporation’sactivities.Agencytheory could thus be expanded to include the concerns of other interested groups and thus incorporate thestakeholder approach.SUGGESTIONS FOR STRATEGIC PRACTICE EXERCISEThe end of chapter exerciseasks the student to evaluate the “best” and the “worst” manager for whom the studenthas worked.The questionnaire is based on the concept of French and Raven’s “bases of power.”This concept isusually discussed in Introduction to Management as well as in Organizational Behavior textbooks as a part of theirdiscussion of leadership.You may need to briefly explain what each base means as part of your discussion of theirscores.Briefly,reward poweris based on someone’s ability to give another something that is valued for doing whatthe other person wants.Coercive poweris based on someone’s ability to give someone something that is disliked ifthe other person does not do what is desired.Legitimate poweris like authority in that itis based onone person’sbelief that another person has the right to ask him/her to do something.Referent poweris like charisma in that it isone person’s ability to get others to identify with him/her and to want to be like that person.Expert poweris basedon a person’s knowledge or abilities in an area that is important for job performance and that the person is willing toshare 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 fortheir “best manager”on each ofthebases.Write their totals under each of the five bases on the board and thencalculate the average for each base.Do the same thing for the same five students for their “worst boss.”In mostinstances, theaverage“best boss” will score higher than theaverage“worst boss” on referent, expert, and rewardpower,and lower on coercive and legitimate power.Becausethe “best manager” tends to have many of thecharacteristics 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 MODULECORPORATE GOVERNANCE STYLESJust as boards of directors vary widely on a continuum of involvement in the strategic management process, so dotop management teams.For example, a top management team with a low involvement in strategic management willtend to be functionally oriented and will focus its energies on day-to-day operational problems; this type of team islikely either to be disorganized or to have a dominant CEO who continues to identify with his or her old division.Incontrast, a top management team with high involvement will be active in strategicplanning.It will try to get divisionmanagers involved in planning so that top management will have more time to scan the environment for challengesand opportunities.Both the board of directors and top management can be placed on a matrix that reflects four basic styles of corporategovernance.Styles of Corporate GovernanceDegree of InvolvementbyTop ManagementHighEntrepreneurshipManagementPartnershipManagementLowChaosManagementMarionetteManagementLowHighDegree of Involvement by Board of DirectorsChaos ManagementWhen both the board of directors and top management have little involvement in the strategic management process,their style is referred to aschaos management.The board waits for top management to bring it proposals.Topmanagement is operationally oriented and continues to carry out strategies, policies, and programs specified by thefounding entrepreneur who died years ago.The basic strategic philosophy seems to be,“If it was good enough forold J.B.,it’sgood enough for us.”There is no strategic management being done here.Entrepreneurship ManagementA corporation with an uninvolved board of directors but a highly involved top management hasentrepreneurshipmanagement.The board is willing to be used as a rubber stamp for topmanagement’sdecisions.The CEO,operating alone or with a team, dominates the corporation and its strategic decisions. An example is Control DataCorporation under the leadership of its founder,William C. Norris.For twenty-nine years, Norris dominated boththecompany’stop management and its board of directors.Insisting that the company could profit by addressing“society’sunmet 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.”Aformer Control Data executive noted,“More often than not,he’sproven his critics wrong, so now his visionsaren’tchallenged.”

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Marionette ManagementProbably the rarest form of strategic management style,marionette managementoccurs when the board of directorsis deeply involved in strategic decision making, but top management is primarily concerned with operations.Such astyle evolves when a board is composed of key stockholders who refuse to delegate strategic decision making to thepresident.The president is forced into a COO role and can do only what the board allows him/her to do. This stylealso occurs when a board fires a CEO but is slow to find a replacement.The COO or executive vice-president stayson as“acting”president or CEO until the selection process is complete.In the meantime, strategic management isfirmly in the hands of the board of directors.Marionettemanagement occurred at Winnebago Industries when thecompany’sboard ofdirectors, chaired by itsfounder, 72-year-old John K. Hanson, took away RonaldHaugen’stitle as chief executive officer but left him ascompany president.No new CEO was named.Hanson, whose family owned 46% ofWinnebago’sstock, had givenup the CEO title in 1983 to President Haugen, a long-time employee.Outside observers noted that althoughChairman Hanson did not also hold the title of CEO, he appeared to have taken on theCEO’sresponsibilities onceagain.Partnership ManagementProbably the most effective style of strategic management,partnership managementis epitomized by a highlyinvolved board and top management.The board and top management team work closely to establish the corporatemission, objectives, strategies, and policies.Board members are active in committee work and utilize strategic auditsto provide feedback to top management on its implementation of agreed-upon strategies and policies.This appearsto be the stylein a number of successful corporations such asTexas Instruments, Target, and General ElectricCompany.

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CHAPTER THREESOCIAL RESPONSIBILITY ANDETHICS IN STRATEGIC MANAGEMENTThe chapter examines the relationship between business firms and society and presents issues in social responsibilityand ethics.It describes the relationship between social responsibility and corporate performance.The chapterconsiders stakeholder concerns and presents various responsibilities of business firms as well.Ethics and ethicalbehavior are considered in light of the challenge from moral relativism.It describes guidelines for ethical behavioraccording to utilitarianism, individual rights, and justice approaches.LEARNING OBJECTIVES1.Discussthe 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 COVERED1.Social Responsibilities of Strategic Decision Makersa.Responsibilities of a Business Firmb.Sustainabilityc.Corporate Stakeholders2.Stakeholder Analysis3.Ethical Decision Makinga.Some Reasons for Unethical Behaviorb.Encouraging Ethical Behavior4.View on Ethical BehaviorSUGGESTED ANSWERS TOMYMANAGEMENTLABQUESTIONS3-1.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 methodfor deciding whether one decision is better than another. For this very reason, many people justify their unethicalpositions,arguing thatthereis not one absolute code of ethics.3-2.How does a company ensure that its code of ethics is integrated into the dailydecision-makingprocessof 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 ofethics should be communicated in training programs, in performance appraisal systems, policies and procedures, andalso 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 governancepresented in Chapter2.Quite simply, itstates that society,in the form of special interest groups,increasingly expects boards of directors to balance theeconomic goal of profitability with the social needs of society.Issues dealing with workforce diversity and theenvironment are now reaching the board level.If business corporations are to avoid increased governmentalrestrictions 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 evaluatemanagement’sperformance in terms of stakeholder criteria.To the extent that boardsuse onlyshareholder value astheir key criteria, they may not be acting responsibly fromsociety’spoint of view.Increasingly, concerns over socialresponsibility may be directed through the board of directors.Agency theory defines the board’s interests quitenarrowly.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 interms of the corporation’s overall social responsibilities.This is likely tocontinuebeing acontroversial issue forquite some time.3-4.What is your opinion ofApplehaving a code of conductfor its suppliers?What would MiltonFriedman say?Contrast his view with that of Archie Carroll’s.Do a company’s responsibilitiesend at its boundary,ordo its responsibilitiesextend toincludeits suppliers anddistributors?This very thorny question has become a point of contention in the area of social responsibility.Thequestion includes a basic question in organization theory:what is the boundary of an organization?Certainly, onecould argue that a company is composed of its employees and all of its assets, such as land, buildings, andequipment.These can thus define acompany’sboundary.Given this view, everything else may be called acompany’s “environment”and therefore outside of acompany’scontrol or responsibility.One could thus argue thata companysuch asAppleorNikecannot be held responsible for the actions of a separate and independent suppliercompany/contractor.The very popularity of outsourcing as a substitute for vertical integration means that morefirms are contracting with other firms to fulfill functions a company no longer wishes to do on its own.If thecontract is long term in nature or if the purchasing company owns a substantial amount of stock in the supplyingcompany, then the hands-length nature of transactions is compromised and it becomes difficult to discern where onefirm’sboundary begins and anotherfirm’sleaves off.Such a relationship suggests that one company does havesome influence over another company’s actions by nature of the othercompany’sdependency on the first company.One could thus argue that acompany’ssocial responsibilities extend beyond what is normally thought of as itsboundary to the extent that it has some control and influence over the othercompany’sactions.Clearly,Apple’smanagement was thinking this waywhen it drafted its code of conduct.Milton Friedman would probably be very much againstApple’smeddling with the rights of its suppliers to freelycontract with their employees.UsingCarroll’scategories, Friedman would probably argue that the onlyresponsibilities of a business firm are economicandlegal.Friedman does say that business should play“within therules of the game.”This can be interpreted as meaning asupplier’slegal responsibilities to follow the rulesestablished within that country.If a purely economic justification is used, it may be difficult but still possible tojustify ethical and discretionary responsibilities.Carroll points out that a refusal to consider ethical responsibilities islikely to lead to an increase in afirm’slegal responsibilities—which,considering the usual inefficiencies ofgovernment,will lead to higher costs and lower long-run business efficiency.Either the U.S.federal governmentorthe United Nations may force companies in developed countries to follow a code likeGap’sor else face sanctions.Friedman would say that this is foolishness, but Carroll would argue that this is a natural result of ignoringone’sethical responsibilities.3-5.Does acompanyhave to act selflessly to be considered socially responsible?For example, whenbuilding a new plant, a corporation voluntarily invested in additional equipment that enabled it toreduce its pollution emissions beyond any current laws. Knowing that it would be very expensive forits competitors to do the same, the firm lobbied the government to make pollution regulations morerestrictive on the entire industry. Is this company socially responsible? Were its managers actingethically?This is a tough question.At first, it seems to be more appropriate to a philosophy class than to a strategicmanagement class.Should motivation and attitudes be considered when judging acompany’sactions?The legalsystem normally does this when differentiating between different degrees of guilt:intentionally killing is calledmurder and is usually punished severely; unintentional killing is called homicide and may not be punished at all if itis considered to be an accidentor self-defense.Using thisapproach, one could say that a company is not sociallyresponsible 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 peopleresult in a better society in terms of material goods.In this system, it is acceptable for a successful business firm toselfishly 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 wethen require that a firm be altruistic when fulfilling its ethical and discretionary responsibilities?This is not the typeof question that pragmatic undergraduate business students are used to.Grad students will enjoy playing with theconcepts 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 levelthansimply regurgitating the book.3-6.Are people living in a relationship-based governance system likely to be unethical in business dealings?The chapter states thatdeveloping nations tend to have relation-based governance.Transactions are based onpersonal and implicit agreements, not on formal contracts enforceable by a court.Information about a business islargely local and private—thus cannot be easily verified by a third party.In contrast, rule-based governance relies onpublicly verifiable information—the type of information that is typically not available in a developing country.Therule-based system has an infrastructure, based on accounting, auditing, ratings systems, legal cases, and codes, toprovide 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 nonverifiablenature of its information.Abusinesspersonneeds to develop and nurture a wide network of personal relations.In arelation-based system, the culture of the country (and the founder’s family) stronglyaffectscorporate culture andbusiness ethics.What is “fair” depends upon whether one is a family member, a close friend, a neighbor, or astranger.Becausebehavior tends to be less controlled by laws and agreed-upon standards than by tradition, businesspeople from a rule-based developed nation perceive the relationship-based system in a developing nation to be lessethical and more corrupt.In contrast, the people living in a relationship-based country see their behavior asfollowing what to them are well-known traditional guidelines and don’t necessarily understand why foreigners fromdeveloped nations have such difficulty understanding how things are done.What is perceived by one person to becorruption 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 goodare the codes?The chapter states that managers tend to ignore codes of ethics and try to solve ethical dilemmas on their own.Tocombat this tendency, corporations should not only develop a comprehensive code of ethics, but also communicatethe code in their training programs, performance appraisal systems, and policies and procedures.Developing codesof ethics can be a useful way to promote ethical behavior, especially for people who are operating at Kohlberg’sconventional level of moral development.A code of ethics (1) clarifies company expectations of employee conductin various situations and (2) makes clear that the company expects its people to recognize the ethical dimensions indecisions and actions.If nothing else, developing and communicating a comprehensive code of ethics can helpprotect a company from lawsuits.ADDITIONAL DISCUSSION QUESTIONSFOR INSTRUCTORSThese 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 intoday’sworld?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, topurelaissez-faire.He states that business should work to increase its profits“so long as it stays within the rules ofthe game, which is to say, engages in open and free competition without deception or fraud.”These“rules of thegame”form the crux of the argument.What should these rules be and who should communicate and enforce them?This leads directly into ArchieCarroll’scontentionthat there are four responsibilities of business corporations:economic, legal, ethical, and discretionary.Purelaissez-faireargues for economic responsibilities only.Friedmanmodifieslaissez-faireby presumably adding legal responsibilities.One could make the point that the“rules of thegame”should include ethical responsibilities as well.The problem, of course, is what happens to the concept of

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laissez-fairewhen one adds all these responsibilities to it and then expects businesspeople at all levels to acceptthem without outside force?Doeslaissez-faireas proposed by Adam Smith and argued by others include onlyeconomic responsibilities?If legal and ethical responsibilities are also expected by society of business corporations,is it still“free enterprise”laissez-faireor some other kind of system?A3-2.UsingCarroll’slist of four responsibilities, should a company be concerned aboutdiscretionaryresponsibilities?Why or why not?Except for a few die-hard followers of MiltonFriedman’sphilosophy, few people would agree that a business firmshould fulfillonlyits economic and legal responsibilities and completely ignore ethical ones. The same is not true ofdiscretionary responsibilities, however.Becausediscretionary responsibilities are defined by Carroll as purelyvoluntary, there is no pressure by anyone for a business firm to fulfill them.One can argue, nevertheless, that thereare three good reasons to undertake these kinds of responsibilities.The first reason is the morality rationale—itmaybe the right thing to do, even though the company may not benefit and may even be hurt in the short run.The secondreason is enlightened self-interest.If a firm undertakes a discretionary activity, it may gain short-run advantages inthe marketplace (e.g., a company offering free day care to its employees may attract more potential workers at lowerwages).It may also serve as a role model for government to legislate if and when that responsibility moves fromdiscretionary to ethical and finally to legal (and thus the firm is able to do things its way instead of thegovernment’sway).The third reason is also one of enlightened self-interest.If a company develops a reputation for voluntarilydoing socially useful activities even though it gains little economically in return, it may collect valuable publicrelations credit inpeople’sminds.This may translate into better sales or a willingness on the part of somegovernment agency to overlook a questionable activity the company might unthinkingly engage in.SUGGESTIONS FOR STRATEGIC PRACTICE EXERCISEThe end of chapter exercise asks the student to evaluate the position ofan organization facing a particular dilemmaand to suggest a course of action to the manager.Studentsshouldread the exercise and make the decision in anethical manner for the manager.Ideally,students mayanalyze the problem in three ways: fiduciary duty, stakeholderanalysis, and the Kantian categorical imperative.If students view the manager’s fiduciary duty to the shareholders asparamount, 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 toact as if the product closer to release is THE ONE.Studentswill also reach a conclusion based on the Kantian categorical imperative explained in the chapter.

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CHAPTER FOURENVIRONMENTAL SCANNING AND INDUSTRY ANALYSISThis chapter examines keyaspects of the external environmentof the corporation with special emphasis onenvironmental scanning, industry analysis, and forecasting.Environmental scanning is presented as the first part ofthe strategic management model and a crucial task for strategic managers.The emphasis is upon monitoringstrategic factors and utilizing possible sources of information.Porter’sapproach to industry analysis is discussed insome detail.Forecasting is then addressed in terms of assumptions and basic techniques.Industry scenarioconstruction/writing is explained.The chapter ends with a suggested way to synthesize external factors through theuse of an EFAS Table.LEARNING OBJECTIVES1.List theaspects 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 toexplainthe competitive forces that influence the intensity of rivalry withinan industry.4.Discusshow 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 COVERED1.Aspects ofEnvironmental Scanninga.Identifying External Environmental Variables2.Strategic Importance of the External Environmenta.Scanning the Societal Environment: STEEP Analysisb.Identifying External Strategic Factors3.Industry Analysis: Analyzing the Task Environmenta.Porter’s Approach to Industry Analysisb.Industry Evolutionc.Categorizing International Industriesd.International Risk Assessmente.Strategic Groupsf.Strategic Typesg.Hypercompetition4.Using Key Success Factors to Create an Industry Matrix5.Competitive Intelligencea.Sources of Competitive Intelligenceb.Monitoring Competitors for Strategic Planning6.Forecastinga.Danger of Assumptionsb.Useful Forecasting Techniques7.The Strategic Audit: A Checklist for Environmental Scanning8.Synthesis of External Factors—EFASSUGGESTED ANSWERS TOMYMANAGEMENTLABQUESTIONS4-1.How does STEEP analysis aid in the development of the strategy in a company?

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STEEP analysis is designed to monitor trends in the society and natural environments.In doing so, this analysisrequires scanning the environment for sociocultural, technological, economic, ecological, and politicalenvironmental 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 ofthese 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, reputationalrisk, and physical risk.Each of these can impact the resort hotel industry.For each of these risks, the student shouldbe 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 acorporation’snatural andsocietal environmentscan affect thecorporation through its task environment.Developments or trends in acorporation’snatural orsocietal environment typically do not affect the corporationdirectly but indirectly through their impact on one or more stakeholder groups in thecorporation’stask environment.As mentioned in the text, the trend toward dual-career couples is a recent development in the societal environmentof any company operating in the United Statesor Canada.Sociocultural forces regarding the changing role ofwomen,plus the trend toward single family households,combined with the economic forces of high interest ratesand inflation in the 1970s to send both men and women searching for full-time jobs in addition to their beingparents.This development in the societal environment continues to effect companies through its impact onemployee/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 interestgroups and even governments (who ask business firms to help support local schools and deal with community socialproblems).As another example, the trend toward global warming may notdirectlyaffect a company making toys,but mayaffect it indirectlythroughasociocultural trend supportingthe use of rechargeable batteries and solar cellsas replacements fordisposable batteries.Such a sociocultural trend may be reflected in changing customerpreferences or in new government regulations or incentive programs.4-4.How would youdetermine the level of competitive intensity in an industry?The answer to thisquestion can be found inFigure 4.2in Chapter4.By this time, students should be able to list thefive forces presented by Michael Porter plus the sixth force (other stakeholders) proposed by Ed Freeman.They arebriefly: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 stakeholdersOnce they have listed the forces, push the students to explain how each of the forces can affect the level ofcompetitive intensity within an industry.Use price of thecompany’sproduct(i.e.,How will a change in each of theforces affect the average price of the product?)and then look at how changes in each force might affect averageproduct quality and other characteristics of the product offered in this particular industry.Arbitrarily select foranalysis a well-known industrysuch asairlinesor automobiles.After examining past and present forces operating ina particular industry, ask the students to try to predict what will happen to each of these forces in the future and howthese developments might affect the future competitive intensity of the industry.Here’s an example of an exerciseyou 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

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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 arechanging and to indicate why.The next step is to ask the class to evaluate the future level of competitive intensity inthe airline industry.Would they invest or look for a job in this industry?The authors’opinions regarding the current level of these forces areas follows.The overall level of competitiveintensity ishighand 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 othernations 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 areentering areas previously controlled by other airlines.Becausethere are few ways to differentiate airlineservice, many carriers become commodities,competing primarily on price.Price wars result from this highdegree of rivalry.Bargaining power of buyers/distributors:Medium to Low.As more airlines are selling directly tocustomers via theInternet, travel agentsas the primary distributors have becomeless important to carriersales.The lowered power of travel agents is indicated by the fact that major airlines were able to institute acap on travel agent commissions so easilyand to emphasize ticket sales via corporate websites.Bargaining power of suppliers:High.With only two large airframe manufacturers compared to many moreairline companies, supplier bargaining power is quitehigh.Relative power of other stakeholders:Medium.Whoare the key stakeholders?Pilotand flight attendantunions are traditionally strong at the established carriers (raising costs).Nonunionized carriers thus gain acost advantage (raising the level of competitive intensity).Becauseairline crashes get major attention,governments are quick to pass safety regulations (raising costs and thus competitive intensity).However,nationalconcerns also cause governments to safeguard domestic airlines from strong foreign competitionthus lowering competitive intensity.4-5.IsPepsi 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 avery superficial understanding of the topics discussed in this chapter will tend to answer“yes”to this question.Theyare using their own common sense understanding of a substitute being another product within the same category.BecauseCoke and Pepsi are both colas, most people think of them as substitutes foreach other.They have almostidentical product characteristics.According to Porter, however, substitute products are those productsthat appear tobe differentbut can satisfy the same need as another product.This means that inPorter’smind,substitutes do nothave similar product characteristics, but are still able to satisfy the same need.This indicates that Porter would notview Pepsi and Coke as true substitutes, buttwo versions/brandsof the same product.Thus, Porter would viewcoffee and tea (both having caffeine) as being substitutes for a soft drink cola.The whole idea ofPorter’sapproachto industry analysis is to get people to go beyond the obvious when considering whataffects the level of competitiveintensity within an industry.4-6.How can a decision maker identifystrategic factors in acorporation’sexternal internationalenvironment?The chapter suggeststhatone begin by listing three or more trends emerging in each of the four forces of afirm’ssocietal environment in an environmental trend analysismatrix (seeTables4.1and 4.3).Then estimate the likelyimpact of these general trends upon the primary stakeholders(e.g., communities, creditors, competitors,etc.).Thesedata form a series of strategic issues—thosetrends and developments that are very likely to determine the futureenvironment.Plot these strategic issues on an issues priority matrix (seeFig. 4.2).Those issues judged to have ahigh probability of occurring and a high probable impact on the corporation are strategic factors.Categorize these

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factors as opportunities or threats.Keep in mind that some strategic factors may be both opportunitiesandthreats,depending on how they are viewed.4-7.Compare and contrast trend extrapolation with the writing of scenarios as forecasting techniques.Asindicated in the chapter, extrapolation is simply the extension of present trends into the future.It relies on theassumption 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 twistingone’shead to look backward.Everything will be fine until a sudden turn is reached!Like driving backward, extrapolation is fine if the time frameto be predicted is short and one is lucky.In contrast, scenariowriting is based upon a series of historical data plusinformed hunches from key people in the company who have access to environmental information or from a Delphipanel of outside experts.Like extrapolation, scenariowriting is a very popular forecasting technique, but unlikeextrapolation, it can get very complicated and time consuming.One approach to constructing an industry scenario issuggested by Porter in the chapter.It has atleast one clear-cut advantage over extrapolation:it encouragesforecasters 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 hazardousdriving!ADDITIONAL DISCUSSION QUESTIONSFOR INSTRUCTORSThese 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 copewith an uncertain environment.If theenvironment was certain and predictable, environmental scanning would be arather easy chore.Simple extrapolation would be the only type of forecasting needed.In a complex and changingworld, however, thosecorporations that engage in environmental scanning and strategic planningtend to deal betterwith 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 theattention of strategy makers?This is a very real problem in most large corporations given the usual obstacles to good communication.The verypeople who are in the best positions to gather this data are often the ones who either fail to pass it on becauseit’stoomuch of a chore,or they fail to notice it because no one told them how important certain developments are to topmanagement.Becauseproper information dissemination is an important part of environmental scanning,corporations attempt to schedule a series of analytical reports for topmanagement’sinformation.Some of thesereports are depicted inFigure 4.1in the chapter. The purchasing department, for example, might be tasked with thejob of compiling a quarterly analysis of the availability and reliability of present and future suppliers.The marketresearch department might prepare analyses of present and future customers for certain products and services withspecial attention to demographic shifts.Each report would need to conclude with a list of strategic factors to monitorin the coming months or years.Other approaches are, of course, possible to get needed information to the attentionof 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 questionis based on theassumption that most long-term forecasts are usually incorrect.One must keep in mindthat some things are easier to forecast than others. For example, a forecasted drop in the demand for tricycles inthree years will very likely occur if it is based on a strong drop in the present birth rate.Nevertheless, most peoplewould probably agree that forecasts going out five to ten years have a low probability of becoming reality intoday’sdynamic world.The text takes the positionthat even if predictions prove to be wrong, the very act of scanning andforecasting the environment helps managers take a broader perspective.It also forces managers to take an activerather than a passive orientation toward its external environment.It encourages calculated risks over WAHs(wild

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a**hunches) and is more likely to result in strategic management instead of reactive management.SUGGESTIONS FOR STRATEGIC PRACTICE EXERCISEHow 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 forcoveringethics in Chapter3, but also for introducingsome of theconcepts found in Chapter4, Environmental Scanning and Industry Analysis.For this reason, you might want to usethis exercisewhen discussing ethics inChapter3rather than at the end of Chapter4.Approach 1:First, ask your students to complete this exercise.Second, list all the items on the blackboard in which alarge percentage of the class rates each of them as 4 or 5.Third, list all the items in which a large percentage of theclass rates each of them a 2 or 1.Fourth, list all the items in which a large majority rates them as a 3.Once thesethree sets of items are listed on the board, ask the class what differentiates one group from another.Try to identifythe criteria the class used to rate the items.This provides the rationale the students in your class are using to makeethical decisions.You might also want to challenge the class as a whole by asking for minority opinions—thosewhorated 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 ofpaper.Have them keep one copy of their ratings.After class, calculate the means for each item, put them into one ofthe three categories mentioned above, and list them on a transparency.Show the class their average responses bygroup.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 averageclass rating.Encourage individual students to challenge the average class ratings. Some interesting discussion isbound to result.You may want to provide the class with the average responses found in the Jones and Bryan studycited below.This exercise was developed from a questionnaire constructed by William Jones, Jr. and Norman Bryan, Jr. ofGeorgia State University for their article“Business Ethics and Business Intelligence: An Empirical Study ofInformation-Gathering Alternatives,”in the June 1995 issue of theInternational Journal of Management(pages204–208).A total of 108 undergraduates in a strategic management class completed the questionnaire during theearly 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:4.55Careful study of trade journals.1.13Wiretapping the telephones of competitors.2.59Posing as a potential customer to competitors.1.57Getting loyal customers to put out a phony“request for proposal”solicitingcompetitors’bids.4.21Buyingcompetitors’products and taking them apart.3.54Hiring management consultants who have worked for competitors.1.44Rewardingcompetitors’employees for useful“tips.”4.00Questioningcompetitors’customers and/or suppliers.1.97Buying and analyzingcompetitors’garbage.1.37Advertising and interviewing for nonexistent jobs.

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4.09Taking public tours ofcompetitors’facilities.1.58Releasing false information about the company in order to confuse competitors.3.70Questioningcompetitors’technical people at trade shows and conferences.3.29Hiring key people away from competitors.3.59Analyzingcompetitors’labor union contracts.1.46Having employees date persons who work for competitors.2.61Studying aerial photographs ofcompetitors’facilities.Jones and Bryan indicated that appropriate actions received mean responses between 3.51 and 5.00.Those itemswith 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 thebasis of age.They suggested that the strong emphasis in the business curriculum on strategic managementmighthave tended to suppress any gender and age differences.ADDITIONAL TEACHING MODULE(Use when discussing forecasting)THE ROLLING J-CURVEWhen current environmental trends (such as the price of oil) look bad or when a new product introduction is notdoing as well as expected, managers and analysts are tempted to usethe infamousrolling J-curvestyle offorecasting, 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.Forexample, if a new program is not resulting in increased sales as anticipated, the person in charge of the programsimply alters the forecast by announcing that the decrease is only temporary and that the expected increase willoccur sometime soon.Sales can thus be diagramed on a chart with the actual sales figures curving downward overtime and the estimated future sales figures forming the upward curve of the J (while everyone continues to hope fora“light at the end of the tunnel”).Companies can go bankrupt using these kinds of forecasts in which hopesubstitutes for analysis.

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CHAPTER FIVEORGANIZATIONAL ANALYSISAND COMPETITIVE ADVANTAGEThis chapter completes the section on environmental scanning by examining the internal environment of acorporation.Often called organizational analysis (to contrast it with industry analysis), internal scanning is a keypart of theresource-based view of the firm—theview that acompany’ssustained competitive advantage is primarilydetermined by its resource endowments.The chapter contrasts the industry value chain from the corporate valuechain.Following the popular functional approach, the chapter breaks the internal environment down into thecorporation’sstructure, culture, and resources.The chapter proposes that to the extent that acorporation’spresentstructure and culture are compatible with present or potential strategies, they can be considered strengths orweaknesses.Corporate resources are discussed in terms of marketing, finance, research and development,operations, human resources, and information systems.The point is made that acorporation’sresources include notonly measurable assets, such as buildings and people, but also the skills and competencies of the people within thefunctional areas.The chapter ends with a suggested way to summarize internalfactors through the use of an IFASTable.LEARNING OBJECTIVES1.Apply the resource-based view of the firmand the VRIO frameworkto determine core and distinctivecompetencies.2.Explain companybusiness models and how they canbe 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 COVERED1.A Resource-Based Approach to Organizational Analysis—VRIOa.Core and Distinctive Competenciesb.Using Resources to Gain Competitive Advantage2.Business Models3.Value-Chain Analysisa.Industry Value-Chain Analysisb.Corporate Value-Chain Analysisc.Scanning Functional Resources and Capabilities4.Basic Organizational Structuresa.Corporate Culture: The Company Wayb.Strategic Marketing Issuesc.Strategic Financial Issuesd.Strategic Research and Development (R&D) Issuese.Strategic Operations Issuesf.Strategic Human Resource Management(HRM) Issuesg.Strategic Information Systems/Technology Issues5.The Strategic Audit: A Checklist for Organizational Analysisa.Synthesis of Internal Factors(IFAS)SUGGESTED ANSWERS TOMYMANAGEMENTLABQUESTIONS5-1.How does theresource-basedview of thefirm provide a superior means of evaluating a company’scompetitive advantage?Aresource-based approach to organizational analysis highlights the resources of the firm with whichitcan confront

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