LEARNING OBJECTIVES -

After studying this chapter, you should be able to dp the following: ^ ^ v, -^' "
1-1. Describe the strategic-management process. . . * -
1-2. Discuss the three stages of strategy formulation, implementation, and evaluation
activities.

1-3- Explain the need for integrating analysis and intuition in strategic management.
1-4. Define and give examples of key terms in strategic management.
1-5. Illustrate the comprehensive strategic-management model.
1-6." Describe the benefits of engaging in strategic management. - .-• ■f'-
. 1-7. Explain why some firms do no strategic planning. '
1-8. Describe the pitfalls In actually doing strategic planning. i:
1-9.. Discuss the connection between business and military strategy.

ASSURANCE OF LEARNING EXERCISES

• The following exercises are found at the end of this chapter:
exercise ia Compare Business Strategy with Military Strategy
EXERCISE IB Gather Strategy Information for the Hershey Company
exercise ic Update the Hershey Cohesion Case
EXERCISE ID Strategic Planning for Your University "
EXERCISE 1E Strategic Planning at a Local Company
exercise if Get Familiar with the Strategy Club Website
EXERCISE iG Game Plans vs. Strategic Plans: Teams vs. Companies

■r .
4 PART 1 .• OVERVIEW OF STRATEGIC MANAGEMENT

When CEOs from the big three U.S.automakers—Ford,General Motors(GM),and

Chrysler—showed up several years ago without a clear strategic plan to ask congres
sional leaders for bailout monies, they were sent home with instructions to develop
a clear strategic plan for the future. Austah Goolsbee, one of President Barack Obama's top
economic advisers, said,"Asking for a bailout without a convincing business plan was crazy."
Goolsbee also said,"If the three auto CEOs need a bridge, it's got to be a bridge to somewhere,
not a bridge to nowhere."^ This text gives the instructions on how to develop a clear strategic
plan—a bridge to somewhere rather than nowhere.
The chapter provides an overview of strategic management. It introduces a practical, inte-
grative model of the strategic-management process, and it defines basic activities and terras in
strategic management.
At the beginning of each chapter, a different company is showcased doing an exemplary
job applying strategic-planning concepts, tools, and techniques. The first company featured for
excellent strategic management practices is Apple, Inc., one of the best-managed companies
ever, and currently led by one of the best strategists in the world, Mr. Tim Cook, who followed
a Hgendary strategist, Mr. Steve Jobs. At the end of each chapter, a new, one-page, mini-case
on a company is provided with respective questions that examine various concepts, tools, and
techniques presented.

What Is Strategic Management?

Once there were tuo company presidents who competed in the same industry. These two
presidents decided to go on a camping trip to discuss a possible merger. They hiked deep into
the woods.- Suddenly, they came upon a grizzly bear that rose up on its hind legs and snarled.
Instantly, the first presidentlook off his knapsack and got out a pair ofjogging shoes. The second
president said,"Hey, you can't outrun that bear." The first president responded,"Maybe Tcan't

EXEMPLARYIcjaij^i^^SHOWCASED

Apple, Inc.(AAPL)
Headquartered in Cupertino. California, Apple, Inc. designs, produces, that CEO Cook
and markets smartphones, watches, personal computers, digital music says is "the
players, and much more worldwide. Apple is arguably the most success most enterpris
ful company in modern times. The company was foun 'ad in 1977 by a ing apps over."
great strategist, an American legend, the late Mr. Steve Jobs. According Also. Apple
to Financial Times, the best corporate strategist in 2014 was Apple CEO recently entered
Tim Cook, who led Apple to a record $700 billion market capitaliza the e-book .v v •' • » -v •
tion, with booming iPhone and personal computer sales, and handed business as well
billions of dollars back to shareholders. Financial Times named CEO as the banking business with its Apple Pay system, whereby customers
Cook as "Person of the Year" for Apple's huge achievements as well as use their iPhone to pay for merchandise at hundreds of retail checkout
Cook's courage. Cook came forward as the Fortune SCO's first openl\ counters. In addition, Apple recently acquired Metaio, a gompany that
gay CEO when he published an essay in October 2014 in Bloomberg makes augmented-reaiity(AR)technologies, a concept that allows devel
Businessweek saying he was "proud to be gay." Cook v\'^s courageous opers to overlay digital irrformation on top of the real world. A number
in other ways too. For example, at an Apple's shareholder meeting, of companies are working on AR, including Microsoft and Google with
when someone questioned the profitability of Apple's environmental their HoloLens and Magic Leap projects, respectively. Many scientists
initiatives, Cook responded, "We do things for other reasoris than a expect AR and virtual reality (VR) to be the next major computing plat
profit motive: we do things because they are right and just. If that's a form after mobile devices such as smartphones and tablets. For the
hard line for you... then you should get out of the stock " eighth year in a row, Fortune recently named Apple the world's most
Amidst tremendous fanfare, Apple recently released its iWatch arc admired company.
is poised to introduce TV, along with an electric car Apple a'"d IBM ha^ e
released the first apps to emerge from tneir coHaDoration•• a collect^c Soiiivc: Company documonls and a variety of sources
 CHAPTER 1 • THE NATURE OF STRATEGIC MANAGEMENT 5
outrun that bear, butI surely can outran you!"This story captures the notion ofstrategic manage
ment, which is to gain and sustain competitive advantage.

What Is a Cohesion Case?

A distinguishing, popular feature of this text is the Cohesion Case, named so because a
^tten case on a company appears at the end of this chapter, and then all other chapters
feature end-of-chapter Assurance of Learning Exercises to apply strategic-planning concepts,
tools, and techniques to the Cohesion Case company. The Hershey Company is featured as
the new Cohesion Case in this edition, because Hershey is a welLknown, well-managed
global firm undergoing strategic change. By working through the Hershey-related exercises
at the end of each chapter, students become well prepared to develop an .effective strategic
plan for any company assigned to them (or their team) to pe'rform a strategic-management
case analysis. Case analysis is a core part of almost every strategic-management course
globally.

Defining Strategic Management

Strategic management is the art and science of formulating, implementing, and evaluating
cross-functional decisions that enable an organization to achieve its objectives. As this defi
nition implies, strategic management focuses on integrating management, marketing, finance
and accounting, production and operations, research and development (R&D), and informa
tion systems to achieve organizational success. The term strategic management in this tent is
used synonymously with the term strategic planning. The latter term is more often used in
the business world, whereas the former is often used in academia. Sometimes the term strate
gic management is used to refer to strategy formulation, implementation, and evaluation, with
strategic planning referring only to strategy formulation. The purpose of strategic management
is to exploit and create new and different opportunities for tomorrow; long-range planning in
contrast, tries to optimize for tomorrow the trends of today.
The term strategic planning originated in the 1950s and was populm* between the mid-1960s
and the mid-1970s. During these years, strategic planning was widely believed to be the answer
for all problems.At the time,much ofcorporate America was"obsessed" with strategic planning.
Following that boom, however, strategic planning was cast aside during the 1980s as various
planning models did not yield higher returns. The 1990s, however, brought the revival of strate
gic planning, and the process is widely practiced today in the business world. Many companies
today have a chiefstrategy officer(CSO). McDonald's hired a new CSO in October 2015.
A strategic plan is, in essence, a compmy's game plan. Just as a football team needs a good
game plan to have a chance for success, a company must have a good strategic plan to compete
successfully. Profit margins among firms in most industries are so slim that there is little room
for error in the overall strategic plan. A strategic plan results from tough managerial choices
among numerous good alternatives, and it signals commitment to specific.markets, policies, pro
cedures, and operations in lieu of other,"less desirable" courses of action.
The term strategic management is used at many colleges and universities as the title for the
capstone course in business administration. This course integrates material from all business
courses, and, in addition, introduces new strategic-management concepts and techniques being
widely used by firms in strategic planning.

Stages of Strategic Management

The strategic-management process consists of three stages: strategy formulation, strategy
implementation, and strategy evaluation. Strategy formulation includes developing a vision and
a mission, identifying an organization's external opportunities and threats, determining internal
strengths and weaknes.ses, establishing long-term objectives, generating alternative strategies,
and choosing particular strategics to pursue. Strategy-formulation issues include deciding what
new businesses to enter, what businesses to abandon, whether to expand operations or dr ersify,
whether to enter international markets, whether to merge or form a joint venture, and how to
avoid a hostile takeovei

^ j--. "■'-'■.V. o"-'i - ;■ ; t

PART 1 • OVERVIEW OF STRATEGIC MANAC^MENT
Because no organization has unlimited resources, strategists must decide which alterna
tive strategies wUl benefit the firm most. Strategy-formulation decisions commit an organiza-
aon to s^ific products, markets, resources, and technologies over an extended period of tme.
Strategies determine long-term competitive advantages. For better or worse, strategic decisions
have major multifunctional consequences and enduring effects on an organization.Top maMgers
have have
they the best
theperspective
authority totocommit
understand fiiUy thenecessary
the resources ramifications of strategy-fonhulation decisions;
for implementation.
Strategy implementation requires a firm to establish annu^ objectives, devise policies,
motivate employees, and allocate resources so that formulated strategies can be executed.
Strategy implementation includes developing a strategy-supportive culture, creating an effective
organizational structure, redirecting mariceting efforts, preparing budgets, developmg and usmg
information systems, and Unking employee compensation to organizational performance.
Strategy implementation "often is called the "action stage" of strategic management.
Implementing strategy means mobiUzing employees and managers to put formulated strategies
into action. Often considered to be the most difficult stage in strategic management, strategy
implementation requires personal discipline, commitment, and sacrifice. Successful strategy
implementation hinges on managers' abiUty to motivate employees, which is more an art than a
science. Strategies formulated but not implemented serve no useful purpose.
Interpersonal skills are especially critical for successful strategy implementation. Stratep-
implcmentation activities affect all employees and managers in an organization. Every division
and depaitment must decide on answers to questions such as **What must we do to implement
our part of the organization's strategy?" and"How best can we get the job done?'- The challenge
of implementation is to stimulate managers ^d employees throughout an organization to work
with pride and enthusiasm toward achieving stated objectives.
Strategy evaluation is the final stage in strategic management. Managers desperately need
to know when particular strategies are not working well; strategy evaluation is the primary means
for obtaining this information. All strategies are subject to future modification because exter
nal and internal factors constantly change. Three fundamental strategy-evaluation activiUes are
(1)reviewing external and intemal factors that are the bases for current strategies,(2)measuring
performance, and (3) taking corrective actions. Strategy evaluation is needed because success
today is no guarantee of success tomorrow! Success always creates new and different problems;
complacent orgamzations experience demise.
Formulation, implementation, and evaluation of strategy activities occur at three hierarchi
cal levels in a large organization: corporate, divisional or strategic business unit, and functional.
By fostering communication and interaction among managers and employees across hierarchical
levels, strategic management helps a firm function as a competitive team. Most small businesses
and some large businesses do not have divisions or strategic business units; they have only the
comorate and functional levels. Nevertheless, managers and employees at these two levels should
be actively involved in strategic-management activities.
Peter Drucker says the prime task of strategic management is tliinking through the overall
mission of a business—

that is, of asking the question,"Wliat is our business?" This leads to the setting of objec
tives, the development of strategies, and the making of today's decisions for tomorrow's
results. This clearly must be done by a part of the organization that can see the entire busi
ness- that can balance objectives and the needs of today against the needs of'Dmorrow; and
the can allocate resources of men and money to key results.

Integrating Intuition and Analysis

Edward Deminj, once said, "in God we trust. All others bring data." The strategic-management
process can be described as an objective, logical, systematic approach for making major decisions
in ui organization. It attempts to organize qualitative and quantitative information in a way that
.illii' .
S deci^il»n.s to be made under conditions of uncertainty. Yet strategic management
is not a pure snence iliat lends itself to a nice. neat, one-two-three approach.
Based on past experiences, ludgnienl. ami feelings, nio.si people recogni/.e that intuition is
esNential to nuikiini eood suategic decisions. Intuition is particularly useful for maktng decisions

TY
 CHAPTER 1 • THE NATURE OF STRATEGIC MANAGEMENT 7

in situations of great uncertainty or little precedent. It is also helpful when highly interrelated
variables exist or when it is necessary to choose from several plausible alternatives. Some man-
, *■ « agers and owners of businesses profess to have extraordinary abilities for using intuition alone
ui devising brilliant strategies. For exarnple, W^l Durant, who organized GM, was described by
Alfred Sloan as "a man who would proceed on a course of action guided solely, as far as I could
tell, by some intuitiye flash of brilliance. He never felt obliged to make an engineering hunt for
the facts. Yet at times, he was astoundingly correct in his judgment."^ Albert Einstein acknowl-
edged the importance of intuition when he said, "I believe in intuition and inspiration. At times
I feel certain that I am right while not knowing tiie reason. Imagination is more important than
knowledge, because knowledge is limited, whereas imagination embraces the entire world."^
Although some organizations today may survive and prosper because they have intuitive
geniuses managing them, many are not so fortunate. Most organizations Can benefit from stra
tegic management, which is based on integrating intuition and analysis in decision making.
Choosing an inmitive or analytic approach to decision making is not an either-or proposition.
Managers at all levels in an organization inject their intuition and judgment into strategic-
management analyses. Analytical thinking and intuitive thinking complement each other.
Operating from the rve-alrcady-made-up-ray-mind-don't-bother-me-with-the-facts mode
is not management by intuition; it is management by ignorance.^ Dnicker says, "I believe in
intuition only if you discipline it. 'Hunch' artists, who make a diagnosis but don't check it out
with the facts, are the ones in medicine who kill people, and in management kill businesses."^
As Henderson notes:

The accelerating rate of change today is producing a business world in which customary
managerial habits in organizations are increasingly inadequate. Experience alone was an
adequate guide when changes could be made in small increments. But mtuitive and experi
ence-based management philosophies are grossly inadequate when decisions are strategic
and have major, irreversible consequences.^
In a sense, the strategic-management process is an attempt to duplicate what goes on in the mind
of a brilliant, intuitive person who knows the business and assimilates and integrates that knowl
edge using analysis to formulate effective strategies.

Adapting to Change
The strategic-management process is based on the belief that organizations should continually
monitor internal and external events and trends so that timely changes can be made as r ^ded.
The rate and magnitude of changes that affect organizations are increasing dr^atically, as
evidenced by how the drop in oil prices caught so many firms by surprise. Firms, like organisms,
must be "adept at adapting" or they will not survive. To survive, all organizations must astutely
identify and adapt to change. The strategic-management process is aimed at allowing organiza
tions to adapt effectively to change over tlie long run. Waterman noted:

In today's business environment, more than in any preceding era, the only constant is
change. Successful organizations effectively manage change, continuously adapting their
bureaucracies, strategies, systems, products, and cultures to survi . e the shocks and prosper
from the forces that decimate the competition ®
On a political map, the boundaries between countries may be clear, but on a competitive
map showing the real flow of financial and industrial activity, the boundaries have largely
disappeared. The speedy flow of information has eaten away at national boundaries so that
people worldwide readily see for themselves how other people live and work. We have become
a borderless world with global citizens, global competitors, global customers, global suppliers,
and global distributors! Many firms headquartered in the United States are challenged by out-
side-U S based companies in many industries. For example. Toyota. Honda. Yamaha, Suzuki.
Volkswagen. Samsung, and Kia have huge market shares in the United States.
The Heed U' adapt to change leads organizations to key strategic-management questions,
such as "Vv hat kind of business should we become?" "Are we in the right fiekifs)'.'" "Should
wc ivshape our business'.'" "What new competitors are entering our industry'.'" "What strategies

.J.
PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT

should we pursue?""How are our customers changing?""Are new technologies being developed
that could put us out of business?"
The Internet promotes endless comparison shopping, enabling consumers worldwide to
band together to demand discounts, The Litemet has transferred power firam businesses to indi
viduals. Buyers used to face big obstacles when attempting to get the best'price and service,such
as limited time and data to compare^ but now consumers can quickly scan,hundreds of vendor
offerings. Both the number of people- shopping online and the average amount they spend is
increasing dramatically. Digital communication has become the name of the game in market
ing. Consumers today are flocking to blogs, sending tweets, watching and posting videos on
YouTUbe, and spending hours on Himbler, Facebook, Reddit, Instagram, and Linkedin, instead
of watching television, listening to the radio, or reading newspapers and magazines. Facebook
recently unveiled features that further marry these social sites to the wider Internet. Facebook
users can now log onto various business shopping sites from their social site, so their friends can
see what items they have purchased from what companies. Facebook wants their members to use
their identities to manage all their online identities. Most traditional retailers boost in-store sales
using their websites to promote in-store promotions.

Key Terms in Strategic Management

Before we further 4iscuss strategic management, we should define nine key terms: competitive
advantage, strategists, vision and mission statements, external opportunities and threats, inter
nal strengths and weaknesses, long-term objectives, strategies, annual objectives, and policies.

Competitive Advantage
Strategic management is all about gaining and maintaining competitive advantage. TTus tenn
can be defined as any activity a firm does especially well compared to activities done by rival
firms,or any resource a firm possesses that rival firms desire.
Having fewer fixed assets than rival finns can provide major competitive advantages. For
example, Apple has virtually no manufacturing facilities of its own, and rival Sony has 57 elec
tronics factories. Apple relies almost entirely on contract manufacturers for production of all its
products, whereas Sony owns its own plants. Having fewer fixed assets has enabled Apple to
remain financially lean. •
According to CEO Paco Underbill of EnviroseJl,"Where it used to be a polite war, it's now
a 21st-century bar fight, where everybody !.^ competing with everyone else for the customer's'
money." Shoppers are "trading down: Nordstrom is taking customers from Neiman Marcus and
Saks Fifth Avenue, T.J. Maxx and Marshalls are taking customers from most other stores in the
mall, and Family Dollar is talcing revenues from .Walmart.^ Getting and keeping competitive
advantage is essential for long-term success in an organization. In mass retailing, big-box com
panies, such as Walmart,Best Buy,and Sears, are losing competitive advantage to smaller stores,
reflecting the dramatic shift in mass retailing to becoming smaller. As customers shift more to
online purchases, less brick and mortar is definitely better for sustaining competitive advan
tage in retailing. Walmart Express siores of less than 40,000 square feet each, rather than its
185,000-square-foot Supercenters, and Office Depot's new 5,000-square-foot stores are exam
ples of smaller is better.
Normally, a firm can sustain a competitive advantage for only a certain period because
Q*" rival firms imitating and undermining that advantage. Thus, it is not adequate sim.ply to
obtain competitive advantage. A firm must strive to achieve sustained competitive advantage
by (1) continually adapting to changes in external trends and events and internal capabilities,
competencies, and resources; and (2) effectively formulating, implementing, and evaluating
strategies that capitalize on those factors.

Strategists
Strategists are the intlividuals most responsible lor the success or t'allure of an oruanizalion.
They have various job titles, such as chief vxccuttve ojjice), presidetu. owner, chair of the hoard,
executive director, t haiicclh)/. dean, and entrepreneur Jay Conger, professor of orizani/.ational
 CHAPTER 1 • THE NATURE OF STRATEGIC MANAGEMENT

behavior at the London Business School and author of Building Leaders, says, "All strategists
have to be chief le^ing officers. We are in an extended period of change. If our leaders aren't
highly adaptive and great models dunng this period, then our companies won't adapt either,
because ultimately leadership is about being a role model."
Strategists help an organization gather, analyze, and organize information. They track indus
try and competitive trends, develop forecasting models and scenario analyses, evaluate corporate
and divisional performance, spot emerging market opportunities, identify business threats, and
develop creative action plans. Strategic planners usually serve in a support or staff role. Usually
found in higher levels of management, they typically have considerable authority for 'decision
making in the firm. The CEO is the most visible and critical strategic manager. Any manager
who has responsibility for a unit or division, responsibility for pix>fit and loss outcomes, or direct
authority over a major piece of the business is a strategic manager (strategist).
In the last few years, the position of CSO has become common in many organiza
tions, including Sun Microsystems, Network Associates, Clams, Lante, Marimba, Sapient,
Commerce One, BBDO, Cadbury Schweppes, General Motors, Ellie Mae, Cendant, Charles
Schwab, Tyco, Campbell Soup, Morgan Stanley, and Reed-Eisevier. This corporate, officer
title represents recognition of the growing importance of strategic planning in business. Franz
Koch, the CSO of German sportswear company Puma AG, was recently promoted to CEO of
Puma. When asked about his plans for the company, Koch said on a conference call, "I plan
to just focus on the long-term strategic plan." Academic Research Capsule 1-1 reveals when
CSOs are most often hired.
Strategists differ as much as organizations do, and these differences must be considered in
the formulation, implementation, and evaluation of strategies; Strategists differ in uieir attitudes,
values, ethics,,willingness to take risks, concem for social responsibility, concern for profitabil
ity, concern for short-run versus long-run aims, and management style—some will not even con
sider various types of strategies because of their personal philosophies.. The founder of Hershey,
Milton Hershey, built the company so that he could afford to manage an orphanage. From cor
porate profits, Hershey today cares for about 900 boys and 1,000 girls in its boarding school for
pre-K through grade 12.
Athletic coaches are also strategists.! Football, basketball, baseball, soccer, and in fact most
athletic contests are often won or lost based a team's game plan. For example, a basketball coach
may plan to fast break and play up-tempo, rather than play more half court, if the players are
smaller and faster, or if the team has more depth than the opposing team. A few great college bas
ketball coaches today are Mike Krzyzewski at Duke, John Calipari at Kentucky, Jim Boeheim at
Syracuse, and Tom Izzo at Michigan State. Great college basketball coaches years ago included
John Wooden, Jim Valvano, Dean Smith, and Bobby Knight. Another great coach of yCoteryear
was Nolan Richardson, who developed excellent game plans and,in 1994, as the first black head
coach at a major university in the South, led the Arkansas Razorbacks men's basketball team to

ACADEMIC RESEARCH CAPSULE 1-1 ^ S?

When Are Chief Strategy Officers(CSOs)Hired/Appointed?
An increasing number of firms are employing a chief strategy officer'
(CSO). In an article published in 2014, Menz and Sheef examined
200 S&P 500 firms over a 5-year period to examine what factors
contribute to firms hiring a CSO and what factors contribute to a
CSO affecting a firm's financial performance. Of the sampled firms,
on average, during the study, 42 percent employed a CSO. Although
many factors may lead to a firm's decision to appoint a CSO, the
authors focused on five key areas that prior research suggests as
most important and most likely to lead to a CSO appointment:
1) As the business portfolio increases (e.g.. the firm becomes more
Oiversified)
2) As acquisition activity expands
3) As alliance activity increases
4) As a firm's size grows
5) As top management team interdependence increases
Results of the Menz and Sheef study reveal that an increase in
management interdependence and growth In acquisition aaivity
were most commonly associated with hiring a new CSO.
Source: Ba.scd on Markus Menz and Christine Sheef, "Chief Strategy
Officers: rrontingency Analysis of Their Presence in Top Management
Teams." Management Journal t5. no. 3(March 2014): 461-471,
10 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT

TABLE 1-1 Ten Famous,Strategic-Planning-Relevant Quotes from NFL Coaches

1. "Perfection is not attainable. But if we chase perfection, we can catch excellence." —Vince Lom-
bardi. Head Coach Green Bay Packers(1959-67) • ^
2. "Leadership is a matter of having people look at you and gain confidence.... If you're in control,
they're in control." —Tom Landry, Head Coach Dallas Cowboys(1960-88)
3."On a team,it's not the strength of the individual players, but it is the'strength of the unit and
how they all function together." —Bill Belichick, Head Coach New England Patriots(2000-
Present), New York Jets(1999), Cleveland Browns(1991—95) ^
4. "If you want to win, do the ordinary things better than anyone else does them day in and day
out." —Chuck Noll, Head Coach Pittsburgh Steelers(1969—91)
5. "Leaders are made,they are not bom.They are made by hard effort, which is the price which all
of us must pay to achieve any goal that is worthwhile." —Vince Lombardi, Head Coach Green
Bay Packers(1959-6?)
6: "Try not to do too many things at once. Know what you want, the number one thing today and
tomorrow. Persevere and get it done." —George Allen, Head Coach Los Angeles Rams(1957,
1966—70), Chicago Bears(1958-65), Washington Redskins(1971-77)
7."You fail all the time, but yon aren't a failure until you start blaming someone else." —Bum Phil
lips, Head Coach Houston Oilers(1975-80), New Orleans Saints(1981-85)
R. "Success demands singleness of purpose." —Vince Lombardi, Head Coach Green Bay Packers
(1959-67)
9. "Stay focused. Yovur start does not determine how you're going to finish." —Herm Edwards,
Head Coach New York Jets(2001-05), Kansas City Chiefs(2006-08)
10. "Nobody who ever gave his best regretted it." —George S. Halas, Head Coach Chicago Bears
(1933-42,1946-55, 1958-67)

Source: A variety of sources.

win the NCAA college basketball national championship versus Duke.^® Switching to football,
some inspirational, strategic-planning-related quotes from legendary National Football League
(NFL)coaches are provided in Table 1-1.

Vision and Mission Statements •)

Many organizations today develop a vision statement that answers the question **What do we
want to become?" Developing a vision statement is often considered tlje first step in strategic
planning, preceding even development of a mission statement. Many vision statements are a sin
gle sentence.For example,the vision statement of Stokes Eye Clinic in Florence, South Carolina,
is "Our vision is to take care of your vision."
Mission statements are "enduring statements of purpose that distinguish one business from
other similar firms. A mission statement identifies the scope of a firm's operations in product and
market terms."'' It addresses the basic question that faces all strategists:"What is our business?"
A clear mission statement describes the values and priorities of an organization. Developing a
mission statement compels strategists to think about the nature and scope of present operations
and to assess the potential attractiveness of future markets and activities. A mission statement
not only broadly charts the future direction of an organization but it also sei-ves as a constant
reminder to its employees of why the organization exists and what the founders envisioned when
they put their fame and fortune (and names) at risk to breathe life into their dreams.

External Opportunities and Threats

External opportunities and external threats refer to economic, social, cultural, demographic,
environmental, political, legal, governmental, technological, and competitive trends and events
that could signilicantly benefit or harm an organization in the future. Opportunities and threats
are largely beyond the control *>1 a sineic organization -thus the word cxtcnuil. .Some general
caieginies of o[>portunities aiKl thii ats are listed in fiible I -2, but be mindful that dollars, num
bers. percentages, latios. .md (.|uaiilirication are essential, so slnitegists can assess the magnilutlc
 CHAPTER 1 • THE NATURE OF STRATEGIC lyiANAGEMENT

TABLE 1-2 Sbme General Categories of Opportunities and Threats

• Availability of capital can no longer be taken for granted.
• Consumers expect green oi>erations and products,
i' • Marketing is moving rapidly to the Internet
• Commodity food prices are increasing. i
• An oversupply of oil is driving oil and gas prices down. ,
• Computer hacker problems are increasing. • . '
• Intmse price competition is plaguing most firms.
• Unen^loyment and underemployment rates remain high globally:
• Interest rates are low but rising.
• Product life cycles are becoming shorter.
• State and local governments are financially weak.
• Drug caItel-^■elated violence is increasing in Mexico.
• Winters are colder and summers are hotter than usual. ,,
• Birth rates are declining in most countries.
• Global markets offer the highest growth in revenues.
• New laws are passed.
• Competitors introduce new products.
o National catastrophes occur. ' ■
• The value of the Euro is rebounding.
• The separation between the rich and poor is growing.
• Social media networking is greatly expanding.
• The Russian ruble has dropped 60 percent in value.

of opportunities and threats and take appropriate actions. For example, in Table 1-2, rather than
saying "Marketing is moving rapidly to the Internet," strategists who.take the time to do research
would fmd, for example, that "spending on online advertisements globally rose about 25 percent
in 2014, according to eMarketer, and represented about 39 percent of total advertising spending
in tlie USA.^^ Strategies must be formulated and implemented based on specific factual informa
tion to the extent possible—because so much is at stake in having a good game plan.
External trends and events are creating a different type of consumer and consequendy a need
for different types of products, services, and strategies. Many companies in many industries face
the severe threat of online sales eroding brick-and-mortar sales. A competitor's strength could be
a threat, or a rival firm's weakness could be an opportunity.
A basic tenet of strategic management is that firms need to formulate strategies to take
advantage of external opportunities and avoid or reduce tlie impact of external threats. For rfiis
reason, identifying, monitoring, and evaluating external opportunities and threats are essential for
success. This process of conducting research and gathering and assimilating external information
is sometimes called environmental scanning or industry analysis. Lobbying is one activity that
some organizations use to influence external opportunit'^s and threats.

Internal Strengths and Weaknesses

Internal strengths and internal weaknesses are an organization's controllable activities that
are performed especially well or poorly. They arise in the management, marketing, finance/
accountins. production/operations, research and development, and management information
systems (MIS) activities of a business. Identifying and evaluating organizational strengths and
weaknesses in the functional areas of a business is an essential strategic-management activity.
Organizations strive to pursue strategies that capitalize on internal .strengths and eliminate inter
nal weaknesses.
.Strenulhs and weaknes.ses are dciermined relative to competiiors. Relative deficiency or
supehorin is important information. Also, strengths and weaknesses can bo determined by
elements heiti^ rather than performance, hor example, a strenglh may involve ownership ol
12 PART 1 • OVERVIEW OF ST'^ATEGIC MANAGEMENT
natural resources or a historic reputation for quality. Strengths' and weaknesses may be deter
mined relative to a firm's own objectives. For instmce,high levels of inventory tumover nwy not
be a strength for a firm that seeks never to stock-but •
In performing a strategic-management case analysis, it is important to be as divisional as
possible when detenmning and stating internal strengths and wealoiesses. In other words,for a
company such as Walmart saying,"Sam Club's revenues grew 11 percent in the recent quarter,"
is much better than Walmart couching all of its internal factors in terms of the firm as a whole.
"Being divisional" will enable strategies to be more effl^tively formulated because in strategic
planning,firms must allocate resources among di\isions(segments)of the firm (that is, by prod
uct, region, customer, or whatever the various units of the finn are), such as Walmart's Sam's
Club versus Walmart's Supercenters, or Walmart's Mexico segment versus Walmart's Europe |
segment.
Both intemal and external factors should be stated as specifically as possible, using numbers,
percentages, dollars, and jatios, as well as comparisons over time to rival firms. Specificity is
important because strategies will beformulated and resources allocated based on this informa
tion. The more specific the underlying external and intemal factors,the more effectively strategies
can be formulat^ and resources allocated.Determining the numbers takes more time,but survival
of the firm often is at stake, so doing some research and incorporating numbers associated with
key factors is essential.
Intemal factors can be determined in a number of ways,including computing ratios, measur
ing performance, and comparing to past periods and industry averages. Various types of surveys
also C2in be developed and administered to examine intemal factors, such as employee morale,
production efficiency, advertising effectiveness, and customer loyalty.

Long-Term Objectives
Objectives can be defined as specific results that an organization seeks to achieve in
pursuing its basic mission. Long-term means more than one year. Objectives are essential for
orgaiuzational success because they provide direction; aid in evaluation; create synergy;reveal
priorities; focus coordination; and provide a basis for effective planninig, organizing, moti ■

vating, and controlling activities. Objectives should be challenging, measurable, consistent,

reasonable, and clear. In a multidimensional firm, objectives are needed both for the overall
company and each division.

Strategies
Strategies are the means by which long-term objectives will be achieved. Business strategies
may include geographic expansion, diversification, acquisition, product development, market
pe etration, retrenchment, divestiture, liquidation, and joint ventures. Strategies currently being
pui'sued by some compames are described in Table 1-3.
Strategies are potential actions that require top-management decisions and large amounts
of the firm's resources. They affect an organization's long-term prosperity, typically for at
least five years, and thus are future-oriented. Strategies also have multifunctional and mul-
tidivisional consequences and require consideration of both the external and iniemal factors
facing the firm.

Annual Objectives
Annual objectives are short-term milestones that organizations must achieve to reach long-
term 'hjectives. Like long-term objectives, annual objectives should be measurable, quanti-
t: ive, challenging, realistic, consistent, and prioritized. They must also be established at the
corporate, divisional, and functional levels in a large organization. Annual objectives should be
Slated in terms of management, marketing, finance/accounting, production/operations, R&D.
and MIS accomplishments. .-X set of annual objectives is needed for each long-term objective.
These objectives are especially important in strategy implementation, whereas long-term ohjec-
tives are particularly impoiiam in strategy formulation. Annual objectives provide the basis for
alliicaiine resouices.

'X " ■ ■■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■' " ■ ■ '■ ■ ■ ■ " ■ ■ ^

 CHAPTER 1 • THE NAtURE OF STRATEGIC MANAGEMENT

TABLE 1-3 Sample Strategies in Action in 2015

. '^General Electric Company(GE)
HeCtric Company recently sold its appliance business to Sweden-based Electrblux AB for
i leaving GE focus^ almost entirely on finance and big-ticket industrial i^uipmmit,such as
locomotives, and aircraft engines. GE's CEO Jeff
1rw«n*vmf{vAe an/I airv^roA' Anmnaa /«T7'e
Immelt, when askeid **What is GE?,"
Ta-PT TvnnriAlf nrllAn oclra/l •1XZI%a#- «o

with the word energy, rather than insurance, plastics, media, cons'unHerfinance,
. >'^'i^plidnces.founded by Thomas Edison in 1889 and originally named Edison General Electric
';; I'Ctmpany,GE is returning to its roots as an energy company.The company has spentabout $14 billion
'.■lately buying oil-and-gas service companies, while divesting dishwashers, radios, stoves, microwayes,
' and toasters..
Chu/sCTUY),

Chuy's is a chsdn of 59 small Mexican restaurants scattered across the United States. It is lot "fast
casual," like Chipotle Mexican Grill; rather, it is a sit-dqwn, table-service restaurant that is uniquely
festive, including, for example, Elvis shrines and complimentary Happy Hour nacho bars served out
of makeshift car trunks. The d6coi also includes walls that feature customei-suomitted snapshots ^
of their pet dogs. Chuy's uniqueness and strategies are working great, as revenue soared 20 percent
to $64.1 million in its latest quarter. The company opened 11 more locations in the last 12 months.
At the individual restaurant level, Chuy's reported a 3 percent improvement in comps, comprised
of a 1.3 percent increase in customers and a 1.7 percent bump in the average check.-Chuy's compa
rable restaurant sales have increased for 17 consecutive quarters. Un'ike Chipt tie, v. 'lich recently
increased prices, Chuy!s has absorbed numerous commcdity increases, keeping most of its menu
items below $10.

Source: Company documents and a variety of sources.

Policies
Policies are the means by which annual objectives will be achieved. Policies include
guidelines, rules, and procedures established to suppoit efforts to achieve Stated objectives.
Policies are guides to decision making and address repetitive or recurring situations. Usually,
policies are stated in terms of management, marketing, finance/accoupting, production/
operations, R&D, and MIS activities. They may be established at the corporate level and
apply to an entire organization, at the divisional level and apply to a single division, or Jiey
may be established at the functional level and apply to particulai* opci tional activities or
departments.
Like aimual objectives, policies are especially important in strategy implementation
because they outline an organization's expectations of its employees and managers. Policies
allow consistency and coordination within and between organizational departments. Policy
change is sometimes difficult. For example, years ago, it was unquestioningly accepted that
people could smoke in their offices, in restaurants, in hotels, and on airplanes. But as people
and companies became educated about the haims of smoking—not only to smokers but also to
nonsmokers ^policy in businesses began to change. Even with the vast changes in smoking in
public areas, smoking rates are still high. In the United States, Kentucky takes the lead in hav
ing -nore smokers than in any other state: 30.2 percent of residents, followed by West Virginia
and Mississippi; Utah has the lowest rate (12.2%), followed by California and Minnesota.'^
In the United States overall, 20.5 percent of men smoke, compared to 15.8 percent of women.
For a brief time, people thought the answer might be "tobacco-less" cigarettes, as electronic
cigarettes hit the market. Unfortunately, however, the product still injects nicotine into the
smoker^s body. suggests that a healthier workforce can more effectively and efficiently
implement strategies. Smoking has become a heavy burden for Europe's state-run social welfare
systems with smoking-related diseases costing more than $100 billion a year. Smoking also is a
huee burden on companies worldwide, so firms are continually implementing policies to curtail
smoking Starbucks has banned smoking within 25 feet of its 7,000 stores not located inside
another retail establishment.
PARTI • OVERVIEW OF STRATEGIC MANAGEMENT

The Strategic-Management Model

The strategic-management process can best be studied and applied using a model. Eveiy" model
represents some kind of process. The framework illustrated in.Figure 1-1 is a widely accepted,
comprehensive model of the strategic-management process.^'' This model does not guarantee
success, but it does represent a clear and practical approach for formulating, implementing,
and evaluating strategies. Relationships among major components of the strategic-management
process are shown in the model, which'appears in all subsequent chapters with appropriate areas
shaped to show the particular focus of each chapter. This text is organized around tMs model
because the model reveals how.organizations actually do strategic planning. Three important
questions to answer in developing a strategic plan are as follows:
Where are we now?
Where do we want to go?
How are we going to get there?

',i.Chgpt^c1ol Business Ethics/SociaVResponsibiliiy/ErivironrT^ '

■ Perform"
• Exteroe'4>udjt
• Chapter.S

Implement
Gen«^^te. _ Implement Strategies
gjes-^ • •
■ Devsiop Vision'; • Evaluate," '• 'Strate'gles^ 5tin^. •
•. MarKet
Measure
• and Evaluate
■ and Mission » Long-Term and select •Manag'ement ■ Fihance",
• yktements. , qhjertives-^ j ^ _ Issues. 'Performance*
'strategies- ^^cCounttng,Jt&D,
Ch'ap^ri .
• .Chapter'2. Chapters .Chaptei*^ I".* Chapfer.7 ■ •agd.^S Issue? ■
h* • * *
Chapter.8'

'T^erfdrm •
I-. Internal Audit _ 'J
Chapter'4,*

; . > • •-
Chapter 11:- ^Qbal/lnternational Issues
j;' "t- -X. ^

strategy Strategy . Strategy

Formulation Implementation Evaluation I

figure 1-1
A Comprehensive Strategic-Management Model
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Rainan. jj.,N;.,|i,iiial
Ni;i,li;nl|i( \iu>,ar.
•!' .11 imiPatiioiin Suw i.oitjo.
< "■inii.ivi"! aiul i'liiu \ruim.i
<4 Imloitosia," InmnalWiguna."Balanoc
of Mmhciiuilii Soorecard
' tind of David's
Tci luwlnfiy. Stralcgic 2011)):
no. -I (()ciohor Modeling20. at Indii-sirial
Biisines'- 101 •
 CHAPTER 1 • THE NATURE OF STRATEGIC MANAGEMENT

Identifying an organization's existing vision, mission, objectives, and strategies is the logi
cal starting point for strategic management because a firm's present situation and condition may
preclude certain strategies and may even dictate a particular course of action. Every organiza
tion has a vision, mission, objectives, and strategy, even if these elements are not consciously
designed, written, or communicated. The answer to where an organization is going can be deter-
niined largely by where the organization has been!
The strategic-management process is dynamic and continuous. A change in any one of the
major components in the model can necessitate a change in any or all of the other components.
For instance, African countries coming online could represent a major opportunity and require
a change in long-term objectives and strategies; a failure to accomplish annual objectives might
require a change in policy; or a major competitor's change in strategy might require a change
in the firm's mission. Therefore, strategy formulation, implementation, and evaluation activities
should be performed on a continual basis, not just at the end of the yeai- or semiannually. The
strategic-management process never really ends.
Note in the strategic-management model that business ethics, social responsibility, and
environmental sustainabilit)- issues impact all activities in the model as discussed in Chaptci 10.
Also, note in the model that global and intemational issues impact virtually all strategic decisions,
as described in detail in Chapter 11.
The strategic-management process is not as cleanly divided and neatly performed in prac
tice as the strategic-management model suggests. Strategists do not go through the process in
lockstep fashion. Generally, there is gi^'e-and-take amooj;, hierarchical 'evels of an or; aniza-
tion. Many organizations conduct formal meetings semiannually to discuss and update the firm's
vision, mission, opportunities, threats, strengths, weaknesses, strategies, objectives, policies, and
performance. These meetings are commonly held off-premises and are called retreats. The ratio
nale for periodically conducting strategic-management meetings away from the work site is to
encourage more creativity and candor from participants. Good communication and feedback
are needed throughout the strategic-management process. Tlie Academic Research Capsule 1-2
reveals what activity is most important in the strategic-management process.
Application of the strategic-management process is typically more.foniial in larger and well-
established organizations. Fonuality refers to the extent that participants, responsibilities, authority,
duties, and approach are specified. Smaller businesses tend to be less formal. Firms that compete m
complex,rapidly changing environments,such as technology companies,tend to be more formal in
strategic planning. Firms that have many divisions, products, markets, and technologies also tend
to be more formal in applying stiategic-management concepts. Greater formality in applying the
strategic-management process is usually positively associated with organizational succ^^s.

Benefits of Engaging in Strategic Management

Strategic management allows an organization to be more proactive than reactive in shaping
its own future; it allows an organization to initiate and influence (rather than just respond to)
activities—and thus to exert control over its own destiny. Small business owners, chief executive

ACADEMIC RESEARCH CAPSULE 1-2

What Activity Is Most Important in the Strategic-Management Process?

Receni research has examined the strategic-management process
and concluded that perhaps the most important "activity" is the
feedback loop, because strategy must be thought of as a "verb rather
than a noun." Rose and Cray contend that strategy is a "living, evolv
ing conceptual enttty," and as such must be engulfed in flexibility.
"Flexibility" should also be reflected in the structures put in place
to monitor and rr.odlfy strategic plans. Flexibility safeguards should
increasingly be known and practiced throughout the firm, especially
ai bvver fr-vels of rhe organi.vatio- The stages of sttateqir manage
ment ,formulaiioM. implementation, and evaiuatiom are so fluid as
to be virtually indistinguishable when one starts and the other ends.
Thus, in the comprehensive model illustrated, the encompassing
feedback ioop is vitally important to enable firms to readily adapt to
changing conditions. A Srgnificant change in any activity• 'box) in the
model could necessitate change(s) in other activitiei.
Source: Based on Wade Ruse and David Cray " The Role ot Context in
the TransCorinaiicm of Flanned Sirateg) into Implemented Strategy."
Iiiirrnaiioinii loiinuil 0/ /{iiM'u-.ys \^oiuiniiiieui n/ul F.ronom'u Hcsecvvh 4.
III'. )< l20l,O: 72l-7.i7.

.'r; ■A'-, • Mi
• PART1 • OVERVIEW OF STRATEGIC MANAGEMENT

officers, presidents, and managers of many for-profit and nonprofit organizations have recog
nized and realized the benefits of strategic management.
Historically, the principal benefit of strategic management has been to help organizations
formulate better strategies through the use of a more systematic, logical, and rational approach
for decision making. In addition, the process, ratlier than the decision or document, is also
a major benefit of engaging in strategic management. Through involvement in the process
(i.e., dialogue and participation), managers and employees become committed to supporting
the organization. Communication is a key to successful strategic management. Communication
may be the most important word in management. Figure 1-2 illustrates this intrinsic benefit of
a firm engaging in strategic planning. Note that all firms need all employees "on a mission" to
help the firm succeed.
Dale McConkey said, "Plans are less important than planning." The manner in which
strategic management is carried out is therefore exceptionally important. A major aim of
the process is to achieve understanding and commitment from all managers and employees.
Understanding may be the most important benefit of strategic management,followed by com
mitment. When managers and employees understand what the organization is doing and why,
they often feel a part of the firm and become committed to assisting it. This is especially true
when employees also understand links between their own compensation and organizational
performance. Managers and employees become surpdsingly creative and innovative when
they understand and support the firm's mission, objectives, and strategies. A great benefit of
strategic management, then, is the opportunity that the process provides to empower individu
als. Empowerment is the act of strengthening employees' sense of effectiveness by encour
aging them to participate in decision making and to exercise initiative and imagination, and
rewarding them for doing so. Wiliiam Fulmer said,"You want your people to run the business
as it if were their own."
Strategic planning is a learning, helping, educating, and supporting process, not merely a
paper-shuffling activity among top executives. Strategic-management dialogue is more impor
tant than a nicely bound strategic-management document. The worst thing strategists can do
is develop strategic plans tliemselves and then present them to operating managers to execute.
Through involvement in the process,line managers become "owners" of the strategy. Ownership
of strategies by the people who have to execute them is a key to success!
Although making good strategic decisions is the major responsibility of an organization's
owner or chief executive officer, both managers and emplo>ees must also be involved in strategy
formulation, implementation, and evaluation activities. Participation is a key to gaining com
mitment for ne^"A changes. An increasing number of corporations and institutions are using
strategic management to make effective decisions. But strategic management is not a guarantee
for success; it can be dysfunctional if conducted haphazardly.

Financial Benefits
Organizations that use strategic-management concepts are generally more profitable and
successful than those that do not. Businesses using strategic-management concepts show signifi
cant improvement in sales, profitability, and productivity compai-ed to firms without systematic

THE RESULT '

ai Td Ail Managers and
'...objectives Employees on a
■^VDiialpgu^- b.To implemenT Mission to Help the
'xbrPartieipation ■ f is dotn^/pi^ ' strategies • Firm Succeed
add why , 4 c; To work hard "
>- >■< .>W

FIGURE 1-2

Benefits to a Firm That Does Strategic Planning

 CHAPTER 1 • THE NATURE OF STRATEGIC management

planning activities. High-performing firms tend to do systematic plannjng to prepare for future
fluctuations in their external and internal environments. Firms with management systems that
utilize strategic-planning concepts, tools, and techniques generally exhibit superior long-term
financial performance relative to their industry.
High-performing firms seem to make more informed decisions with good anticipation of
I - both short- and long-term consequences. In contrast, firms that perform poorly often engage in
activities that are shortsighted and do not reflect good forecasting offuture conditions. Strategists
of lovv-performing organizations are often preoccupied with solving intemal problems and meet
ing paperwork deadlines. They typically underestimate their competitors' strengths and overesti
mate their own firm's strengths. They often attribute weak performance to uncontrollable factors
such as a poor economy, technological change, or foreign competition,
More than 100,000 businesses in the United States fail annually. Business failures include
bankruptcies, foreclosures, liquidations, and court-mandated receiverships. Although many
factors besides a lack of effective strategic management can lead to business failure, the plan
ning concepts and tools described in this text can yield substantial financial benefits for any
organization.

Nonfinandal Benefits
Besides helping firms avoid financial demise, strategic management offers other tangible
benefits, such a.s enhanced awareness of ext^. mal thre:its, i" iprovsd under^'anding uf compefi
tors' strategies, increased employee productivity, reduced resistance to change, and a clearer
understanding of performance-reward relatidnsh'ps. Strategic management enhances the prob
lem-prevention capabilities of organizations because it promotes interaction among managers
at all divisional and functional levels. Firms that have nurtured their managers and employees,
shared organizational objectives with them, empowered them to help improve the product or
service, and recognized their contributions can tum to them for help in a pinch because of this
interaction.
In addition to empowering managers and employees, strategic management often brings
order and discipline to an otherwise floundering firm. It can be the beginning of an efficient and
effective managerial system. Strategic management may renew confidence in the current business
strategy or point to the need for corrective actions. The strategic-management process provides
a basis for identifying and rationalizing the need for change to all managers and employees of
a firm; it helps them view change as an opportunity rather than as a threat. Some nonfinancial
benefits of a fmn utilizing strategic management, according to Greenle) are increased discipline,
improved coordination, enhanced communication, re... ced resistance to change, increased for
ward thinking, improved decision making, increased synergy, and more effective allocation of
time and resources.

Why Some Firms Do No Strategic Planning

Some firms do no strategic planning, and some firms do strategic planning but receive no support
from managers and employees. Ten reasons (excuses) often given for poor or no strategic plan
ning in a firm are as follows;
1. No tormal training in strategic management
2. No understanding of or appreciation for the benefits of planning
3. No monetary rewards for doing planning
4. No puni.shmenl for not planning
5 Too busy "firefighting"(resolving internal cnses) to plan ahead
6 View planning as a waste of lime, since no product/service is made
7* Laziness; effective planning takes time and effort: time is money
8* cimicnt with current success: failure to realize that succe.ss today is no guarantee fur
'suc'l^ss tomorrow; even Apple inc. is an example
9. Oveivonfidenl . , • .
10 Pno. bad experience with strategic planning done soniciime/somewhcrc

ISV- • -
18 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT

Pitfalls in Strategic Planning

Strategic planning is an involved, intricate, and complex process that takes an organization into
uncharted territory. It does not provide a ready-to-use prescription for success; instead, it takes
the organization through a journey and olfers a framework for addressing questions and solving
problems. Being aware of potential pitfalls and being prepared to address them is essential to
success.

Here are some pitfalls to watch for and avoid in strategic planning:
• Using strategic planning to gain control over decisions and resources
• Doing strategic planning only to satisfy accreditation or regulatory requirements
• Too hastily moving from mission development to strategy formulation
• Failing to communicate the plan to employees, who continue working in the dark
• Top managers making many intuitive decisions that conflict with the formal plan
• Top managers not actively supporting the strategic-planning process
• Failing to use plans as a standard for measuring performance
• Delegating planning to a "planner" rather than involving all managers ^
• Failing to involve key employees in all phases of planning
• Failing to create a collaborative climate supportive of change
• Viewing planning as unnecessary or unimportant
• Becoming so engrossed in current problems that insulficient or no planning is done
• Being so formal in planning that flexibility and creativity are stifled^'

Comparing Business and Military Strategy

A strong military heritage underlies the study of strategic management. Terms such as objec
tives, mission, strengths, and weaknesses were first formulated to address problems on the bat
tlefield. According to Webster's New World Dictionary, strategy is "the science of planning and
directing large-scale military operations, of maneuvering forces into the most advantageous
position prior to actual engagement with the enemy."'^ The word strategy comes from the
Greek strategos, which lefers to a military general and combines stratos(the army)and ago(to
lead). The history of strategic planning began in the militaiy. A key aim of both business and
military strategy is "to gain competitive advantage." In many respects," business strategy is like
military strategy, and military strategists have learned much over the centuries that can benefit
business strategists today.
Both business and military organizations try to use their own strengths to exploit com
petitors' weaknesses. If an organization's overall strategy is wrong (ineffective), then all the
efficiency in the world may not be enough to allow success. Business or military success
is generally not the happy result of accidental strategies. Rather, success is the product of
both continuous attention to changing external and Internal conditions and the formulation
and implementation of insightful adaptations to those conditions. The element of surprise
provides great competitive advantages in boih military and business strategy; information
systems that provide data on opponents' or competitors' strategies and resources are also
vitally important.
A fundamental difference between military and business strategy is that business strateiiy
is formulated, implemented, and evalu: ed with an assumption of competition, whereas mili
tary strategy is based on an assumption of conflict. Nonetheless, military conflict and business
competition are so similar that many strategic-management techniques apply equally to both.
Business strategist^ ha\ e access to valuable insights that military thinkers have refined over time"
Superior strategy formulation and iiriplerncntation can overcome an opponent's superiority in
numbers and resources.
Born in Pella in 356 hcf. Alc.xandcr the Great was king of Macedon. a state in northern
ancient Greece, fiitored b\ Aristotle until the age of 16. Alexander had created one of the largest
empires ot the aiieiem Aorf i h\ the age of .^O. riretching from the Ionian Sea to the Himalayas
Ale.xander was uiuiel. . laJ ip l^aiile aiiJ !^ aonsi.lered one of history's most successful commanil-
cis. lie hccauic Uu ,ip ,v.;,. v.Inch militaiv leaders even today compare them^cKes.'and
 CHAPTER 1 • THE NATURE OF STRATEGIC MANAGEMENT 19

military academies throughout the world still teach his strategies and tactics. Alexander the Great
. once said,"Greater is an army of sheep led by a lion,than an army oflions led by a sheep." This
^ quote reveals the overwhelming importance of an excellent strategic plan for any organization to
'^succeed.The legendary Alabama football coach Bear Bryant asserted,"I will defeat the opposing
^?coach's team with my players, but if given a week's notice, I could defeat the opposing coach's
;S team with his players and he take my players.'
Both business and military organizations must adapt to change and constantly improveto be
successful. Too often,firms do not change their strategies when their environment and competi-
'^vtive conditions dictate the need to change. Gluck offered a classic military example of this:
When Napoleon won,it was because his opponents were committed to the strategy, tac
tics, and organization of earlier wars. When he lost—against Wellington, the Russians,
and the Spaniards—-it was because he, in turn, used tried-and-true strategies against
enemies who thought afresh, who were developing the stiategies not of the last war but
of the next.^-^

Sun Tzu's 7he Art of War has been appUed to many fields well outride of the mihtary. Much
of the text is about how to fight wars without actually having to do battle: It gives tips on how
to outsmart one's opponent so that physical battle is not necessary. As such, the book has found
application as a training guide for many competitive endeavors that do not involve actual combat,
such as in devising courtroom trial stratcy or acnuirino a rival company. There are business
^ books applying its lessons to office politics and corporate strategy. Many Japanese companies
''/make the book required reading for their ton. executives. The book is ai popular read among
Western business managers who have turned to it for inspiration and advice on how to succeed in
competitive business situations.
The Art of War has also been applied in the world of sports in preparing for athletic con-
,tests. NFL coach Bill Belichick is known to have read the book and used its l^^ssons to gain
/ insights in preparing for games. Australian cricket coaches, as well as Brazilian association
-'football coaches Luis Felipe Scolari and Carolos Alberto Barreira, embraced the text. Scolari
; 'made the Brazilian V/orld Cup squad of 2002 study the ancient work during their successful
'campaign. .
Similarities can be construed from Sun Tzu's writings to the practice of formulating and
^implementing strategies ^ong businesses today. Table 1-4 provides narrative excerpts fi-om The
; ;Arf of War. As you read through the table, consider which of the principks of war apply to busi
ness strategy as companies today compete aggressively to survive ard grow.

TABLE 1-4 Excerpts from Sun Tzu's T/ieArtof IVar Writings

War is a matter of vital importance to the state: a matter of life or death, the road either to snrvival or
ruin. Hence, it is imperative that it be studied thoroughly.
Warfare is based on deception. When near the enemy, make it seem that you are far away; when far
away, make it seem that you are near. Hold out baits to lure the enemy. Strike the enemy when he
is in disorder. Avoid the enemy when he is stronger. If your opponent is of choleric temper, try to
irritate him. If he is arrogant, try to encourage his egotism. If enemy troops are well prepared after
reorganization, try to wear them down. If they are united, try to sow dissension among them. Attack
the enemy wiiere he is unprepared, and appear where you are not expected. These are the keys to
victory for a strategi.st. It i.s not possible to fornmlate them in detail beforehand.
A speedy victory is the main object in war. If this is long in coming, weapons are blunted and morale
depressed. When the arniy engages in protracted campaigns, the resources of the state will fall short.
Thus, while we have heard of.stupid haste in war, we have not yet seen a clever operation that was
prolonged.
Generally, in war the best policy is to take a state intact; to ruin it is inferior to this. To capture the
enein V s entire army is better than to destroy it; to take intact a regiment, a company, or a squad is
bettei ilniii to destrov it l oi i«' v. iti "'i'-' hmidicd \ ietor.es in one hundred battles is not the epitome o!
d." eiie-ii;. ".iilio'-i! ifhime IMP..-Mipirinr r\(x-|li;nr._ fhose M^Ii!ed in v. ,i! subdue
Ihr ei . A ■ "ni;. - itlionf battle
 PARTI • OVERVIEW OF STRATEGIC MANAGEMENT

• The art of using troops is this; When ten to the enemy's one, surround him. When five times his
strength, attack him. If double his strength, divide him. If equally matched, you may engage him with
some good plan. If weaker, be capable of withdrawing. And if in all respects unequal, be capable of
eluding him.
• Know your enemy and know yourself, and in a hundred battles you will never be defeated. Wheii you
are ignorant of the enemy but know yourself, your chances of winning or losing are equal. If ignorant
, both of your enemy and of yourself, you are sure to be defeated in every battle.
• He who occupies the field of battle first and awaits his enemy is at ease, and he who comes later to
the scene and rushes into the fight is weary. And therefore, those skilled in war bring the enemy to
the field of battle and are not brought there by him. Thus, when the enemy is at ease, be able to tire
him; when well fed, be able to starve him; when at rest; be able to make him move.
• Analyze the enemy's plans so that you will know his shortcomings as well as his strong points.
Agitate him to ascertain the pattern of his movement. Lure him out to reveal his dispositions and to
ascertain his position. Launch a probing attack to leam where his strength is abundant and where
deficient. It is according to the situation that plans are laid for victory, but the multitude does not
comprehend this.
• An army may be likened to water, for just as flowing water avoids the heights and hastens to the low
lands, so an army should avoid strength and strike weakness. And as.water shapes its flow in accora-
- ance with the ground, so an army manages its victory in accordance with the situation of the enemy.
And as water has no constant form, there are in warfare no constant conditions. Thus, one able to win
the victory by modifying his tactics in accordance with the enemy situation may be said to be divine.
• If you decide to go into battle, do not announce your intentions or plans. Project "bu'^iness as
usual."

• Unskilled leaders work out their conflicts in courtrooms and battlefields. Brilliant strategists rarely
go to battle or to court; they generally achieve their objectives through tactical positioning well in
advance of any confrontation.
• When yoii do decide to challenge another company (or army), much calculating, estimating, analyz
ing, and positioning bring triumph. Little computation brings defeat.
• Skillful leaders do not let a strategy inhibit creative counter-movement. Nor should commands from
those at a distance interfere with spontaneous maneuvering in the immediate situation.
■ • When a decisive advantage is gained ov^r a rival, skillful leaders do net press on. They hold their
position and give their rivals the opportunity to surrender or merge. They do not allow their forces to
be damaged by those who have nothing to lose.
• Brilliant strategists forge ahead with illusion, obscuring the area(s) of major confrontation, so
that opponents divide their forces in an attempt to defend many areas. Create the appearance
of confusion, fear, or vulnerability so the opponent is helplessly drawn toward this illusion of
advantage.

Note: Substitute the words strategy or strategic planning for war or warfare.
Source: Sun Tzu's The Art of War Writings, 1910, Lionel Giles.

Figure 1-3 reveals that to gain and sustain competitive advantages,
a firm must create and nurture a clear vision and mission, and
then systematically formulate, implement, and evaluate strategies.
Consistent business success rarely happens by chance; it most often
results from careful planning followed by diligent, intt-iiigent, hard
work 1* the process were easy, every business would be successful,
Consts*!. t success requires that strategists gather and assimilate rel-
ev: "t data, mak-e tough trade-off decisions among various options
that would benefit the firm, energize and reward employees, and
contir jally adapt to change. To survive and prosper, a business must
gam a-^d sustain at least several major competitive advantages over
rival ^ . and resolve potential problems
The strategic-management process represents a systematic means
I or creating, maintaining, and strengthening a firm's competitive ad
vantages. This text provides step-by-step guidance throughout the
process to help strategists gain and sustain a firm's competitive advan
tages. As the eleven chapters unfold, more than 100 key elements of
the process, ranging from developing portfolio matrices to managing
workplace romance, are examined to help strategists lead the firm in
delivering prosperity to shareholders, customers, and employees. The
eleven chapters provide a clear, planned, journey through the strate
gic-management process, with numerous highlights accented along
the way, so strategists can perform essential analyses and anticipate
leading tlieir firm to success

k-.
- '-Y-'
 • ■ - • .•.tv5.VV.;.'5V^£a?-^?.;3
^-5:. -iJ:iiJv,>;:-ites;vwS
'i' s * 7. '- .^ . . »vv'&v'ii o "-jv^./

.J-- -. !'r.;.* •• -- •* '•?< If

--W

Formulate Strateg
Collect, AnaIyz«Bj.&-|
Prioritize Data Us'inig
Matrices; Establish Aky^.,,'■•• ..
Clear Strategicpl^^«'' '

■ ■ <> '■

'r'^ ' ^ '

FIGURE 13
How to Gain and Sustain Competitive Advantages
V '••• •
.<•.•1(1. .. »,.

In performing strategic-management case analysis, emphasize
throughout your project, beginning with the first page or slide,
where your firm has competitive advantages and disadvantages.
More importantly, emphasize throughout how you recommend the
firm sustain and grow its competitive advantages and how you rec
ommend the firm overcome its competitive disadvantages. Pave the
way early and often in your presentation for what you ultimately
recomrr.sind your firm should do over the next three years. The no
tion of competitive advantage should be integral to the discussion
of every page or PowerPoint slide. Therefore, avoid being merely
descriptive in your written or oral analysis; rather, be prescriptive,
insightful, and forward-looking throughout your D''oject.

Chapter Summary
All rinns have a strategy, even if it is informal, unstructured, and sporadic. AD organizations are
heading somewhere, but unfortunately some organizations do not know where they are go.ng.
The old .saying "If you do not know where you are going, then any road will lead yo.. there!"
accents the need for organizations to u.se strategic-management concepts and techniques. The
siratcgic-managenient process is hecomiiig more widely used hy sniall llrms. large companies,
nonprolil instiliilions. governnicnial organizations, and miiltinatioiial cnngloineraies alike. The
proee.ss of empowering rnanageii and employees has almost limille-is hcneliis.
 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT

Organizations should take a proactive rather than a reactive approach in their industry, and
they should strive to influence, anticipate, and initiate rather than just respond to events. The
strategic-management process embodies this approach to decision making. It represents a logical,
systematic, and objective approach for determining an enterprise's future direction. The stakes
are generally top high for strategists to use intuition alone in choosing among altemative courses
of action. Successful strategists take the time to think about their businesses, where they are with
their businesses, and what they want to be as organizations—and then they implement programs
and policies to get from where they are to where they want to be in a reasonable period of time.
.It is a known and accepted fact that people and organizations that plan ahead are much more
likely to become what they want to become than those that do not plan at all. A goqd strategist
plans and controls his or her plans, whereas a bad strategist never plans and then tries to control
people! This text is devoted to providing you with the tools necessary to be a good strategist.

MyManagementLab®
To compiete the problems with the o, go to EOC Discussion Questions In the MyLab.

Key Tenns and Concepts

annual objectives (p. 12)
competitive advantage(p. 8)
empowerment(p. 16)
environmental scanning (p. II)
external opportunities(p. 10)
external threats (p. 10)
intemal strengths (p. 11)
internal weaknesses(p. 11) •
intuition (p. 6)
long-range planning (p. 5)
long-term objectives(p. 12)
mission statements (p. 10)
policies(p. 13)
retreats (p. 15)
strategic management(p.5) ^
Strategic-management model(p. 15)
strategic-management process (p. 5)
~ strategic planning (p. 5)
- strategies(p. 12)
strategists (p. 8)
. =•' strategy evaluation (p.6)
strategy formulation (p. 5)
strategy implementation (p.6) ■
V,;'. sustained competitive advantage (p-.S)
vision statement(p. 10)

Issues for Review and Discussion

1-1. Diagram the comprehensive strategic-management
model.
1-2. Develop a diagram to reveal the benefits to a firm for
doing strategic planning. Include "improved under
standing," "enhanced communication," "all managers
and employees on a mission," and "greater commit^
ment"—in the correct order.
1-3. How important do you believe "having an excellent-
game plan" is to winning a basketball or football game
against your university's major rival? Discuss.
1-4. Are strategic management and strategic planning
synonymous terms? Explain.
1-5. Why do many firms move too hastily from vision
and mission development to devising alternative
strategies?
1-6. Why arc sirategic-pUinning retreats often conducted
awa> from the worksite ? How often should firms have a
rctreai. and who should participate in them?
1-7. Distinguish between long-range planning and strategic
planning.
1-8. Compare a company's strategic plan with a football
team's game plan.
1-9. How important do you think "^eing adept at adapting"
is for business firms? Explain.
1-10. As cited in the chapter,famous businessman Edward
Darning once said,"In God we trust. All others bring
data." What did Deming mean in terms of developing a
strategic plan?
1-11. What strategies do you believe can save newspaper
companies from extinction?
1-12. Distinguish between the concepts of vision and mission.
1-13. Tour university has fierce competitors. List three
external opportunities and three external threats that
face your university.
1-14. List three internal strengths and three internal weak
nesses that characterize your univcrsitv
 CHAPTER.1 • THE NATURE dp STRATEGIC Management

.List reasons why objectives are essential for organiza- • 1-33. Most students will never become a chief executive of
fional success.
. Why are policies especially iiripoitant in strategy impl^:. ' ficer or even a top manager in a large company.So why
is it important for all business majors to study strategic
mentation? management?
.What is a."retreat," and why do firms t^e the time and 1-34. Describe the content available at the Strategy Club •
spend the money to have these? website at www.strategyclub.com.
. Discuss the notion of strategic planniiig being 1-35. List four fin^cial and four npnfinancial benefits of a
more formal versus informal in an organization. On ^ firm engaging in strategic planning. .
1-to-lO scale from formal to informal, what number 1-36. Why is it that a firm can normally sustm a competitive
best represents your view of the most effective
advantage for only a limited period of time?
approach? Why? 1-37. it is not adequate sirnply to obtain competitive
.List what you believe are the five most important advantage? v-' • ■
lessons for business that can be garnered from The Art l[-38. How can a firm best achieve sustained competitive
ofWarho6\i. advantage?
. Whatis the Amdamental difference between business strat-Q 1-39. Tn sequential order in the strategic-planning process,
egy and military strategy in teii^s of basic assumpHons? arrange the foUowing appropriately; policies, objectives,
. Explain why the strategic-management class is often vision, strategies, mission, strengths.
called a "capstone course." o 1-40. Label the following as an opportunity, a strategy, or a
.What aspect of strategy formulation do you think strength. , '
requires the most time? Why?
. Why is stiategy implcmentat»t.yu ofiwr. considereo a. XYZ Inc. is hiring 50 more salespersons.
the roost difficult s.Uige in the strategic-management b. XYZ Inc. has 50 salespersons.
process? c. XYZ Inc,*s rival firm has only 50 salespersons.
. Why is it so impottant to integrate intuition and analysisO 1-41. What two factors most often result in a CSO being
in strategic management? hired or appointed by the firm?
, Explain the imnortance of a vision and a mission state- o 1-42. Explain why internal strengths and weaknesses
ment. sho'old be stated in divisional terras to the extent
. Discuss relationships among objectives, sttategies, and possible. .'
policies. o 1-43. Explain why both internal and external factors should
. V.^y do you think some chiefexecutive officers fail to use a be stated in specific terms (that is, using numbers, per
strategic-management approach to decision making? centage, money ratios, and comparisons over time) to
, Discuss the importance of feedback in the strategic- the extent possible.
management model. ■ o 1-44. Identify the three activities that comprise strategy
, How can strategists best ensure that strategic.' will be evaluation.
effectively implemented? Q i-45. List six characteristics of annual, objecu.'es.
Give an example of a recent podticaJ development that o 1-46. Would strategic-management concepts and techniques
changed the overall strategy of an organization. benefit foreign businesses as much as domestic firms?
Who are the major competitors of your college or uni Justify your aiiswer.
versity? What are their strengths and weaknesses? WfaatQ I 47. What do you believe are some potential pitfalls or risks
are their strategies? How successful are these institu in using a strategic-management approach to decision
tions compared to your college? maidng?
In your opinion, what is the single major benefit of o 1-48. What does -ecent research reveal to be the most impor
using a strategic-management approach to decision tant component/activity in the strategic-management
making''Justify your answer. process?

MyManagementLab®
Go to the Assignments section of your MyLab to complete these writing exercises.
1-49. Strengths and weaknesses should be determined relative 1-50. What ar'= the three stages in strategic mana eme
to competitors, or by elements of being or relative to a Which stage is more analytical? Which reHes nmst on
firni'.s own objectives. Explain. empowerment to be successful? Which relies most on
.statistics? Justify your answers. "
24 PARTI • OVERVIEW OF STRATEGIC MANAGEMENT \ • ■ •••
•• ,

'■.-.if-- . -

MiNJ-CASE ON THE KROGER COMPANY (KR)

I-^ 'ir1T~'ili^i'ft^'i'

WHAT AMERICAN COMPANY DOES THE BEST

JOB OF strategic PLANNDIG?
The answer to this question may be Kroger Company. Founded in 1883 and headquartered in
Cincinnati, Ohio, Kroger is one of America's best companies for effectively formulating, implement
ing, and evaluating strategies. Kroger manufacturers, processes, and distributes food for sale in its
supermarkets, drugstores, and convenience stores. The company riot only owns and operates 325
Source: ifoto/Fotolia jewelry stores—it also owns City Market, Dillons, Food 4 Less, Fred Meyer, Frys, H^s Teeter, Jay
C. King Soopers, OFC, Ralphs, and Smiths. All total; Kroger operates nearly 2,700 supermarkets,
and more than 1,300 of these have fuel centers. Kroger is recognized by Forbes as the most generous
company in the United States because it actively supports hunger relief, breast cancer awareness, the
military and their families, and more than 30,000 schools and grassroots organizations. The company
also contributes food and funds equal to 200 million meals a yjear through more than 100 Feeding
America food bank partners. And Kroger does all of this very profitably. In fact, Kroger dominates
the supermarket industry as the largest and most profitable firm. Kroger purchased Harris Teeter
Supermarkets in 2014.
■ Kroger tries every day to help consumers stretch their food budget in a variety ofways, including
weekly promotions and fuel rewards. And Kroger continue.s to make natural and organic foods al-
fordable and accessible to all customers, especially with Simple Truth. The company's brands (labels)
represent about 27.3 percent of total units sold and 25.8 percent of sales dollars, excluding ftiel and
pharmacy. Kroger appeara to be perfectly vertically integrated, owning substantial parts of its supplier,
production, and distribution business network.
Even the most successful firms, however, are vulnerable strategically. Kroger is concerned that
two of the world's largest supermarket chains are discussing a merger. Specifically, Dutch company
Royal Ahold NV and Belgium-based Delhaize Group are talking about combiniug into one company.
Ahold operates Giant Food Stores in Maryland, Yirginia. and Washington, DC, where Krogrii: wants
to build more Harris Teeter Supermarkets Inc. Ahold also owns Martin's Food- Markets stores in
Virginia. Delhaize operates Food Lion in tlie South, where Kroger is strong. Ahold owns Peapod,
an online grocery ordering service that delivers products to customers' homes or lets them pick up
orders at stores. Kroger is trying hard to enter the online grocery ordering and customer pickup
service. Ahold also operates Stop & Shop in New England and the Northeast, where Kroger plans to
build its first stores. Delhaize runs Hannaford stores in Nev/ England. If Ahold and Delhaize merge,
that would create a company with 2,034 supermarkets in the United States, compared to Y oger's
2,625 in 34 states, and could res"lt in a more price competitive grocery business.

Questions

mr 1. Explain why Kroger is recognized by Forbes as one of the most generous companies in America.
Is being generous consistent with (or inconsistent with) being a highly profitable? Discuss.
2. Which supermarket do you shop most often and why?
3. What are the three most important criteria that determine in which supermarket you shop? Does
Kroger meet your criteria?
4. What response would be appropriate for Kroger if Ahold and Deli.aize merge?
5. Go to the webpfie www.finance.yahoo.com, put in KR as the stock symbol, and then click on
Profile, Statistics, Competitors, and Headlines. Determine whether Kroger has continued its
fantastic performance lately. Use this website, among others, throughout this course to gather
research about companies.
W'
''•' J ■■' 6. Determine from the www.finance.com website who are Kroger's two primary competitors, and
how is Kroger performing versus those rival companies?
Source: Company documents and a vju'icty of sources.

Current Readings ; ^ ^
Alb^ Laura.'The CEO ofWyiiams-Soncfma on BlenH5»ig Iq-
] .. stinct with Analysis." Harvard Business Revie\y 92.9(2014):
41-44. Premie/', Web,5 Sept.2014.
Courtney, Hugh,Dan Loyallo,and Carmina Clarke.'T)eciding
/ • Hdw to Decide(Cover Sioiy^r Harvard Business Review
. 91.11 (2013): 62-70- iSoMree Premier, Web.5
/ Sept. 2014. ' . .
Hon,Alice H.Y., Matt Bloom,and J, Michael CranL ''dyercoming
Resistance to Change and Enhancing Creative Peiformance."
Journal ofManagement^30Q\A)'.919-'9A\.Business
Abstracts with Full Text(H. W. Wilson). Web,5 SepL 2014.
Martin, Roger L."The Big Lie of Strategl; Planning," Harvard
Business Review 92.1/2(2014): 78-8,4- Business Source
Premier. Web.5 Sept. 2014. ' 'with Full Text(H. W. Wilson). Web.5 Sept. 2014.
Endnotes
',1. Kathv Kiely,"Officials Say Auto CTEOsMust Be Specific
on Plans," i75A Today, November 24;2008,3B. ,
y i. Peter Drucker, Management: Tasks, Responsibilities, arA
Prncricej(New York; Harper & Row, 1974),611,
'3. Alfred Sloan, Jr., Adventures ofthe White Collar Man
tNew York: Doubleday, 1941), 104.
^. 4. Quoted in Eugene Raudsepp,"Can You Trust Your
, . Hunches?" Management Review 49,no.4(April 1960): 7.
5. Stephen Harper,"Intuition: What Separates Executives
from Managers," Business Honzons3l,no.5(September-
■ October 1988): 16.
6. Ron Nelson,"How to Be a Manager/'Success(July-August
: 1985): 69. ' Management Journal 6, no. 27(1994): 1649-1665; Michael
7. Bruce Henderson, Henderson on Corporate Strategy
(Boston: Abt Books. 1979^ 6. - .
8. Robert Waterman, Jr., The Renewal Factor: How the Best
Get and Keep the Competitive Edge(New York: Bantam,
1987). See also BusinessWeek, September 14, 1987,100:
and Academy ofManagement Executive 3, no. 2(May
1989): 113.
9. Jayne O'Donnell,"Shoppers Rock to Discount Stores,"
USA Today, February 25, 2009, B1.
10. Richie Brand,"Nolan Richardson Scored a Championship
Career," Investor's Business Daily(November 14, 2014): A3.
11. John Pearce, U, and Fred David."The Bottom Line on
Corporate Mission Statements," Academy ofManagement
Executive 1, no.2(May 1987): 109.
12. Jack Marshall,"Online Ads Lure Cash, But Losses Still
Mount" Wall Street Journal(August 18, 2014), Bl.
CHAPTER 1 • THE NATURE OF STRATEGIC management 25
Prieid, ^chaidL.,John E;Butler, and Sah-Li,'Toward '
Reimagining Strategy Research: Retrospe.ction and
I^ospecdon on the 2011AMR Decade Award Article."
Academy ofManagement Revi^ 38.4^2013): 471-489.
Business Snwree Premier. Web.5 Sept. 2014..- -
Roseiizweig, Phil."'What Makes Strategic Decisions
Different fCover Story)." Harvard Business Revie\y -
91.11 (2013): t>Z-9Z;.BUsiness Source Premier. Web.5
Sept. 2014.
Weaver, Clary R., Scott J. Reynolds, and Michael E. Brown.
"Moral Intuition: Connecting Current Knowledge to
' Future Organizational Research and Practice." Journal of
Management 40.1 (2014): 100-129. Business Abstracts
13. Mike Esterl, Karishma Mebrotra, and Valerie Bauerlein,
"America's Smokers: Still 40 Million Strong," Wall Street
Journal Qnly 16,2014),Bl.
14. Fred R. David,"How Companies Define Their
Mission," Lorig Range Planning 22, no. 1 (February
1989): 91.
15. G.L. Schwenk and K. Schrader,"Effects of Formal Stra
tegic Planning in FL ancial Performance in Small Fimis: A
Meta-Analysis," Entrepreneurshlp and Practice 3, no. 17
(1993):53^^.See also C. C. Miller and L.B.Cardinal,
"Strategic Planning and Firm Performance: A Synthesis
of More Than Two Decades of Research,"Academy o/
Peel and John Bridge,"How Planning and Capital Budget
ing Improve SME Performance," Lcng Range Planning 31,
no:6(October 1998): 848-856; Julia Smith,"Strategies for
Start-Ups," Long Range Planning 31, no.6(October 1998):
857-872.
16. Gorc'^n Greenley,"Does Strategic Planning Improve
Company Performance?" Long Range Planning 19, no. 2
(April 1986): 106.
17. Adapteu from www.des.calstate.edu/limitations.html and
www.entarga.com/stratplan/purposes.html
18. "Victoria Neufeldt, ed. Webster's New World Dictionary,
4th ed.(Hoboken, NJ: Pearson, 1998). Pearson purchased
this dictionary from Simon & Schuster in 1998, but sold it
to IDG Books in 1999.
19. Frederick Gluck,'Taking the Mystique Out of Planning"
Across the Board (July-August 1985), 59,
PART 1 •:0VERViEW OF STRATEGIC MANAG E M ENT

THE COHESION

The Hershey Company,2015

BY FOREST R. DAVID AND MEREDITH E. DAVID

www.hersheys.corn, HSY
headquartered in Hershey, Pennsylv^da, Hershey^ Company is tlie;largest chocolate proddcer in
North America aiid a confectionary leader worldwide, with over 80 brands, annual iwenues over
S7 billion, about 20,000 employees, and operations In about 80 countries. Hershey offers chocolates
'as well as other candies, mints, and chewing gum; Notable products include Hershey Kisses, Mr.
Goodbar, Twizzlen, Jolly Ranchers,Ice Breakers, and, what inay be the best-selling candy bar on the
planet—Reese's, a Hershey brand that recently became an official sponsor of FSPN college footlall
game day. Hershey is currently expanding globally wijh strategic emphasis on markets in China and
if- Mexico, but the company still derives more than 85 percent of its revenue from the UnHed States. In
2015, Hershey introduced the following new products: Kit Kat White Minis, Hershey's Caramels,Ice
Breakers Cool Blast Chews, Reese's Spreads Snacksters, and Graham Dippers.
Hershey's net income for the first quarter(Ql)of 2015 declined 3.1 percent to $244 million from
Q4 of 2014. Hershey's Ql 2015 revenues in China declined 47 percentl In response to this downturn,
Hershey shifted its strategy in China to combat slower consumer spending by focusing on small
er rather than largest cities, increasing its e-commerce offerings, and decreasing its reliance on
hypermarkets. Also for Ql of 2015, Hershey's advertising expenses increased 8 percent, but its selling
and marketing expenses increased about 15 percent. Analysts have turned pessimistic about Hershey
meeting its 20 percent sales growth guidance in China for calendar year 2015. The company's sales
rose 3.5 percent to $1.94 billion for Ql of 2015. Hershey has retail stores in New York City, Chicago,
Niagara Falls, Shanghai, Dubai, Singapore, and Hershey(FA).
Copyright by Fred David Books LLC.(Written by Forest R. David and Meredith F- David}

History
Id 1894, Milton Hershey'of Lancaster,Pennsylvania, decided to coat his popular caramels with a sv/eet
chocolatel.This venture was actually Mr. Hei-shey's third attempt in the confectioaary business.In a 1927
interview, Mr. Hershey shared some advice from his mother that he attributed to Ids success: "When
you tackle a job. stick to it until you have won tlie battle." Mr. Hershey was never an advocate of heavy
advertising,instead telling anyone v/ho would listen that providing a quality product is the best advertis
ing in the world. A personal motto in Mr. Hershey's office read "Business is a matter of" ■man service."
By 1900, Hershey was producing chocolate not only tor caramel coatings but also in bars and other
shapes, including the world famous Hershey's Kiss in 1907. A defining feature of Hershey from early on
was its assembly line systems that lowered the unit cost of chocolate to a level that most everyone could
afford. The 1950s through 1980s saw great growth for Hershey from acquisitions. Most notably was
the 1956 acquisition of Reese Candy Company, which produced the world-famous Reese Peanut Butter
Cups that had always used Hershey's chocolate to coat its peanut butter cups. After fonnally changing
its name to Hershey Foods Corporation in 1968, Hershey acquired marketing rights to the English firm
Rowntree Mackintosh; Y«S:S Candies, famous for Twizzlers; and Peter Paul/Cadbury's USA confec
tionery operations. Petei Paul's most notable products include. .Imond Joy arid Mounds Bars. In 2012,
according io. Adyeriising Age and Euronionitor International, the Hershey's Reese's brand was the No.
1-ranked candy in America, with annual sales of $2.6 billion. Globally, Reese's stood at No. 4.
Hershey's net sales for ihe fourth quarter of 2014 totaled $2.01 billion, but fell short of the $2.07
billion estimated by analysts. That was the sixth quarter over the past two years that Hershey's sales
underperformed. However, the company s sales were higher than the prior year, partly due to Hershey
acquiring the Shanghai Golden Monkey based in China. Acquiring the firm in China more than doubled
Hershey's revenue derived trom that country. On December 30, 2014, Hershey entered into an agree
ment to divest its Mauna Loa macadainia nut business. $68 million annually, to Hawaiian Host, Inc.
In early 2015. Hershey acquired KRAVE Pure Foods, Inc. for about $300 million. KRAVE is a
niaker of beef jerky and other high protein snacks. Hershey made ihe move reponedl)' to tap rising
interest in meat snacks, and to further the company's reach in making foods that consumers want to
.snack on. Hershey says the estimated $2.5 billion U.S. meat snacks category L unn\ inu at a double-
digit pace. Founded in 2000. KR.'Wl-. generated about .$.35 rnilljon in sales in 2014. Hershey plans

...
 CHAPTER \ • THE NATURE OF STRATEGIC MANAGEMENT

■ to. Operate KRAVE as a stand-alone business within its Hershey North America division; KRAVE's
founder, Joh Seb^tiani,continues to lead the business as President of KRAVE. , r" , '

Internal Issues
Organizational structure
Hershey has 10topexecutiVes,^illustiatedmfeeoiganizationalchartgiveninEjdubitl. Notice thereaite'.;,''-:^^^'' " ^
two segments: North America and Interhational, with those executives reportlDg to the Chief Corporate
Strategy and Administrative Officer.The North America segment includes only Ae USA and Canada."JTie , • aV • • r ■''
Hershey Board of Directors is comprised of 11 members, each serving terms that expire armually.

EXHIBIT 1 Hershey's Organizational Chart

John Bilbrey, CEO, President"

and Chairman of,-the Board i

-li

"Kevin VValling, Patricia Little, Terence O'Day, Waheed Zaman, Leslie Turner, •b. Michael ' William Papa,
Senior VP and Senior. Vp( , ; Senior VP and Senior VP and Senior VP of Wage, Senior VP and Chief
Chief of and CFp , ( ' ' Chief Supply Chief Corporate | General VP Chief. R&D Officer
Human Cham Oft.:er Strategy and Counsel and Growtl. arid
Administrative Secretary ; Marketirig ■
Officer Officer
V J

Humberto Micheie Buck,

Alfonso. President of
.President North America
International
^

Vision/Mission
H h v*s vision statement reads: 'We bring goodness to the, world through great tasting snacks. One
^"1 ne moment, and one person at a time." The company's mission statement reads as follows:
'^^n^^ng sweet moments o. Hershey happiness to the v^ orld eveiy day."
Social Responsibility . ■ ^
Hershey is o of the most socially responsible
on the Dow companies i: Index
Jones Sustainability the world and has won on
and membership numerous acco-
The Civic 30.
lades, inc u i among the top corporations for improving the communities m which it operates.
Hershey ofteri^^^^ extensive narrative, numerous pictures, and many videos that substantiate the
Hershey s we j-ggponsibiUty efforts. For over lOO years. Hershey has been well known for owning
company's soc' Milton Hershey School, originaHy for orphan children. Today, the Milton Hershey
and operating largest and wealthiest boarding school for needy children, with $7.5 billion in
School is ^ ludents. Hershey spends about $110,000 a year per student, according to its nonprofit
assets for 1-900 s nation's most expensive and elite prep schools.
IRS tax filing— consumer demand for healthier, .latural food and menu transparency.
In response to^ j^jgh_fructose corn syrup from its candy products as part of its efforts to use
Hershey is '^/simple and easy to understand." Rival Nestle is removing all artificial flavors and
"ingredients that ^ chocolate candy, replacing them with ingredients f im natural sources—
FDA-ceftifi^'^ affects more than 2.30 products and H) brands.
amove that Nest Social Responsibiliiy iCSRi Report (issued in early 2013) highlights
Hershey's j^^ade in 2014 on business ethics, environmental susiainabilily. ingredient irans-
advancesiheconiP^^ ,„g,edienis. In panicular. the rcpon revealed mat m 2014. Hershey achieved
parency. nnd ^-fifled cocoa, pulling Hershey ahead of schedule to hii iis20i3 coal of .30 percent
30 percent use "t p^rceni certified am! susiauiable an-na in all ehoeulaie products by
Her.shcy f"''" "M,elpe^l establish CocoaAcuon. a pivcompcim^,, -f,K|,j.sirv collaboi.ition seeking to
-,(pn. Hersfi^'>
 part 1 • OVERVIEW OF STRATEGIC MANAGEMENT

align the cocoa sustainability efforts of ^e world's largest cocoa aiid chocolate companies to improve,
farmer productivity, address child labor challenges, make basic education avaUable, and improve gen
der parity in cocoa productiori.In addition, the report stated that Hershey r^uced its waste per pound
ofproduct by 1.4 percent and reduced packaging waste by a cumulative L75 million ^omts through 26
companywide initiatives; reduced greenhouse gas emissions in United States distributibn and logisdcs
by 4.75 percent from 2013 baseline; and achieved zero-waste-to-landfiil status at the El Salto,Mexico,
facility, one of eleven Hershey facilities to achieve this milestone. In recognition of the company's
many accomplishments,CEO J. P. Bilbrey yms honored as a 2014 Responsible CEO ofthe Year by CR
Afflgnzmc. Other 2014 notable honors for Hershey include: ' •, -
1 Selected to Dow Jones Sustainability World and North America Index for second consecutive.year
Obtained 100 percent on Corporate Equality Index
Recognized for environmental achievements by being named No.46 out of 400.m the Newsweek
Green Rankings

Marketing
Hefshey's sales are generally higher in the third and fourth quarters of the year, due to holiday-related
s^es patterns. About 25 percent of Hershey's sales are made to McLane Company,Inc.,one ofthe largest
wholesale distributors in the United Slates to convenience stores and mass merchandisers such as Walmart
stores. Hershey has increased its overall candy, mint,and gum(CMG)marketshare in the United States in
2014 to 31.4 percent, an increase of0.3 share points compared to"2013. Hershey's sellmg, marketing,and
administrative(SM&A)expenses decreased $21.5 million, or 1.1 percent, in 2014.
Since consumption patterns of confectionery products are becoming more sunilai worldwide, one
strategic option moving forward would be for Hershey to report financial information by product,rather
th^ by region, and alter the firm's structure accordingly. Hershey accotints for aboui 44 percent of the
U.S. chocolate market, 21 percent of the U.S. nonchocolate candy market, and 5 percent of the world
chocolate and nonchocolate candy market share. Elevated and volatile commodity costs, particularly for
cocoa,sugar,and daiiy, may hurt Hershey's prohtabiiity going forward. In particular, dairy costs—which
can't be hedged—have been trending higher in light of the prolonged drought in California.

^9 Strategy
Hershey has recently embarked on a niultiyear joint venture with 3D Systems, makers of 3-D printing
teclinology, to start producing new confectionary products ifsing this technology. 3D Systems currently
produces two 3-D printers capable of making chocolate. The firm's,CheUet is priced around $5,000
and prints single-colored candy much like a plain Hershey candy bar. The ChefJet Pro, priced at around
$10,000,can produce multicolored candies. Both printers are capable of printing complex candy designs
at a rare ofoneinch per hour and sizes up to 8 inches by 10 inches by 14inches. Some analysts, however,
do not believe 3-D printing is an option for confectionaries until 2020 due to si production and high
cost factors. The technology will be affordable enough to produce specialized candies for Valentine's
Day and other holidays around that time but still not affordable enough for mainstream production.
Recently, Hershey purchased Brookside-branded candy, famous for its dark-chocolate-covered
candies with fruit-juice centers such as pomegranate and blueberry. Hershey purchased Shanghai
Golden Monkey Food in 2014. In that year, Hershey began distribution of acquired confectionery and
protein-based bean curd snacks into t'ne China modem trade. For all of 2014, Hershey's chocolate
sales in variou::; countries grew, including China (12% vs. 7% prior year), Mexico(2% vs. 7% prior
year), and Brazil(1% vs. 5% prior year).
With the KRAVE acquisition in 2015, and with the company's vision statement, Hershey's strate
gy is to broaden its product line more by adding healthful snacks to complement its numerous types of
chocolate and nonchocolate candies. Since protein snacks are growing rapidly in popularity globally,
the KRAVE acquisition may be the first of many for Hershey in that line of business. The acquisition
represents one of the first times Hershey has taken a big step outside confectionery.
Hershey's 2014 international net sales increased nearly 15 percent, including a net sales coniri-
bution of approximately 7 percent, or $54 million, from Shanghai Golden Monkey Food Joint Slock
Co.. Ltd,(SGM). Excluding SGM and the unfavorable foreign currency exchange impact. Hershey's
intemaiional net sales increased approximately 10 percent in 2014.

Segments
Hei'shey's primary opi-'aiions and markets arc in the United Siate.s. The i>ercenlage of total Hershey net
sales outside of the U .S. was 17,5 percent for 2014. 16.6 percent for 2013. and 16.2 i>ercem for 2012-
riie percentage ol toiai consolidated assets outside of the U.S. was 35.4 percent as of December 31.
 CHAPTER 1 • THE NATURE OF STRATEGIC MANAGEMENT

jK20l4.and 19.4 percent as oT December 31,2013.Although Hershey does not report sales and income by
Ir^product category,the company keeps internal records by three product segriients; Ghocolate,Sweets and
Snacks and Adjacencies. The ChocoJate category consists offancier options such as
Itr.'acquired.Cadbury, traditiona] products such as Mr. Goodbar and Hershey's Kisses, and Dagoba organic
^-chocolates.TWizzlcrs,Jolly Rancher,PayDay,and others are included under the Confectionary Products
2 •umbrella. Breath Savors, Bubble Yum,and Icebreakers fall under Sweets and Refreshments, and Her-
^ey's baking chocolate and syrups^included under Snacks ami Adjacencies. Hershey also offers a
KwuU line of sugar-free products. Many Hershey products are naturally gluten free and kosher in nature^
Hershey's sales and income by geographic region are given in Exhibit 2. North America accounted
Hfer 85.6, 86.8, and 87.5 percenter the company's sales in 2014, 2013, and.2012, respectively. Note
Exhibit 2 that Hershey's income from outside North America has declined steadU}'. All sales and
■^Rcoime from Hersh^'stores are-included in thelntemational and Other segment.
EXHIBIT 2 Kjrshey's Net Sales and Income (in millions)

\ Sales .. :.
North America $6,352.7 $6,200.1 $5,812.7
international and Other 1,069.1 ■ 946.0 831.6
Total . 7,421.8 7,146.1 - . 6,644.3'
Income

|/^-}A':North America 1,916.2

1,916.2 1,862.6
• A .
' 1,656.1
Intematiioaal and Other ' 40.0 44.6 51.4
Total $1,956.2 $1,907.2 $1,707.5
' Source: Based on Hershey's 2014 Form lOK, p. 25.

iHnance
Hershey reported a 3.9 percent increase in revenues in 2014 to $7.42 billion, whereas company earnings
increased about 7 percent overall from the prior year. The coiripany's intemational net sales increased
• ■ nearly 15 percent, including the negative imp ret of foreign currency exchange rates and positive contii-
: bution of about $54 million from Hershey's acquisition of Shanghai Golden Monkey in China.
: Hershey has gained market share in every measured channel three years running, even after raising
i'/ prices on many items 10 percent over the same period. In fact, Hershey has produced higher earnings
' every year but two since 2000. Wit' a 34 percent market share in North America, Hershey instituted ap "
' 8 percent price! ."'-e in late 2014 on most of its chocolate products, partly in response to higher cocoa i
'' prices. The company's most recent income statements and balance sheets are provided in Exhibits 3
and 4, respectively. Note the steady increases in both revenues and net income.
i. - '
EXHIBIT 3 Hershey's Income Statements (in thouso<ids, except per share amounts)
2014 2013 2012

Sales $7,421,768 $7,146,079 $6,644,252

Costs and expenses.
Cost of sales 4,085,602 3,865,231 3,784,370
Selling, marketing, and administrative 1,900,970 1,922,508 1,703,796
Business realignment and impairment 45/21 18,665 44,938
Total costs and expenses 6,032,193 5,806,404 5,533,104
Income before interest and taxes 1,389.575 1,339,675 1,111,148
Interest expense 83.532 88,356 95,569
Income before taxe.s 1,306,043 1,251.319 1,015,579
Income taxes 459,131 430.849 354,648
Net Income 846.912 820.470 660.931
Net income per share 3,91 .1.76 3.01

Dividend.s paid per share 2.04 1.81 1.56

Stmrce: Based on Hershey's 2014 Ffiw H>K. p. 4.^,

.30 i PART 1 •.OVERVIEW OF STRATEGIC MANAGEMENT
EXHIBIT 4 Hershey's Balance Sheete (in thousands)

Cash and Cash Equivalent ; ' •• $-374,854 $1,118408

Short-Terra Investments . . 97,131.
Accounts Receivable—^Trade (Net) 596,940: ; 477,91^
801,036 . 659441
W'fe -v Inventories
1004115, . 52,511
,S|r^ Deferred Income Taxes
Prqjaid Expenses and O&er' 276,571 178,862
Total Current Assets /- • ^ . / 2,247,047 ; ;2,487,334
Net Property, Plant, and Equipment ,2,151.901 1,805,345
Goodwill 792.955 ' 576,561
Other Intangibles 294;841 195,7.44
Other Assets 14Z.772 293.004

Total Assets $5,6294116 $ 5457,488

Liabilities and Stockholders* Equity
Short-Term Borrowings $ 635401 ' $ 166,875
Accounts Payable :; v , , - 48^,017 4 i4I4
Accrued Liabilities , .-i '813413 ^ 699,722
f^';
Accrued Income Thxes J Sw- 4,616 79,911
Total Current Liabilities .,j| ^frvl,935.647 1,408,022
Long-Term Debt if |^^^k,548,963 1,795,142
Other Long-Term Liabilities . ' 526.003 434,068
.tj; !■ ■*■ --■•.«<•.• , •: !kj . Deferred Income Taxes i 99,373' 104,204

Total Liabilities A ^ * $4,109,'^ . $3,741,436

Stockholders* Equity ■,AC;
Preferredstocksharesissued;nonein^l4^d2013 .

Ur. »
Common stock, shares issued; 299,281,967 in 2014 and
299.281,527 in 2013
Class B common stock, shiUres issued; 60,619,777 in 2014
and 60,620,527 in 2013
Additional paid-in capital
Retained earnings
Treasury stock; 138,856,786 in 2014 and 136,007,023
sS' 754,186 ■ 'S
5,860,784
(5,161,236)
■ 'y. ■ • -r; ■ '4';

664,944
5,454,286
(4,707,730)
in 2013

r- ■■ Accumulated other comprehensive loss (358,573) (166,567)

Stockholders' equity 1,455,062 1,604,834
NonconiroUing intere.>ts in subsidiaries 64,468 11,218

Total stockholders equity 1,519,530 1,616.052

Total liabilities and stockholders' equity $ 5,629416 $ 5457,488

Source: Hershey's 2014 Form lOK, p. 47.

Competitors
The chocolate industry is dominated by five companies: (1) Hershey, (2) Nestld, (3) Mars. (4) Lindl&
Sprungli AG. and (5) Tootsie Roll Industries. Europe, the United States, and South America account
for 54. 32. and 8 perccm of total chocolate and nonchocolate candy revenues, respectively, or a
dominant 94 percent- Thus, there U much room for expansion by these firms into developing nations
whose disposable incomes are increasing, especially nations in Asia and .Africa, but also in South
America. A coiiiparison of coinpemors is jirovidcd in Hxhibils 5 and 6. Note thai Mars dmiiinaies in
noiicliocola'c cand>. Also note thai Nestle is about 10 times larger than Hershc>.
 CHAPTER 1 • THE NATURE OF STRATEGIC MANAGEMENT

EXHIBIT 5 Hershey versus Rival Firms, Market Share (percent)

Product Type Hershey Nestle Others

USAChocolate ,
USA Nonchocolate Candy"
Global Chocolate and Nonchocolate
Candy(non-USA)

Source: Based on iirfonnatipn at IBIS a Wall Street Journal ^cle on 2-18-15,p. B6. Numbers are
rounded. . :'
* Undt & Sprungli AG contributed about 10 percent ot others inwket share. .
*■'' Mondelez International Inc. and Fertero SpA contributed 11 and 8 percent market shares, respectively, t

EXHIBIT 6 Hershey versus Rival Firms

Hershey Nestle ;Toot«;ie Roll Industry Avg.

.7 Employees . 20,800 233,000

$ Revenue 7.5B IQ5.47B
$ Revenue per Employee 360,575 316.000 270,500
$ '^^et Inccme' 840M 1I.15B
$ Market Capitalization 20.7B 242B
> .Ope"ating Margin 0.19'; 0.15

4
Earnings per Share 3.76 . 3.49
.1
Source: A variety of sources.
I ■I
Nestie S.A. (stock symbol =: NSRGY)
ieadqujaleied in Vevey, Switzerland, Nestie is a large food-processing company with 2014 revenues
of .96.2 billion U.S. dollam (USD) and ar net ihcome of $15.14 billon. According it its website, Nestld
proclaims to be the top global company with respect to nutrition, health, and wellness by providing
'customers with nutritious and great-tasting food and beverage choices. Nestle's mission statement is
■ simply "Good Food, Good Life." The company produces a wide array of products ranging from baby
;foods, chocolate, cofifee, juices, dairy, ice cream, pet care, and more.-Notable chocolate products include
Butteriinger, Crunch, Aero, K'*^Kat, and Toil House chocolate chips. Wonka is also owned Hy Nestle
and include Nerds, Sweetarts, Spree, La^ Taffy, Runts, Gobstopper, Fun Dip, and many other sugary
candy options. In 2013, Nestle reported chocolate sales of $8.5 billion Swiss Francs ($8.5 billion USD)
and sugary confectionary sales of 1.2 billion Swiss Francs ($1.4 billion USD). Total chocolate and sugary
confectionary sales were around 10 percent of total company revenues. Total sales derived from (1) the
Americas, (2) Europe, and (3) Asia, Oceania, and Africa wer. 44,28, and 28 percent, respectively.
Nestie is much more diversified than ail of its chocolate competitors, except for Mars, and con
tinues to expand its brands. Recently, Nestle paid $12. billion to acquire Pfizer Nutrition to bolster
its market share in the child nutrition maiket, as well as Pan,.ab, a U.S.-based health-care products
company. In February 2014, Nestle sold an 8 percent stake in French cosmetics firm UOreal and is
currenily planning a large share buyback of its own stock. Analysts anticipate that Nestle will sell its
remaining 23 percent .stake in L'Oreal. One potential company it might try to acquire is Ferrero, an
Italian firm known for producing the chocolate hazelnut spread Nutella. Analysts estimate the value of
Ferrero would be-around $22 billion USD.
Nestle and Google agreed in 2014 to name Google's new Android operating system KitKat after
Nestle's world-renown chocolate wafer candy. No money changed hands on the agreement. Google
benefits by having more than 50 million specially wrapped KitKat bars in 19 different nations, includ
ing the United Slates, where Nestle licenses KitKat to Hershey. The 50 million KitKat bars are timed to
be relea.sed with the launch of Google KitKat. The special u lappers lead consumers to Google-affiliai-
cd websiie.s. where they can win prizes such as the Google Nexus 7. and credits to spend at Google Play.
Wars. Inc.
Mars K ilu- second-iargesi candy maiiutacuiiet in the I imed Slates and the third-largest privately
^^Id compans in the Uniied Slates according to f-nrhr.y Hcadc|Lianercii in Mcl can. Virginia, and
PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT
having annual sales over $30 biUion, Mars, Uke NestlS, is well diversified with six business units
consisting of chocolate, drinks, food, symbioscience, pet care, and Wrigley chewing gum. Mars
■ blockbuster chocolate brands include Snickers, Milky.Way, M&Ms,Dove, Bounty, 3 Musketeers, .
Stiucburst, and Skittles, among others. The annual revenue of Mars in 2014 was about $3d billion
more than 50 percent higher than'in 2007,largely due to the firm's 2008 acquisition of Wrigley. Since
patenting recipes is difficult and producing chocolate is secretive. Mars does not allow visitors to its
kitchens in its factories and facilities. Mars* first blockbuster product back in-1923 was the Milky
Way candy bar, still a big seller today.
Market researcher Euromoniior Ihtemational recently repwrted that Mars' market share in the
United States rose to 28 percent from 24 percent. To further battle Hershey,in 2014, Mars opened a
new 500,000 square-foot chocolate factory in Topeka, Kansas, at a cost of $270 million. The factory
cranks out more than 8 million miniature Snickers candy bars and 39 miiUqn peanut M&M's every day.
Like Nestid, Mars advocates global sustainability of the cocoa resource but has received criticism
in recent years over purchasing cocoa from West African farms that use chiiJ labor. Mars is also one
of the world's biggest producers of dog food and pet-care products. Mars* Wrigley division produces
chewing gums, confectionery products, and a variety of other products ranging from Uncle Ben's rice
to Pamesello grated cheese and Flavia coffee. Mars'pet-food brands include Pedigree, Jreenies,Sheb^
and Whiskas. Interestingly, chocolate is Mars'secona-largest busmess globally, behind pet care.
Lindt & Sprungli AG
Headquartered in Switzerland, Lindr purchased U.S.-b sed and -rivat^ly held Russell Stover in 2014 •
for an unreported amount, making Lindt the. third-largest chocolate company in the United States
(with a 10 percent market sharey, behind Hershey and Mars, and ahead of Nestle. With the Russell
Stover addition, l.indt acquired over 70,000 drugstore outlets for their products in the United States
and Canada. Lindt also currently owns Ghirardelli Chocolate, based in San Francisco,. Interestingly,
Lindt is taking a slightly different strategic path than Hershey, Mars, and Nestl6. Although many top
chocolate brands are betting on emerging markets such as China and India that have growth rates over
15 percent, Lindt is betting on North America with growth rates of less than 2 percent in chocolate
sales. Lindt cites the main reason for sticking with the United States and Canada are they are safer
markets and still will be three times larger chocolate markets than both China and India combined,
even as far out as 2018.Lindt also specializes in higher- and middle-end chocoiates and these products
aie not cost-effective options for many of the customers in China and India.
Tootsie Roll Industries(stock symbol =TR)
Headquartered in Cliicago, Olinois,Tootsie Roll Industries' CEO and Chairman, Melvin Gordon,died
at the age of 95 in January 2015. Gordon, with his wife, Ellen Gordon, who inherited control of the
company from her father, were married for 65 years and togetiier created one of the most secretive
mm corporate cultures among publicly traded companies in the United States. The Gordons rarely gave in
terviews; indeed,they shunned media attention,issued onlyscant quarterly earnings reports,and tightly
restricted visits to its headquarters on Chicago's South Side. An analyst once said,"I think the only way
you can get a tour.of Tootsie RoU's manufacturing plant is byjurnping over the fence and sneaking in.
Over the decades, the Gordans acquired other well-known candy brands, assembling a-portfolio of
-i> similarly time-wom-but-profitable names, including Charms Blow Pops,Sugar Babies caramels, Junior
Mints and DOTS gumdrops in addition to the eponymous chocolate chews that made Tootsie Roll fa
mous Tootsie Roll reported earnings of S12.9 million in Q1 of 2015, down from $15.0 million the prior
year. Thecompai^y's sales were $105 miUion in Q1 of 2015,down from $106 million the prior year.Toot
sie Roll Industiies became the world's largest maker of lollipops when it bought the Charms Company
in 1988. The company later acquired Sugar Daddy and Junior Mints and,in 2004, Concord Confections,
adding Dubble Bubble and Wack-o-Wax to the candies it produces.The company was well-known fo. its
commercials. It claims to have received more than 20,000 letters from children trying to answ er a question
posed by an owl in a 1970s commercial:How many licks does it take to reach the center of a Tootsie Pop"?
Tootsie Roll's brands, as well as its real estate assets in Chicago, and the fact that Gordon s
children are not directly involved in the business, make the company an attractive firm to acquire,
perhaps for Hershey Company,Mars,or Nestle. Ellen Gordan,age 83. is the largest Tootsie Roll share
holder. and was even prior to her husband's death. The Gordon family holds a controlling stake in the
company. Tootsie Roil trade.s at about 20 times its profit and has about 2,000 employees. That gives
it a higher price tag than any other similur-si/ed public candy maker target in the last deeade. everi
before accounting for a premium Tootsie Roll's shares rose 8 percent to a IT-month high of $33.28
I'olknving the announcemem of Mr. Ciordi>n's death, hiii by May 201.s. shares were back dtm n to $30.
 CHAPTER 1 • THE NATURE OF STRATEGICj^ANAGEMENT
V- jferrara Candy Company
'Ferra^ not to be confus^ with Italy-based Ferrero maker of Nutelia and other chocolate products,
was founded in 1908.in Chicago and^is a rapidly growing America candy company. Top products
include Atomic Rreball, l^monhead, Now&:^ter, Fruit Strip, Boston Bak^ Beans. The firm
has one plant in Mexico and produces almost exclusively nonchocolate candy. Total revenues in 2009
were $563 million, growinig to over $1 billion by year end 2013. Ferrara, a rapidly growing company,
generally financ€^ through equity over debt to help improve credit ratings. ir.s-,.-. ...-v;

External Issues
Hcrshey is replacing high-fiuctose com symp in some of its products with sugar, making the firm
a high-profile example of the move away from high-fructose com syrup that may fuel weight gain
and diabetes. Examples of Hershey products thatoise com symp include Almond Joy, Fifth Avenue,
Take 3, and^brk; the American Medical Association has said there is net enough evidence to specifi
cally restrict the use of the symp.The Com Refiners Association recently hired market-research firms
Mintel and Nielsen to study perceptions of sweeteners, and reported "67% of consumers agree tlial
moderation is more iuiportant than specific sweetener types." In the food and beverage industry, soda
accounts for a majority of the market for high-fructose com syrup. Interestingly, Hunt's ketchup is an
example product that switched to more sugar but then switched back to com syrup, seeing no change
in the sales of Hunt's. The Food and Drug Administration has denied requests by some companies to
have their sweetening agent renamed "com sugar" on nutrition labels. Chocolate sales in the United
; States are increasing about 3 percent annually, compared with a 2 percent increase for total packaged
jfood^The chocolate increases ^e recorded despite a trend toward more healthful eating.

I^lCoc aPi ces

Due to growing consumer demand for healthier food, Nesde SA recently removed artificial fla-
vors and colors from its Cranch and Butterfinger candy bars and other chocolates in the USA. Nestle
. USA is the first major U.S. candy manufacturer to remove such artificial ingredients, such as Red 40,
.V.'Yellow 5, and vanillin. For examole, natural vanilla flavor is replacing vanillin in Crunch bars, and
-annaito is replacing artificial food colorings.

; When Hershey was founded over 100 years ago, chocolate was generally considered a luxury for the
^,rich and out of the grasp of I iwer-income customers. Mr. Hershey changed this, at least with respect
to U.S. customers, by creating an automated assembly line system and competing on economies of
;,scale. Some 100 years later, once again, chocolate demand is on the increase. This time, however, the
'increase in demand is not from falling chocolate prices like it was 100 years earlier but rather from
'millions of new coL.>urners in emerging worldwide markets being able to afford Irxreasingly higher-
'tju lity chocolates that require better and higher percentages of cocoa. Unlike other crops, such as [MirsjrlHHUB
com or soybeans,cocoa is more difficult to produce and cocoa prices are expected to rise substantially
»! moving forward, according to the International Cocoa Organization (ICG).
Typically, cocoa trees take as many as iO years to mature, and many of today's trees are old, not.
yielding the same number or quality of beans. I armers are also switching to more profitable crops,
a ll
even as the price of cocoa approaches $3,000 per ton. Analysts estimate the cocoa price would need
to be $3,500 per ton to maintain'cuirent production rates from farmers. In fact, the ICG expects the Bn
demand to production ratio to be the highest ever by 2018,since it started keeping records in 1960. In
2013 alone, worldwide consumption ofcocoa beans was up 32 percent from 2012 and Chinese demand
is projected to rise 5 percent annually through 2018.To help combat the new demand, Mars and Nestl6
have spent millions to educate farmers in West Africa on proper techniques and in developing new
types of cocoa trees. The Ebola virus outbreak in West Africa threatened hundreds of cocoa farms.
North American-based Blomme. Chocolate Company is a top cocoa processor and one of the
main suppliers to Hershey and other choculaie-producing companies. Biommer is expanding its
processing capacity to meet strong U.S. chocolate demand. Nevertheless, chocolate companies are
facing tough choices that include raising prices, rediming portion sizes, or even using less cocoa in
its products,.^s early as 2006, Hershey started u«ing substitutes for cocoa butter in the production of
Krackel and Mr. Goodbar, which resulted in the firm having to change the label "milk chocolate" to
"made with chocolate" or "chocolate candy to comply with the Food and Drug Administration(FDA)
protficols for the labeling of chocolate tood items. Hershey. however, is now switching both Krackel
and Mr. GiKJcibar back to solid milk chocolate, meaning the bars will ct^ntain at least 10 percent cocoa
per FD.A regulations to be called milk clwcolute. Also hurting Hershey are lower grain prices used in
poionlialls siihstliulc snack products such as pretzels, cookies, and other snacks.
 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT

Potential Taxes and Health-Minded Public

• , . • 'I"
There is a growing awareness worldwide of the dangers of unhealthfiil eating, especially vyhen it
comes tb sugars, processed foods, and animal fats. Many different governments 'local, regional, and
nationai) have increased (or plan to)taxes or have flat out banned unhealthy items. Taxes are viewed
by governments much like tobacco taxes a$ a way not only to curb citizens' consumption but also as
aii addition^ means of revenues. For example, Connecticut recently proposed a 2 percent additional
tax on all soda, suggesting it would provide $144 million in annual revenues and reduce soda con-
suriiption in the state. New York City has banned most sugary drinks 16 ounces and larger from being
served. The Navajo Nation,the largest American Indian Reservation in the United States with 300,000
members, is proposing a tax of up to 7 percent on fatQ'snacks and soda,upfrom the current level of5
percent, and excluding healthful food items from taxation. Former NBA star Yao Ming is campaigning
in his home country of China to promote healthier eating and exercise habits. Mexico recently passed
legislation to significantly tax both sugary drinks and high-calorie items such as candy, and in 2012,
• Peru,Uruguay,and Costa Rica.banned alljunk food from public schools,including candy bars. Many
other nations in Latin America require red or yellow circles around sugar content on the packaging of
items, depending on their sugar content. All of these act!'- ns and trends are a threat to Hershey.
• Increasing obesity is a major problem among the world's popitlation. Processed sugar negatively
impacts the body.by increasing chances of tooth decay, obesity, and diabetes^ and additionally can
significantly increase one's chances of getting heart disease and even cancer. Scientific tests reveal
that sugar is basically a food for cancer cells and people who drink 2 soft drinks a week are 87 percent
more likely to develop pancreatic cancer. For c-^mpansor a He«-shey Milk Chocolate bar contains 24g
of sugar,a Hershey Dark Chocolate bar contains 2lg ofsugar,and a can ofcola contains around 39g of
sugar. Sugar is also believed to be damaging to one's skin,looks; and overall mood. Moving fonvard,
Hershey could consider increased marketing of dark chocolate, which contain good antioxidants, but
ii much higher in saturated fat than milk chocolate and contains high levels of sugar. Sugar-ffee candy
has also bee.n linked to cancer and v/eight gain, partly because artificial sweeteners are not healthy.
Fanera Bread Company is removing i 50 artificial ingredients from its kitchens by 2017.The types
of ingredients being eliminated at Panera include artificial sweeteners, preservatives, and artificial
flavor enhancers. Food companies are increasingly eliniinating unnatural and unhealthy ingredients.
For example,Kraft Foods Groiip is replacing the artificial orange colorings in its macaroni and'cheese
product with natural colorings made, from spices like turmeric and paprika. PepsiCo is replacing its
artificial sweetener aspartame used in Diet Pepsi with sucralose. Dunkin'Donuts is • amoving titaruum
I'i'' dioxide, a whitening agent used in sunscreen, from its powdered doughnut recipes, but only after an
environmental advocacy group said it found nanoparticles in the company's white powdered sugar
through independent laboratory tests. The environmental group says nanoparticles, such as titanium
...!> A i dioxide,,could cause damage tb cells and tissues. .

Conclusion
Developed in partnership with 3-D Systems (stock symbol = DDD), Hershey Compan"'s new 3-D
printing gives consumers nearly endless possibilities for personalizing their chocolate. Hershey has a
new 3-D exhibit and 3-D chocolate printer (the most advanced model in operation today) on display
at Hershey's Chocolate V/orld Attraction in Hershey,Pennsylvania.
An analyst once said that "'strategic planning is more about deciding what strategies not to pursue
than it is about deciding what to do." This may be especially true for Hershey Company, which has
many good options. Most nations of the world would be pleased to see Hershey extend their product
lines into their country. Even in the United States, customers desire to see new Hershey products
introduced annually. Hershey could continue to acquire firms in the healthful snacks business such
as KRAVB, or acquire firms in the candy business, such as Tootsie Roll Industries, or si iply grow
more organically by building manufacturing plants and distribution facilities globally. There are mure
than 150 couniries on the planet where Hershey products are still not available. Most people in those
countrie.s would welcome chocolate.

Hershey needs a dear siraiegic plan going forw ard. Develop a strategic plan that will enable the
company to meet its many obligations, not only to the 1.900 girls and boys at the .\'1ilion Hershey
School hut also to its tbou.saiuh nf shareholders who expect to .see the company grf>w both reveniie.s
and pmfits annually.
 CHAPTER 1 •"mf NATURE OF STRATEGIC MANAGEMENT 35

ASSURANCE OF LEARNING EXERCISES

exercise 1A.
Compare Business Strategy with Military
Strategy
Purpose ' .
Ihis exercise will enable you to compare and contrast military strategy with business strategy because
in many ways, operating a business is similar to conducting a-military campaign. Many strategic-
management concepts evolved from the military. Napoleon Bonaparte listed 115 maxims for military
strategy. U.S. Civil War General Nathan Bedford Forrest, however, had only one sti'ategic principle:
,"to git ih"rfursl with the most men"(to get there first with the most men). The strategy concepts given
■ A..;
as essential in the United States Army's Field Manual(FM-3-0)of Military Operations(sections 4-32
to 4-39)says there are nine key military strategy maxims:
1. Objective—^Direct every military operation toward a clearly defined, decisive, and attainable
objective.
2. Offensive—Seize, retain, and exploit the initiative.
3. Mass—Concentrate combat power at the decisive place and time.
4. Fxx)nomy cf Fc ce—Allocate minimum essential conibai power to secondary efforts.
. ;'5. Maneuver—^Place the enemy in a disadvantageous position through the flexible application of
.'v combat power.
6. Unity of Command—For every objective, ensure unity of effort under one responsible .
commander.

7. Security—Never permit the enemy to acquire an unexpected advantage.

8. Surprise—Strike the enemy at a time, at a place, or in a manner for which he is unprepared.
9. Simplicity—^Prepare clear, uncomplicated plans and clear,concise orders to ensure thorough •
understandiiig.

instructions
/Step 1 • Consider the extent to which each of the nine maxims listed are applicable in formulating and
. implementing strategies in a business setting.
Instep 2 Rank-order the nine maxims,from 1 = most important to 9= least important in formulating
V a i implementing strategies in a business setting.
Step 3 Compare your ranking to our(the authors')ranking by getting the difference between each
of your rankings and each of the authors' rankings, and summing those differences (i.e.,
summing the absolute value of those differences).
Step 4 Determine who in the class has the lowest summed difference score. This student(s) scored
best in the class on this exercise '^ased on the authors' rankings.

|
^ a
aAUa EXERCISE 1B
exercise 1B
Gather Strategy Information for the Hershey
Company
Purpose
The purpose of this exercise is to get you familiar with strategy terms introduced and defined in this
chapter. Ut's apply these terms to Hershey (stock .symbol = HSY),
instructions
Step! Go to www.theheisheycompan^'com (Hershey's website). Along the top of the site, click
on Imeswrs. Then click Fiiiancinl Reports. Then click on Annual Reports. Then print the
company'.s late.st Form lOK. a document tltai comain.s excellent information for developing a
list of Hci'shes's inlcinal st:enulli- ;>nd \veaknesse>.
Step 2 (io to yourcolicge libiiir> website and prim j copy of.Suindard & Poor'>. IndiisirySurvry.s for
the confectionery indu.siry Thi.'^ d*^cumeni \s\\\ contain excellcm information for dc\eloping
list of external opportimnics and threats lacing HSY.
^|ART^1-^. OVERVIEW OF STRATEGIC fyiANAGEMENT
Step 3 Qo to the vww.finance.yahoo.com website. EntCT, HSY. Note the wealth of infonnation on
Hershey that may be obtained by clicking any item along the left column. Click on Competi
tors down the left column.Print out the resultant tables and information. Not6 that Hershey's
major competitors are Mars,Inc., Mqndelez International,Inc., and Nestld S.A;
Step 4 Using the Hershey Company Cohesion Case, the www.finance.yahoo.com infonnation,the
Form 1OK,and the S&P Industry Survey document,on a separate sheet of paper list vdiat you
consider to be Hershey's 10 major strengths,.10,major weaknesses, 10 major opportunities,
and 10 major threats. Each factor listed for this exercise must include a. p^centage, number,
dollar,of ratio to reveal some quantified fact or trend. These factors provide the underlying
basis for a strategic plan because a finn strives.to take advantage of strengths, improve
weaknesses, avoid threats, and capitalize on opportunities.
Step 5 Through class discussion, compare your lists of external and internal factors to thp^e deveh
oped by other students and add to your lists of factors. Keep this information for use in later
exercises at the end of other chapters. ' ,
Step 6 Whatever case company is assigned to you this semester, update the information on your
company by following the steps listed in,this Exercise IB.

EXERCISE 1C

Update the Hershey Cohesion Case

Purpose
Ever)' week Hershey updates- its website with News Releases of important straiegic decision^ and
information. Smce the fime this text was published, more than 100 Hershey News Releases have
mm:'
been'posted. In performing strategic planning and classroom strategic-management case analysis,it is
important to have the latest information possible on which to base decisions and processes.
Instructions
Step 1 Go to the www.thehersheycompany.com website and across the top of the page, click on
Investors, Read the.most recent Hershey Press Releases.
Step 2 TVpe a two-page Executive Summary of Hershey's newest strategies being formulated and **
implemented. .
Step 3 Submit your report to your professor.

EXERCISE 1D

Strategic Planning for Your University

Purpose
External and internal factors are the underlying bases of strategies formulated and implemented by
organizations. Your college or university faces numerous external opportunities and threats and has
ma-y internal strengths and weaknesses. The purpose of this exercise is to illustrate the-process of
identifying critical external and internal factors.
Extemal influences include trends in the followmg areas: economic,social,cultural, demographic,
envirc tmental, technological, political, legal, governmental, and competitive. Extemal factors
could include declining numbers of high school graduates; population shifts; community relations;
increased competitiveness among colleges and universities; rising numbers of adults returning to col
lege; dccrca.scd support from local, state, and federal agencies; increasing numbers of foreign students
attending U.S. colleges; and a rising number of Inlernel courses.
Internal factors of a college oi" university include faculty,students, staff, alumni,athletic programs,
physical plant, grounds and maintenance, student housing, administration, fund-raising, academic
programs, food services, parking, placement, clubs, fraternities, sororitie.s, and public relations.
Instructions
St-p 1 On a separate sheet of paper, down the left column, write four headings: Extemal Opponuni-
ties. External Threai.s. Internal Strengths, and Internal Weakne.sses.
Step 2 .As related to your college or university, li.st what you consider to be the five most important
factors under each of the four headings.
^ Uisciiss ihc factors as a class.
Step 4 \\ hat new things thd von Icam about your university from the cla.ss di.scu.ssion? How could
this type of discussion hcncfii tin organization?
 chapter 1 • The NATURE OF STRATEGIC MANAGEMENT

pVEXERCISE'lE-
p^.^trategic Planning at a Local Company v' ■
te.'iPurpose
iiiis activity is aimed at giving"you practical knowledge about how organizations in your tity or town
^ strategic planning. This exercise also will give you experience in interacting on a profes-
sional basis with local business leaders.

Instructions
^^Vstep.l Contact several business owners or top managers. Find an organiMtioa tlwt does snategic
planning. Make an appointment to visit with the strategist(president,chiefexecutive ofFicer,
or owner)of that buriness.
Step 2 Seek answers to the following questions during the interview:
• Does your firm formally conduct strategic planning? If no, why not?If yes, who is involved -'mm
in the process? Does the firm hold planning retreats? If yes, how often and where?
• Does your firm have a written mission statement? How was the statement develope'^?
When was the statement last changed?
• What are the benefits of engaging in strategic planning? '
• "What are the major costs or problems in doing strategic planning in your business?
• Do you anticipate making any changes in the strategic-planning process at yonr company?
If yes, please explain.
Uj^^Step3 Report your fmdings to the class. • -
fM:'" • •• • •

EXERCISE 1F

; Get Familiar with the Strategy Club Website

tv^.Purpose ^ ,' H
^ You may use for free all the resources provided at the authors' website, www.strate^club.com,-
Ifcp.tociuding the downloadable Excel student template. Thousands of students have found tins.template.
.1^ to be immensely useful in preparing a strategic management case analysis •
% V Instructions
Instructions rV ^T
Step 1 - ■ Go to the www.strategyclub.com website. Review the following free resbi^^s^^S
• Excel student template '
• Sample case analysis PoweiPoints
• Live author videos
■ • Live case analysis presentations
• Chapter and case updates - '
Step 2 Prepare to give your class an overview of your impression of the website. ' • fr,
ii'

" T'''. ' • ,

EXERCISE 1G %
Game Plans vs. Strategic Plans: Teams vs. Companies
Purpose
As discussed in the chapter, athletic team.s develop elaborate game plans to compete against rival
teams. This exercise can famiiianze you with how game planning for a football or "basketball game
compares to strategic planning for a company,organization, or even an institution such as your college
or university.

Instructions
Step I Make an appointment to visit with a head football, basketball, or soccer coach at your college
or University. Ask that person about how he or .she develop.s a game plan for the team's most
important rival.
Step 2 Repnr. back to class on your findings. Compare and contrast what the coach told yot, versus
What you read about strategic planning in this textbook.

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