One of the things that makes the study of strategic management so interesting is that it tries to answer the question: Why do some firms outperform othersHow is it that struggling firms can become stars, while high flyers can become earthbound very rapidly When Wal-Mart announced its intentions of entering the Canadian retail scene in the mid-1980s, most established companies—large and small alike—were justifiably terrified.
Within the next few years and as a direct result of Wal-Mart’s aggressive strategy, venerable competitors, such as Eaton’s and Kmart, disappeared. Others, though, were able to survive and some, such as Canadian Tire and Loblaws, faced the onslaught head-on and have thrived in the new competitive landscape. Bombardier has been a Canadian success story of genius and serendipity; it was able to carve a unique place in a range of industries in aerospace, public transit, and outdoor recreational equipment. During the recent stock market slump beginning in 2000, many technology firms were particularly ravaged.
Let’s look at one such firm that experienced a hard fall from grace. case study John Roth, after his appointment in 1997 as chief executive officer of the Brampton, Ontariobased telecom behemoth Nortel Networks, embarked on a three-year journey to transform Nortel from a lumbering bureaucracy into a template for the New Economy. Along the way, Nortel electrified the high-tech industry with a series of lightning-quick manoeuvres and became a major player in the Internet revolution. Roth’s efforts earned him Canada’s
Outstanding CEO of the Year Award for 2000. He catapulted Nortel beyond its decades-long core business of making telephone equipment into the red-hot market for fibre-optic networks and other systems for transmitting digital information over the Internet. It also spawned a series of multi-billion dollar acquisitions and new alliances. In 2000, Nortel ranked as North America’s number two maker of telecom products, trailing only Lucent Technologies, and was the second largest router manufacturer, behind its other chief rival, Cisco Systems Inc.
In early 2000, Nortel Networks had surpassed $400 billion in market capitalization and accounted for as much as 36 percent of the value of the TSE 300, leading the stock exchange to record trading volumes. Yet, on February 15, 2001, sales growth expectations were cut in half to 15 percent, earnings growth predictions were reduced from 30 percent to 10 percent, and a first-quarter earnings guidance was revised downward from 16 cents per-share growth to a loss of 4 cents per share.
Nortel’s stock, which had already been battered along with all high-tech shares during the second part of 2000, lost another third of its value and dropped below $30, down 76 percent from its high of $125 in July 2000. The CEO, whose credibility evaporated along with Nortel’s market capitalization, was now just another executive scrambling to keep his business intact as the bottom fell out of the high-tech market. Nortel’s shareholders lost a collective $325 billion in value, and the damage wasn’t limited to a small, elite class of investors.
Through mutual funds, pension plans, retirement savings plans, and other investments, Canadians of all stripes owned a piece of the country’s largest, mightiest company. Roth attempted to explain the sudden change in outlook on the dramatically slowing U. S. economy. He argued that during the four weeks since he first announced 2001 projections on January 18, Nortel customers unexpectedly changed their telecom spending plans, which, for the first time, seriously began to impact sales forecasts of Nortel equipment.
Ostensibly, despite earlier warnings from the likes of Cisco, Lucent, and Ericsson, nothing of significance had shown up on Nortel’s order books until February 15, 2001. Only then did the bad news flood in—to the tune of US$1. 8 billion less in expected revenue for the first quarter.
During the four weeks between forecasts, a number of other events took place. First, two Nortel executives sold approximately $7 million worth of shares. The company’s chief technology officer, Bill Hawe, quietly resigned and exercised his own options, worth about Nortel’s woes continued unabated; two subsequent CEOs resigned under the weight of accounting irregularities, and by the spring of 2005, its shares were trading for under $3. 6 Part 1 Strategic Analysis US$10 million.
On the same day that Hawe resigned, RBC Dominion Securities interviewed Roth for a Webcast not widely disseminated, during which he commented that customers were “slowing down expenditures of capital like we’ve never witnessed before! ” And finally, Nortel completed an all-stock deal for a JDS Uniphase Corp. ubsidiary, worth about US$3 billion at the time, but as much as US$1 billion less after the stock collapsed.
For many Canadians who had seen their retirement savings disappear, this was a slap in the face—particularly since Roth received $135 million in 2000 from salary, bonus, and proceeds from the sale of Nortel shares. Nortel was knocked off its pedestal—and Roth stood out like the clothing-challenged emperor. 1 Who and what might be responsible for Nortel’s successes during the 90s and its failures sinceAnswers to such questions lie at the heart of strategic management and are the subject of this book.
Leaders, such as those at Nortel, face a large number of unusual challenges in today’s global marketplace. In deciding how much credit (or blame) they deserve, one might consider the romantic view of leadership. Here, the implicit assumption is that the leader is the key force in determining an organization’s success—or lack thereof. This view dominates the popular press in business magazines, such as Fortune, BusinessWeek, Forbes, and Canadian Business, wherein the CEO is either lauded for his or her firm’s success or chided for the organization’s demise.
Consider, for example, the credit that has been bestowed on such leaders as Jack Welch, Andrew Grove, Isadore Sharpe, and Paul Tellier for the tremendous accomplishments of their firms, General Electric, Intel, Four Seasons Hotels and Resorts, and Canadian National Railways, respectively. In the world of sports, managers and coaches, such as Scotty Bowman or Pat Quinn, get a lot of the credit for their teams’ outstanding successes in the field and on the ice. On the other hand, when things don’t go well, much of the failure of an organization can also, rightfully, be attributed to the leader.
After all, Nortel’s Roth, in his enthusiasm to pump up revenues, aggressively counted huge contracts that left little margin for error. Such risks are generally not advised, especially as market and economic conditions erode. Nonetheless, he repeatedly ignored negative signals and continued to make rosy forecasts. Profits and the firm’s stock price eventually took a big hit. However, this gives only part of the picture. From another perspective on leadership, external control is highlighted.
Here, rather than making the implicit assumption that the leader is the most important contributor in determining organizational performance, the focus is on external factors that may positively or negatively affect a firm’s success. One doesn’t have to look far to support this perspective. Clearly, Nortel was negatively impacted by the worldwide recession that began in 2000, which drastically cut the demand for telecommunication equipment and services. Other rivals, such as Alcatel and Lucent Technologies, were also negatively affected.
Furthermore, as we see later on in the book, other perspectives ascribe the success of an organization primarily to unique combinations of skills and resources that are rare and invaluable in creating the products and services offered to the market. The point, of course, is that no single perspective is entirely correct, and we must acknowledge multiple angles in the study of strategic management. Our premise is that leaders can make a difference, but they must be constantly aware of the opportunities and threats that they face in the external environment and have a thorough understanding of their firm’s resources and capabilities.
Consider a rather dramatic example of the external control perspective at work: the terrorist attack on the twin towers of the World Trade Center in New York City and the Pentagon building in Arlington, Virginia, on September 11, 2001. The loss of life and injuries to innocent people were immense, and the damage to property was enormous.
The effect on many industries was devastating. Yet, some hightechnology firms recognized opportunities and benefited from government reactions to the terrorist attacks and from subsequent developments such as the creation of the Department of Homeland Security and the Iraq War in 2003. Leaders and entrepreneurs responded and capitalized on increased outlays for specialized computing hardware and software, surveillance equipment and services, and appropriations for the military, which have increased dramatically since then.
The effectiveness of those firms’ responses highlights the fact that an organization’s success (and, by extension, strategic management) cannot be viewed as deriving from a single factor, nor can a single person normally make all the difference in the results.
What Is Strategic Management?
Given the many challenges and opportunities in the global marketplace, today’s managers must do more than set long-term strategies and hope for the best. They must go beyond what some have called “incremental management,” whereby they view their job as making a series of minor changes to improve the efficiency of their firm’s operations. That is fine if their firm is competing in a very stable, simple, and unchanging industry. But there aren’t many of those left.
As we shall discuss in this chapter and throughout the book, the pace of change is accelerating, and the pressure on managers to make both major and minor changes in a firm’s strategic direction is increasing. Rather than view their role as mere custodian of the status quo, today’s leaders must be proactive, anticipate change, continually refine and, when necessary, make significant changes to their strategies.
The strategic management of the organization must become both a process and a way of thinking throughout the organization. At the heart of strategic management, each manager faces the question: How can I contribute to make our firm outperform othersThe challenge to managers is, first, to decide on strategies that provide advantages, which can be sustained over time and, second, to effectively execute those strategies in the midst of an environment of great turbulence and uncertainty.
Defining Strategic Management
Strategic Management consists of the analysis, decisions, and actions an organization undertakes in order to create and sustain competitive advantages. Competitive advantage, in turn, is what makes a company’s offerings superior to those of its competitors. Superiority comes in many dimensions, and firms can pursue different avenues of competitive advantage. Some can excel in providing products and services of superior quality that may incorporate unique and valuable features, that may be customized to address specific customer needs more closely, or that may be lower priced.
Even for organizations whose mandates do not include making profits, such as government departments and not-for-profit organizations, the concept of competitive advantage is very instructive. Consider, for example, our court system. What is the competitive advantage of a particular court of justice as compared to alternatives such as mediation or arbitration What elements of its organizing structure, staff, and strategy are responsible for providing resolutions to disputes that are speedier, fairer, or perceived as more just than the alternatives?
The answers are important since they can influence whether the populace will trust the court and whether the government will then adequately fund it rather than divert resources to its “competitors. ” The above definitions of strategic management and competitive advantage capture two main elements that go to the heart of the field of strategic management.
First, the strategic management of an organization entails three ongoing processes: analysis, decisions, and actions. That is, strategic management is concerned with the analysis of strategic goals LO 1 Part 1 Strategic Analysis (vision, mission, and strategic objectives) along with the analysis of the internal and external environment of the organization. Next, leaders must make strategic decisions.
These decisions, broadly speaking, address two basic questions: What industries should we compete in How should we compete in those industriesThese questions also often involve an organization’s domestic as well as its international operations. And last are the actions that must be taken. Decisions are of little use, of course, unless they are acted on.
Firms must take the necessary actions to implement their strategies. This requires leaders to allocate the necessary resources and to design the organization to bring the intended strategies to reality. Strategic management is, therefore, a process and an evolving managerial responsibility that requires a great deal of interaction among those three subprocesses. It should be noted that although each of the three subprocesses can conceptually be viewed as occurring distinctly and in sequence, effective managers engage in all three, all the time.
Their actions provide insights and experiences that further inform their understanding of what is going on in the marketplace as well as what their firm is capable of accomplishing. Such appreciation allows them to continuously refine or drastically change their adopted strategies. Second, the essence of strategic management is the study of why some firms outperform others. 5 Thus, managers need to determine how a firm is to compete so that it can obtain advantages that are sustainable over a period of time. That means focusing on two fundamental questions: How should we compete in order to create competitive advantages in the marketplace?
For example, managers need to determine if the firm should position itself as the low-cost producer or develop products and services that are unique, which would enable the firm to charge premium prices, or some combination of both. Since managers must also ask how to make such advantages sustainable, instead of temporary, in the marketplace, the next question is: How can we create competitive advantages in the marketplace that are not only unique and valuable but also difficult for competitors to copy or substitute6,7 Ideas that work are almost always copied by rivals immediately.
In the 1980s, American Airlines tried to establish a competitive advantage by introducing the frequent flyer program. Within months, all major airlines in the U. S. as well as in Canada and the rest of the world had similar programs. Overnight, instead of competitive advantage, frequent flyer programs became a necessary tool for competitive parity. The challenge, therefore, is to create a competitive advantage that is sustainable.
Michael Porter argues that sustainable competitive advantage cannot be achieved through operational effectiveness alone. Most of the popular management innovations of the last two decades—total quality, just-in-time, benchmarking, business process re-engineering, outsourcing—are about operational effectiveness.
Operational effectiveness means performing similar activities better than rivals. Each of these is important, but none leads to sustainable competitive advantage, for the simple reason that everyone is doing them. Strategy is all about being different from everyone else. Sustainable competitive advantage is possible only through performing different activities from rivals or performing similar activities in different ways.
Companies such as Wal-Mart, Canadian Tire, and IKEA have developed unique, internally consistent, and difficult-to-imitate activity systems that have provided them with sustained competitive advantage. A company with a good strategy must make clear choices about what it wants to accomplish. Trying to do everything that its rivals do eventually leads to mutually destructive price competition, not long-term advantage.
The defining feature of the global economy is not the flow of goods— international trade has existed for centuries—but the flow of capital, people, and information worldwide.
With globalization, time and space are no longer a barrier to making deals anywhere in the world. Along with the increasing speed of transactions and global sourcing of all forms of resources and information, managers must address the paradoxical demand to think globally and act locally.
They also face new challenges when formulating strategies: volatile political situations, difficult trade issues, ever-fluctuating exchange rates, unfamiliar cultures, and gut-wrenching social problems. Today, managers must be more literate in the ways of foreign customers, commerce, and competition than ever before. Globalization requires that organizations increase their ability to learn and collaborate and to manage diversity, complexity, and ambiguity. Top-level managers can’t do it all alone. Technology Technological change and diffusion of new technologies are moving at an incredible pace.
Such developments accentuate the importance of innovation for firms if they are to remain competitive. David de Pury, former co-chair of the board of Asea Brown Boveri, claimed that “innovate or die” is the first rule of international competition. Similarly, continuous technological development and change shrink product life cycles. Andrew Grove, chairman of Intel, explained the recent introduction of a sophisticated new product at his company—one in which it had invested considerable funds. However, later in the same year, Intel was forced by competition to introduce a replacement product that would cannibalize its existing product.
The firm had only 11 months to recoup that significant investment. Such time-intensive product development involves the efforts and collaboration of managers and professionals throughout the organization. Once again, toplevel managers can’t do it all alone. Intellectual Capital Knowledge has become the direct source of competitive advantage(s) for companies selling ideas and relationships (e. g. , professional services, software companies, and technology-driven companies) as well as for all companies trying to differentiate themselves from rivals by how they create value for their customers.
Many technology-strategy consultants operating in North America, and making over $150,000 annually, are blissfully unaware of the challenge posed by the likes of Ganesh Narasimhaiya. Ganesh is a 30-year-old Indian who enjoys cricket, R&B music, and bowling. He has a bachelor’s degree in electronics and communications, and he can spin out code in a variety of languages: COBOL, Java, and UML (Unified Modelling Language), among others. Ganesh has worked on high-profile projects for Wipro, a $903 million Indian software giant, all over the world. He has helped GE Medical Systems roll out a logistics application throughout Southeast Asia.
When he’s home in Bangalore, his pay is about one-quarter of that—$21,000 a year. But by Indian standards, this is a small fortune. Ganesh is part of Wipro’s strategy of amassing a small force of high-level experts who are increasingly focused on specific industries and can compete with anyone for a given consulting project. Wipro’s Trojan horse is the incredibly cheap offshore outsourcing solution that it can provide. The rise of a globally integrated knowledge economy is a blessing for developing nations. What it means for the North American and Western European skilled labour forces is less clear.
This is something that strategy consultants working for Accenture and EDS in the United States, Canada, or Germany need to think about. WhyForrester Research has predicted that at least 3. 3 million white-collar jobs and $136 billion in wages will shift from the U. S. alone to low-cost countries by 2015. With dramatically lower wage rates and the same level of service, how is the Western technology professional going to compete with Ganesh and his colleaguesgoods have steadily accounted for a shrinking proportion of the total economy, their value has risen substantially. Why?
In the information age, manufactured goods have increasingly become what can be called “congealed brainpower. ” Intel, for example, turns something of less value than metal—sand (which becomes silicon)—into something far more valuable than gold—Pentium III chips. Brainpower can take the form of ultra-high technology, as in the Pentium chip, or brand power, as in the Hermes scarf. Most often it’s both, as in the Mercedes-Benz. ”Creating and applying knowledge to deliver differentiated products and services of superior value for customers requires the acquisition of superior talent as well as the ability to develop and retain that talent.
Successful firms create an environment with strong social and professional relationships, where people feel strong “ties” to their colleagues and their organization. Technologies are used to leverage human capital and to facilitate collaboration among individuals. The challenge for management is to instill human capital with a strategic perspective and use its talents to effectively help the organization attain its goals and objectives. Strategy Spotlight 1. 2 discusses the global market for talent. It illustrates how forces of globalization, technology, and intellectual capital can be related.