Strategic
ManageMent
concepts and cases
A Competitive AdvAntAge ApproACh
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Part 1
Source: Odua Images/Fotolia
Overview Of Strategic ManageMent
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the nature of Strategic
Management
learning Objectives
After studying this chapter, you should be able to do the following:
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.
1-7. Explain why some firms do no strategic planning.
1-8. Describe the pitfalls in actually doing strategic planning.
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 1a
exercise 1b
exercise 1c
exercise 1D
exercise 1e
exercise 1f
exercise 1g
compare Business Strategy with Military Strategy
gather Strategy information for the Hershey company
Update the Hershey cohesion case
Strategic Planning for Your University
Strategic Planning at a Local company
get familiar with the Strategy club website
game Plans vs. Strategic Plans: teams vs. companies
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w
hen 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 congressional leaders for bailout monies, they were sent home with instructions to develop
a clear strategic plan for the future. austan 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.”1 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, integrative model of the strategic-management process, and it defines basic activities and terms 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 legendary 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 two 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 president took off his knapsack and got out a pair of jogging shoes. the second
president said, “Hey, you can’t outrun that bear.” the first president responded, “Maybe i can’t
exemPlary cOmPany shOwcaseD
apple, inc. (aaPL)
Headquartered in Cupertino, California, Apple, Inc. designs, produces,
and markets smartphones, watches, personal computers, digital music
players, and much more worldwide. Apple is arguably the most successful company in modern times. The company was founded in 1977 by a
great strategist, an American legend, the late Mr. Steve Jobs. According
to Financial Times, the best corporate strategist in 2014 was Apple CEO
Tim Cook, who led Apple to a record $700 billion market capitalization, with booming iPhone and personal computer sales, and handed
billions of dollars back to shareholders. Financial Times named CEO
Cook as “Person of the Year” for Apple’s huge achievements as well as
Cook’s courage. Cook came forward as the Fortune 500’s first openly
gay CEO when he published an essay in October 2014 in Bloomberg
Businessweek saying he was “proud to be gay.” Cook was courageous
in other ways too. For example, at an Apple’s shareholder meeting,
when someone questioned the profitability of Apple’s environmental
initiatives, Cook responded, “We do things for other reasons than a
profit motive; we do things because they are right and just. If that’s a
hard line for you . . . then you should get out of the stock.”
Amidst tremendous fanfare, Apple recently released its iWatch and
is poised to introduce iTV, along with an electric car. Apple and IBM have
released the first apps to emerge from their collaboration—a collection
that CEO Cook
says is “the
most enterprising apps ever.”
Also,
Apple
recently entered
the
e-book
business as well
as the banking business with its Apple Pay system, whereby customers
use their iPhone to pay for merchandise at hundreds of retail checkout
counters. In addition, Apple recently acquired Metaio, a company that
makes augmented-reality (AR) technologies, a concept that allows developers to overlay digital information on top of the real world. A number
of companies are working on AR, including Microsoft and Google with
their HoloLens and Magic Leap projects, respectively. Many scientists
expect AR and virtual reality (VR) to be the next major computing platform after mobile devices such as smartphones and tablets. For the
eighth year in a row, Fortune recently named Apple the world’s most
admired company.
Source: company documents and a variety of sources.
cHaPter 1 • tHe nature Of Strategic ManageMent
outrun that bear, but i surely can outrun you!” this story captures the notion of strategic management, 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
written 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 well-known, 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 perform 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 definition implies, strategic management focuses on integrating management, marketing, finance
and accounting, production and operations, research and development (r&D), and information systems to achieve organizational success. the term strategic management in this text 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 strategic 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 popular 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 of corporate 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 strategic planning, and the process is widely practiced today in the business world. Many companies
today have a chief strategy officer (CSO). McDonald’s hired a new cSO in October 2015.
a strategic plan is, in essence, a company’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, procedures, 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 weaknesses, establishing long-term objectives, generating alternative strategies,
and choosing particular strategies to pursue. Strategy-formulation issues include deciding what
new businesses to enter, what businesses to abandon, whether to expand operations or diversify,
whether to enter international markets, whether to merge or form a joint venture, and how to
avoid a hostile takeover.
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Because no organization has unlimited resources, strategists must decide which alternative strategies will benefit the firm most. Strategy-formulation decisions commit an organization to specific products, markets, resources, and technologies over an extended period of time.
Strategies determine long-term competitive advantages. for better or worse, strategic decisions
have major multifunctional consequences and enduring effects on an organization. top managers
have the best perspective to understand fully the ramifications of strategy-formulation decisions;
they have the authority to commit the resources necessary for implementation.
Strategy implementation requires a firm to establish annual 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 marketing efforts, preparing budgets, developing and using
information systems, and linking employee compensation to organizational performance.
Strategy implementation often is called the “action stage” of strategic management.
implementing strategy means mobilizing 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’ ability 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. Strategyimplementation activities affect all employees and managers in an organization. every division
and department 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 and 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 external and internal factors constantly change. three fundamental strategy-evaluation activities are
(1) reviewing external and internal 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 organizations experience demise.
formulation, implementation, and evaluation of strategy activities occur at three hierarchical 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
corporate 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 thinking through the overall
mission of a business—
that is, of asking the question, “what is our business?” this leads to the setting of objectives, 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 business; that can balance objectives and the needs of today against the needs of tomorrow; and
that can allocate resources of men and money to key results.2
integrating intuition and analysis
edward Deming 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 an organization. it attempts to organize qualitative and quantitative information in a way that
allows effective decisions to be made under conditions of uncertainty. Yet strategic management
is not a pure science that lends itself to a nice, neat, one-two-three approach.
Based on past experiences, judgment, and feelings, most people recognize that intuition is
essential to making good strategic decisions. intuition is particularly useful for making decisions
cHaPter 1 • tHe nature Of Strategic ManageMent
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 managers and owners of businesses profess to have extraordinary abilities for using intuition alone
in devising brilliant strategies. for example, will 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 intuitive 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.”3 albert einstein acknowledged 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 the reason. imagination is more important than
knowledge, because knowledge is limited, whereas imagination embraces the entire world.”4
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 strategic management, which is based on integrating intuition and analysis in decision making.
choosing an intuitive 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 strategicmanagement analyses. analytical thinking and intuitive thinking complement each other.
Operating from the i’ve-already-made-up-my-mind-don’t-bother-me-with-the-facts mode
is not management by intuition; it is management by ignorance.5 Drucker 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.”6
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 intuitive and experience-based management philosophies are grossly inadequate when decisions are strategic
and have major, irreversible consequences.7
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 knowledge 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 needed.
the rate and magnitude of changes that affect organizations are increasing dramatically, 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 organizations to adapt effectively to change over the 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 survive the shocks and prosper
from the forces that decimate the competition.8
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 outside-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 need to adapt to change leads organizations to key strategic-management questions,
such as “what kind of business should we become?” “are we in the right field(s)?” “Should
we reshape our business?” “what new competitors are entering our industry?” “what strategies
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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 internet has transferred power from businesses to individuals. 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 marketing. consumers today are flocking to blogs, sending tweets, watching and posting videos on
Youtube, and spending hours on tumbler, 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 discuss strategic management, we should define nine key terms: competitive
advantage, strategists, vision and mission statements, external opportunities and threats, internal strengths and weaknesses, long-term objectives, strategies, annual objectives, and policies.
Competitive Advantage
Strategic management is all about gaining and maintaining competitive advantage. this term
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 firms can provide major competitive advantages. for
example, apple has virtually no manufacturing facilities of its own, and rival Sony has 57 electronics 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 Underhill of envirosell, “where it used to be a polite war, it’s now
a 21st-century bar fight, where everybody is competing with everyone else for the customers’
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 taking revenues from walmart.9 getting and keeping competitive
advantage is essential for long-term success in an organization. in mass retailing, big-box companies, 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 advantage in retailing. walmart express stores 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 examples of smaller is better.
normally, a firm can sustain a competitive advantage for only a certain period because
of rival firms imitating and undermining that advantage. thus, it is not adequate simply 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 individuals most responsible for the success or failure of an organization.
they have various job titles, such as chief executive officer, president, owner, chair of the board,
executive director, chancellor, dean, and entrepreneur. Jay conger, professor of organizational
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 learning officers. we are in an extended period of change. if our leaders aren’t
highly adaptive and great models during 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 industry 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 profit 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 organizations, including Sun Microsystems, network associates, clarus, Lante, Marimba, Sapient,
commerce One, BBDO, cadbury Schweppes, general Motors, ellie Mae, cendant, charles
Schwab, tyco, campbell Soup, Morgan Stanley, and reed-elsevier. 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 their attitudes,
values, ethics, willingness to take risks, concern for social responsibility, concern for profitability, concern for short-run versus long-run aims, and management style—some will not even consider 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 corporate 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 basketball 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 yesteryear
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
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
diversified)
2)
3)
4)
5)
As acquisition activity expands
As alliance activity increases
As a firm’s size grows
As top management team interdependence increases
Results of the Menz and Sheef study reveal that an increase in
management interdependence and growth in acquisition activity
were most commonly associated with hiring a new CSO.
Source: Based on Markus Menz and christine Sheef, “chief Strategy
Officers: contingency analysis of their Presence in top Management
teams,” Strategic Management Journal 35, no. 3 (March 2014): 461–471.
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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 Lombardi, 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 born. 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 (1959–67)
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 you aren’t a failure until you start blaming someone else.” —Bum Phillips, Head Coach Houston Oilers (1975–80), New Orleans Saints (1981–85)
8. “Success demands singleness of purpose.” —Vince Lombardi, Head Coach Green Bay Packers
(1959–67)
9. “Stay focused. Your 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.10 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 the first step in strategic
planning, preceding even development of a mission statement. Many vision statements are a single 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.”11 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 serves 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 significantly benefit or harm an organization in the future. Opportunities and threats
are largely beyond the control of a single organization—thus the word external. Some general
categories of opportunities and threats are listed in table 1-2, but be mindful that dollars, numbers, percentages, ratios, and quantification are essential, so strategists can assess the magnitude
cHaPter 1 • tHe nature Of Strategic ManageMent
Table 1-2 Some General Categories of Opportunities and Threats
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availability of capital can no longer be taken for granted.
consumers expect green operations and products.
Marketing is moving rapidly to the internet.
commodity food prices are increasing.
an oversupply of oil is driving oil and gas prices down.
computer hacker problems are increasing.
intense price competition is plaguing most firms.
Unemployment 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 cartel–related 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.
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 find, 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 the USa.12 Strategies must be formulated and implemented based on specific factual information 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 consequently 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 the impact of external threats. for this
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 opportunities 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/
accounting, 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 internal weaknesses.
Strengths and weaknesses are determined relative to competitors. Relative deficiency or
superiority is important information. also, strengths and weaknesses can be determined by
elements of being rather than performance. for example, a strength may involve ownership of
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natural resources or a historic reputation for quality. Strengths and weaknesses may be determined relative to a firm’s own objectives. for instance, high levels of inventory turnover may not
be a strength for a firm that seeks never to stock-out.
in performing a strategic-management case analysis, it is important to be as divisional as
possible when determining and stating internal strengths and weaknesses. 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 effectively formulated because in strategic
planning, firms must allocate resources among divisions (segments) of the firm (that is, by product, region, customer, or whatever the various units of the firm are), such as walmart’s Sam’s
club versus walmart’s Supercenters, or walmart’s Mexico segment versus walmart’s europe
segment.
Both internal and external factors should be stated as specifically as possible, using numbers,
percentages, dollars, and ratios, as well as comparisons over time to rival firms. Specificity is
important because strategies will be formulated and resources allocated based on this information. the more specific the underlying external and internal factors, the more effectively strategies
can be formulated 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.
internal factors can be determined in a number of ways, including computing ratios, measuring performance, and comparing to past periods and industry averages. various types of surveys
also can be developed and administered to examine internal 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
organizational success because they provide direction; aid in evaluation; create synergy; reveal
priorities; focus coordination; and provide a basis for effective planning, organizing, motivating, 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
penetration, retrenchment, divestiture, liquidation, and joint ventures. Strategies currently being
pursued by some companies 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 multidivisional consequences and require consideration of both the external and internal factors
facing the firm.
Annual Objectives
Annual objectives are short-term milestones that organizations must achieve to reach longterm objectives. Like long-term objectives, annual objectives should be measurable, quantitative, 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
stated in terms of management, marketing, finance/accounting, production/operations, r&D,
and MiS accomplishments. a set of annual objectives is needed for each long-term objective.
these objectives are especially important in strategy implementation, whereas long-term objectives are particularly important in strategy formulation. annual objectives provide the basis for
allocating resources.
cHaPter 1 • tHe nature Of Strategic ManageMent
Table 1-3 Sample Strategies in Action in 2015
general electric company (ge)
general electric company recently sold its appliance business to Sweden-based electrolux aB for
$3.3 billion, leaving ge focused almost entirely on finance and big-ticket industrial equipment, such as
power turbines, locomotives, and aircraft engines. ge’s ceO Jeff immelt, when asked “what is ge?,”
recently responded with the word energy, rather than insurance, plastics, media, consumer finance,
or appliances. founded by thomas edison in 1889 and originally named edison general electric
company, ge is returning to its roots as an energy company. the company has spent about $14 billion
lately buying oil-and-gas service companies, while divesting dishwashers, radios, stoves, microwaves,
and toasters.
chuy’s (cHuY)
chuy’s is a chain of 59 small Mexican restaurants scattered across the United States. it is not “fast
casual,” like chipotle Mexican grill; rather, it is a sit-down, 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 décor also includes walls that feature customer-submitted 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 comparable restaurant sales have increased for 17 consecutive quarters. Unlike chipotle, which recently
increased prices, chuy’s has absorbed numerous commodity 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 support 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/accounting, 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 they
may be established at the functional level and apply to particular operational activities or
departments.
Like annual 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 harms 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 having more 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.13
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.
Substantial research 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
huge 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.
13
14
Part 1 • Overview Of Strategic ManageMent
the Strategic-Management Model
the strategic-management process can best be studied and applied using a model. every model
represents some kind of process. the framework illustrated in figure 1-1 is a widely accepted,
comprehensive model of the strategic-management process.14 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 this 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?
Chapter 10: Business Ethics/Social Responsibility/Environmental Sustainability Issues
Perform
External Audit
Chapter 3
Develop Vision
and Mission
Statements
Chapter 2
Establish
Long-Term
Objectives
Chapter 5
Generate,
Evaluate,
and Select
Strategies
Chapter 6
Implement
Strategies—
Management
Issues
Chapter 7
Implement
Strategies—
Marketing,
Finance,
Accounting, R&D,
and MIS Issues
Chapter 8
/GCUWTG
CPF'XCNWCVG
2GTHQTOCPEG
%JCRVGT
Perform
Internal Audit
Chapter 4
Chapter 11: Global/International Issues
Strategy
Formulation
Strategy
Implementation
Strategy
Evaluation
Figure 1-1
A Comprehensive Strategic-Management Model
Source: fred r. David, “How companies Define their Mission,” Long Range Planning 22, no. 3 (June 1988): 40. See also anik
ratnaningsih, nadjadji anwar, Patdono Suwignjo, and Putu artama wiguna, “Balance Scorecard of David’s Strategic Modeling at industrial
Business for national construction contractor of indonesia,” Journal of Mathematics and Technology, no. 4 (October 2010): 20.
cHaPter 1 • tHe nature Of Strategic ManageMent
15
identifying an organization’s existing vision, mission, objectives, and strategies is the logical 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 organization 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 determined 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 year or semiannually. the
strategic-management process never really ends.
note in the strategic-management model that business ethics, social responsibility, and
environmental sustainability issues impact all activities in the model, as discussed in chapter 10.
also, note in the model that global and international 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 practice as the strategic-management model suggests. Strategists do not go through the process in
lockstep fashion. generally, there is give-and-take among hierarchical levels of an organization. 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 rationale 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. the 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 formal in larger and wellestablished organizations. formality refers to the extent that participants, responsibilities, authority,
duties, and approach are specified. Smaller businesses tend to be less formal. firms that compete in
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 strategic-management concepts. greater formality in applying the
strategic-management process is usually positively associated with organizational success.15
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?
Recent 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, evolving conceptual entity,” and as such must be engulfed in flexibility.
“Flexibility” should also be reflected in the structures put in place
to monitor and modify strategic plans. Flexibility safeguards should
increasingly be known and practiced throughout the firm, especially
at lower levels of the organization. The stages of strategic management (formulation, implementation, and evaluation) are so fluid as
to be virtually indistinguishable when one starts and the other ends.
Thus, in the comprehensive model illustrated, the encompassing
feedback loop is vitally important to enable firms to readily adapt to
changing conditions. A significant change in any activity (box) in the
model could necessitate change(s) in other activities.
Source: Based on wade rose and David cray “the role of context in
the transformation of Planned Strategy into implemented Strategy,”
International Journal of Business Management and Economic Research 4,
no. 3 (2013): 721–737.
16
Part 1 • Overview Of Strategic ManageMent
officers, presidents, and managers of many for-profit and nonprofit organizations have recognized 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, rather 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 commitment. 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 surprisingly 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 individuals. Empowerment is the act of strengthening employees’ sense of effectiveness by encouraging them to participate in decision making and to exercise initiative and imagination, and
rewarding them for doing so. william 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 important than a nicely bound strategic-management document. the worst thing strategists can do
is develop strategic plans themselves 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 employees must also be involved in strategy
formulation, implementation, and evaluation activities. Participation is a key to gaining commitment for needed 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 significant improvement in sales, profitability, and productivity compared to firms without systematic
Enhanced
Communication
a. Dialogue
b. Participation
Deeper/Improved
Understanding
a. Of others’ views
b. Of what the firm
is doing/planning
and why
Figure 1-2
Benefits to a Firm That Does Strategic Planning
Greater
Commitment
a. To achieve
objectives
b. To implement
strategies
c. To work hard
THE RESULT
All Managers and
Employees on a
Mission to Help the
Firm Succeed
cHaPter 1 • tHe nature Of Strategic ManageMent
planning activities. High-performing firms tend to do systematic planning 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
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 of future conditions. Strategists
of low-performing organizations are often preoccupied with solving internal problems and meeting paperwork deadlines. they typically underestimate their competitors’ strengths and overestimate 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 planning concepts and tools described in this text can yield substantial financial benefits for any
organization.
Nonfinancial Benefits
Besides helping firms avoid financial demise, strategic management offers other tangible
benefits, such as enhanced awareness of external threats, improved understanding of competitors’ strategies, increased employee productivity, reduced resistance to change, and a clearer
understanding of performance–reward relationships. Strategic management enhances the problem-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 turn 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 firm utilizing strategic management, according to greenley, are increased discipline,
improved coordination, enhanced communication, reduced resistance to change, increased forward thinking, improved decision making, increased synergy, and more effective allocation of
time and resources.16
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 planning in a firm are as follows:
1.
2.
3.
4.
5.
6.
7.
8.
no formal training in strategic management
no understanding of or appreciation for the benefits of planning
no monetary rewards for doing planning
no punishment for not planning
too busy “firefighting” (resolving internal crises) to plan ahead
view planning as a waste of time, since no product/service is made
Laziness; effective planning takes time and effort; time is money
content with current success; failure to realize that success today is no guarantee for
success tomorrow; even apple inc. is an example
9. Overconfident
10. Prior bad experience with strategic planning done sometime/somewhere
17
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 offers 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 insufficient or no planning is done
Being so formal in planning that flexibility and creativity are stifled17
comparing Business and Military Strategy
a strong military heritage underlies the study of strategic management. terms such as objectives, mission, strengths, and weaknesses were first formulated to address problems on the battlefield. 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.”18 the word strategy comes from the
greek strategos, which refers to a military general and combines stratos (the army) and ago (to
lead). the history of strategic planning began in the military. 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 competitors’ 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 both 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 strategy
is formulated, implemented, and evaluated with an assumption of competition, whereas military 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 strategists have access to valuable insights that military thinkers have refined over time.
Superior strategy formulation and implementation can overcome an opponent’s superiority in
numbers and resources.
Born in Pella in 356 bce, alexander the great was king of Macedon, a state in northern
ancient greece. tutored by aristotle until the age of 16, alexander had created one of the largest
empires of the ancient world by the age of 30, stretching from the ionian Sea to the Himalayas.
alexander was undefeated in battle and is considered one of history’s most successful commanders. He became the measure against which military leaders even today compare themselves, and
cHaPter 1 • tHe nature Of Strategic ManageMent
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 of lions 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
team with his players and he take my players.”
Both business and military organizations must adapt to change and constantly improve to be
successful. too often, firms do not change their strategies when their environment and competitive 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, tactics, 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 strategies not of the last war but
of the next.19
Sun tzu’s The Art of War has been applied to many fields well outside of the military. 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 strategy or acquiring 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 top executives. the book is a 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 contests. nfL coach Bill Belichick is known to have read the book and used its lessons to gain
insights in preparing for games. australian cricket coaches, as well as Brazilian association
football coaches Luis felipe Scolari and carolos alberto Parreira, embraced the text. Scolari
made the Brazilian world 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 among businesses today. table 1-4 provides narrative excerpts from The
Art of War. as you read through the table, consider which of the principles of war apply to business strategy as companies today compete aggressively to survive and grow.
Table 1-4 Excerpts from Sun Tzu’s The Art of War Writings
•
•
•
•
war is a matter of vital importance to the state: a matter of life or death, the road either to survival 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 where he is unprepared, and appear where you are not expected. these are the keys to
victory for a strategist. it is not possible to formulate 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 army 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
enemy’s entire army is better than to destroy it; to take intact a regiment, a company, or a squad is
better than to destroy it. for to win one hundred victories in one hundred battles is not the epitome of
skill. to subdue the enemy without fighting is the supreme excellence. those skilled in war subdue
the enemy’s army without battle.
19
20
Part 1 • 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. when 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 learn 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 lowlands, so an army should avoid strength and strike weakness. and as water shapes its flow in accordance 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 “business 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 you do decide to challenge another company (or army), much calculating, estimating, analyzing, 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 over a rival, skillful leaders do not 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.
imPlicatiOns fOr strategists
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, intelligent, hard
work. If the process were easy, every business would be successful.
Consistent success requires that strategists gather and assimilate relevant data, make tough trade-off decisions among various options
that would benefit the firm, energize and reward employees, and
continually adapt to change. To survive and prosper, a business must
gain and sustain at least several major competitive advantages over
rival firms.
The strategic-management process represents a systematic means
for creating, maintaining, and strengthening a firm’s competitive advantages. This text provides step-by-step guidance throughout the
process to help strategists gain and sustain a firm’s competitive advantages. 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 strategic-management process, with numerous highlights accented along
the way, so strategists can perform essential analyses and anticipate
and resolve potential problems in leading their firm to success.
cHaPter 1 • tHe nature Of Strategic ManageMent
21
Establish A Clear
Vision & Mission
Evaluate & Monitor
Results:
Take Corrective
Actions; Adapt
To Change
Gain & Sustain
Competitive
Advantages
Formulate Strategies:
Collect, Analyze, &
Prioritize Data Using
Matrices; Establish A
Clear Strategic Plan
Implement Strategies:
Establish Structure;
Allocate Resources;
Motivate & Reward;
Attract Customers;
Manage Finances
Figure 1-3
How to Gain and Sustain Competitive Advantages
imPlicatiOns fOr stuDents
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 recommend the firm overcome its competitive disadvantages. Pave the
way early and often in your presentation for what you ultimately
recommend your firm should do over the next three years. The notion 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 project.
chapter Summary
all firms have a strategy, even if it is informal, unstructured, and sporadic. all organizations are
heading somewhere, but unfortunately some organizations do not know where they are going.
the old saying “if you do not know where you are going, then any road will lead you there!”
accents the need for organizations to use strategic-management concepts and techniques. the
strategic-management process is becoming more widely used by small firms, large companies,
nonprofit institutions, governmental organizations, and multinational conglomerates alike. the
process of empowering managers and employees has almost limitless benefits.
22
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 too high for strategists to use intuition alone in choosing among alternative 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 good 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 complete the problems with the
, go to EOC Discussion Questions in the MyLab.
Key terms and concepts
annual objectives (p. 12)
competitive advantage (p. 8)
empowerment (p. 16)
environmental scanning (p. 11)
external opportunities (p. 10)
external threats (p. 10)
internal 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)
sustained competitive advantage (p. 8)
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 understanding,” “enhanced communication,” “all managers
and employees on a mission,” and “greater commitment”—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 are strategic-planning retreats often conducted
away from the worksite? How often should firms have a
retreat, 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 “being adept at adapting”
is for business firms? explain.
1-10. as cited in the chapter, famous businessman edward
Deming 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. Your 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 weaknesses that characterize your university.
cHaPter 1 • tHe nature Of Strategic ManageMent
1-15. List reasons why objectives are essential for organizational success.
1-16. why are policies especially important in strategy implementation?
1-17. what is a “retreat,” and why do firms take the time and
spend the money to have these?
1-18. Discuss the notion of strategic planning being
more formal versus informal in an organization. On a
1-to-10 scale from formal to informal, what number
best represents your view of the most effective
approach? why?
1-19. List what you believe are the five most important
lessons for business that can be garnered from The Art
of War book.
1-20. what is the fundamental difference between business strategy and military strategy in terms of basic assumptions?
1-21. explain why the strategic-management class is often
called a “capstone course.”
1-22. what aspect of strategy formulation do you think
requires the most time? why?
1-23. why is strategy implementation often considered
the most difficult stage in the strategic-management
process?
1-24. why is it so important to integrate intuition and analysis
in strategic management?
1-25. explain the importance of a vision and a mission statement.
1-26. Discuss relationships among objectives, strategies, and
policies.
1-27. why do you think some chief executive officers fail to use a
strategic-management approach to decision making?
1-28. Discuss the importance of feedback in the strategicmanagement model.
1-29. How can strategists best ensure that strategies will be
effectively implemented?
1-30. give an example of a recent political development that
changed the overall strategy of an organization.
1-31. who are the major competitors of your college or university? what are their strengths and weaknesses? what
are their strategies? How successful are these institutions compared to your college?
1-32. in your opinion, what is the single major benefit of
using a strategic-management approach to decision
making? Justify your answer.
23
1-33. Most students will never become a chief executive officer or even a top manager in a large company. So why
is it important for all business majors to study strategic
management?
1-34. Describe the content available at the Strategy club
website at www.strategyclub.com.
1-35. List four financial and four nonfinancial benefits of a
firm engaging in strategic planning.
1-36. why is it that a firm can normally sustain a competitive
advantage for only a limited period of time?
1-37. why it is not adequate simply to obtain competitive
advantage?
1-38. How can a firm best achieve sustained competitive
advantage?
1-39. in sequential order in the strategic-planning process,
arrange the following appropriately: policies, objectives,
vision, strategies, mission, strengths.
1-40. Label the following as an opportunity, a strategy, or a
strength.
a. XYZ inc. is hiring 50 more salespersons.
b. XYZ inc. has 50 salespersons.
c. XYZ inc.’s rival firm has only 50 salespersons.
1-41. what two factors most often result in a cSO being
hired or appointed by the firm?
1-42. explain why internal strengths and weaknesses
should be stated in divisional terms to the extent
possible.
1-43. explain why both internal and external factors should
be stated in specific terms (that is, using numbers, percentages, money ratios, and comparisons over time) to
the extent possible.
1-44. identify the three activities that comprise strategy
evaluation.
1-45. List six characteristics of annual objectives.
1-46. would strategic-management concepts and techniques
benefit foreign businesses as much as domestic firms?
Justify your answer.
1-47. what do you believe are some potential pitfalls or risks
in using a strategic-management approach to decision
making?
1-48. what does recent research reveal to be the most important component/activity in the strategic-management
process?
MyManagementLab®
Go to the Assignments section of your MyLab to complete these writing exercises.
1-49. Strengths and weaknesses should be determined relative
to competitors, or by elements of being or relative to a
firm’s own objectives. explain.
1-50. what are the three stages in strategic management?
which stage is more analytical? which relies most on
empowerment to be successful? which relies most on
statistics? Justify your answers.
24
Part 1 • Overview Of Strategic ManageMent
mini-case On the KrOger cOmPany (Kr)
wHat aMerican cOMPanY DOeS tHe BeSt
JOB Of Strategic PLanning?
Source: ifoto/Fotolia
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, implementing, and evaluating strategies. Kroger manufacturers, processes, and distributes food for sale in its
supermarkets, drugstores, and convenience stores. the company not only owns and operates 325
jewelry stores—it also owns city Market, Dillons, food 4 Less, fred Meyer, frys, Harris 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 year 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 of ways, including
weekly promotions and fuel rewards. and Kroger continues to make natural and organic foods affordable 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 fuel and
pharmacy. Kroger appears 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 combining into one company.
ahold operates giant food Stores in Maryland, virginia, and washington, Dc, where Kroger wants
to build more Harris teeter Supermarkets inc. ahold also owns Martin’s food Markets stores in
virginia. Delhaize operates food Lion in the 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 new england. if ahold and Delhaize merge,
that would create a company with 2,034 supermarkets in the United States, compared to Kroger’s
2,625 in 34 states, and could result in a more price competitive grocery business.
Questions
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 Delhaize merge?
5. go to the website 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.
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 variety of sources.
cHaPter 1 • tHe nature Of Strategic ManageMent
25
current readings
alber, Laura. “the ceO of williams-Sonoma on Blending instinct with analysis.” Harvard Business Review 92.9 (2014):
41–44. Business Source Premier. web. 5 Sept. 2014.
courtney, Hugh, Dan Lovallo, and carmina clarke. “Deciding
How to Decide (cover Story).” Harvard Business Review
91.11 (2013): 62–70. Business Source Premier. web. 5
Sept. 2014.
Hon, alice H. Y., Matt Bloom, and J. Michael crant. “Overcoming
resistance to change and enhancing creative Performance.”
Journal of Management 40.3 (2014): 919–941. Business
Abstracts with Full Text (H. W. Wilson). web, 5 Sept. 2014.
Martin, roger L. “the Big Lie of Strategic Planning.” Harvard
Business Review 92.1/2 (2014): 78–84. Business Source
Premier. web. 5 Sept. 2014.
Priem, richard L., John e. Butler, and Sali Li. “toward
reimagining Strategy research: retrospection and
Prospection on the 2011 aMr Decade award article.”
Academy of Management Review 38.4 (2013): 471–489.
Business Source Premier. web. 5 Sept. 2014.
rosenzweig, Phil. “what Makes Strategic Decisions
Different (cover Story).” Harvard Business Review
91.11 (2013): 88–93. Business Source Premier. web. 5
Sept. 2014.
weaver, gary 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
with Full Text (H. W. Wilson). web. 5 Sept. 2014.
endnotes
1. Kathy Kiely, “Officials Say auto ceOs Must Be Specific
on Plans,” USA Today, november 24, 2008, 3B.
2. Peter Drucker, Management: Tasks, Responsibilities, and
Practices (new York: Harper & row, 1974), 611.
3. alfred Sloan, Jr., Adventures of the White Collar Man
(new 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 Horizons 31, no. 5 (September–
October 1988): 16.
6. ron nelson, “How to Be a Manager,” Success (July–august
1985): 69.
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 of Management Executive 3, no. 2 (May
1989): 115.
9. Jayne O’Donnell, “Shoppers flock 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, ii, and fred David, “the Bottom Line on
corporate Mission Statements,” Academy of Management
Executive 1, no. 2 (May 1987): 109.
12. Jack Marshall, “Online ads Lure cash, But Losses Still
Mount,” Wall Street Journal (august 18, 2014), B1.
13. Mike esterl, Karishma Mehrotra, and valerie Bauerlein,
“america’s Smokers: Still 40 Million Strong,” Wall Street
Journal (July 16, 2014), B1.
14. fred r. David, “How companies Define their
Mission,” Long Range Planning 22, no. 1 (february
1989): 91.
15. g. L. Schwenk and K. Schrader, “effects of formal Strategic Planning in financial Performance in Small firms: a
Meta-analysis,” Entrepreneurship and Practice 3, no. 17
(1993): 53–64. See also c. c. Miller and L. B. cardinal,
“Strategic Planning and firm Performance: a Synthesis
of More than two Decades of research,” Academy of
Management Journal 6, no. 27 (1994): 1649–1665; Michael
Peel and John Bridge, “How Planning and capital Budgeting improve SMe Performance,” Long 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. gordon greenley, “Does Strategic Planning improve
company Performance?” Long Range Planning 19, no. 2
(april 1986): 106.
17. adapted 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.
26
Part 1 • Overview Of Strategic ManageMent
the cOhesiOn case
the Hershey company, 2015
by Forest r. DaviD anD MereDith e. DaviD
www.hersheys.com, HSY
Headquartered in Hershey, Pennsylvania, Hershey company is the largest chocolate producer in
north america and a confectionary leader worldwide, with over 80 brands, annual revenues over
$7 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, twizzlers, Jolly ranchers, ice Breakers, and, what may be the best-selling candy bar on the
planet—reese’s, a Hershey brand that recently became an official sponsor of eSPn college football
game day. Hershey is currently expanding globally with strategic emphasis on markets in china and
Mexico, but the company still derives more than 85 percent of its revenue from the United 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 (Q1) of 2015 declined 3.1 percent to $244 million from
Q4 of 2014. Hershey’s Q1 2015 revenues in china declined 47 percent. in response to this downturn,
Hershey shifted its strategy in china to combat slower consumer spending by focusing on smaller rather than the largest cities, increasing its e-commerce offerings, and decreasing its reliance on
hypermarkets. also for Q1 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 Q1 of 2015. Hershey has retail stores in new York city, chicago,
niagara falls, Shanghai, Dubai, Singapore, and Hershey (Pa).
Copyright by Fred David Books LLC. (Written by Forest R. David and Meredith E. David)
History
in 1894, Milton Hershey of Lancaster, Pennsylvania, decided to coat his popular caramels with a sweet
chocolate. this venture was actually Mr. Hershey’s third attempt in the confectionary business. in a 1927
interview, Mr. Hershey shared some advice from his mother that he attributed to his success: “when
you tackle a job, stick to it until you have won the battle.” Mr. Hershey was never an advocate of heavy
advertising, instead telling anyone who would listen that providing a quality product is the best advertising in the world. a personal motto in Mr. Hershey’s office read “Business is a matter of human service.”
By 1900, Hershey was producing chocolate not only for 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 formally changing
its name to Hershey foods corporation in 1968, Hershey acquired marketing rights to the english firm
rowntree Mackintosh; Y&S candies, famous for twizzlers; and Peter Paul/cadbury’s USa confectionery operations. Peter Paul’s most notable products include almond Joy and Mounds Bars. in 2012,
according to Advertising Age and euromonitor 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 the 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 from that country. On December 30, 2014, Hershey entered into an agreement to divest its Mauna Loa macadamia 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
maker of beef jerky and other high-protein snacks. Hershey made the move reportedly 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 is growing at a doubledigit pace. founded in 2009, Krave generated about $35 million in sales in 2014. Hershey plans
cHaPter 1 • tHe nature Of Strategic ManageMent
to operate Krave as a stand-alone business within its Hershey north america division; Krave’s
founder, Jon Sebastiani, continues to lead the business as President of Krave.
Internal Issues
Organizational Structure
Hershey has 10 top executives, as illustrated in the organizational chart given in exhibit 1. notice there are
two segments: north america and international, with those executives reporting to the chief corporate
Strategy and administrative Officer. the north america segment includes only the USa and canada. the
Hershey Board of Directors is comprised of 11 members, each serving terms that expire annually.
exhibiT 1 Hershey’s Organizational Chart
John Bilbrey, CEO, President
and Chairman of the Board
Kevin Walling,
Senior VP and
Chief of
Human
Resources
Patricia Little,
Senior VP
and CFO
Terence O’Day,
Senior VP and
Chief Supply
Chain Officer
Waheed Zaman,
Senior VP and
Chief Corporate
Strategy and
Administrative
Officer
Humberto
Alfonso,
President
International
Leslie Turner,
Senior VP of
General
Counsel and
Secretary
D. Michael
Wege, Senior
VP Chief
Growth and
Marketing
Officer
Michele Buck,
President of
North America
Vision/Mission
Hershey’s vision statement reads: “we bring goodness to the world through great tasting snacks. One
smile, one moment, and one person at a time.” the company’s mission statement reads as follows:
“Bringing sweet moments of Hershey happiness to the world every day.”
Social Responsibility
Hershey is one of the most socially responsible companies in the world and has won numerous accolades, including membership on the Dow Jones Sustainability index and membership on the civic 50.
Hershey often ranks among the top corporations for improving the communities in which it operates.
Hershey’s website gives extensive narrative, numerous pictures, and many videos that substantiate the
company’s social responsibility efforts. for over 100 years, Hershey has been well known for owning
and operating the Milton Hershey School, originally for orphan children. today, the Milton Hershey
School is the nation’s largest and wealthiest boarding school for needy children, with $7.5 billion in
assets for 1,900 students. Hershey spends about $110,000 a year per student, according to its nonprofit
irS tax filing—more than the nation’s most expensive and elite prep schools.
in response to growing consumer demand for healthier, natural food and menu transparency,
Hershey is replacing high-fructose corn syrup from its candy products as part of its efforts to use
“ingredients that are simple and easy to understand.” rival nestlé is removing all artificial flavors and
fDa-certified colors from its chocolate candy, replacing them with ingredients from natural sources—
a move that nestlé says affects more than 250 products and 10 brands.
Hershey’s latest corporate Social responsibility (cSr) report (issued in early 2015) highlights
advances the company made in 2014 on business ethics, environmental sustainability, ingredient transparency, and simple ingredients. in particular, the report revealed that in 2014, Hershey achieved
30 percent use of certified cocoa, putting Hershey ahead of schedule to hit its 2015 goal of 50 percent.
Hershey has pledged to use 100 percent certified and sustainable cocoa in all chocolate products by
2020. Hershey also helped establish cocoaaction, a precompetitive industry collaboration seeking to
William Papa,
VP and Chief
R&D Officer
27
28
Part 1 • Overview Of Strategic ManageMent
align the cocoa sustainability efforts of the world’s largest cocoa and chocolate companies to improve
farmer productivity, address child labor challenges, make basic education available, and improve gender parity in cocoa production. in addition, the report stated that Hershey reduced its waste per pound
of product by 1.4 percent and reduced packaging waste by a cumulative 1.75 million points through 26
companywide initiatives; reduced greenhouse gas emissions in United States distribution and logistics
by 4.75 percent from 2013 baseline; and achieved zero-waste-to-landfill 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 was honored as a 2014 responsible ceO of the Year by CR
Magazine. Other 2014 notable honors for Hershey include:
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 in the newsweek
green rankings
Marketing
Hershey’s sales are generally higher in the third and fourth quarters of the year, due to holiday-related
sales patterns. about 25 percent of Hershey’s sales are made to McLane company, inc., one of the largest
wholesale distributors in the United States to convenience stores and mass merchandisers such as walmart
stores. Hershey has increased its overall candy, mint, and gum (cMg) market share in the United States in
2014 to 31.4 percent, an increase of 0.3 share points compared to 2013. Hershey’s selling, 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 similar worldwide, one
strategic option moving forward would be for Hershey to report financial information by product, rather
than by region, and alter the firm’s structure accordingly. Hershey accounts for about 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 dairy, may hurt Hershey’s profitability going forward. in particular, dairy costs—which
can’t be hedged—have been trending higher in light of the prolonged drought in california.
Strategy
Hershey has recently embarked on a multiyear joint venture with 3D Systems, makers of 3-D printing
technology, to start producing new confectionary products using this technology. 3D Systems currently
produces two 3-D printers capable of making chocolate. the firm’s chefJet 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 rate of one inch per hour and sizes up to 8 inches by 10 inches by 14 inches. Some analysts, however,
do not believe 3-D printing is an option for confectionaries until 2020 due to slow 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 the china modern trade. for all of 2014, Hershey’s chocolate
sales in various 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 strategy 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 contribution of approximately 7 percent, or $54 million, from Shanghai golden Monkey food Joint Stock
co., Ltd. (SgM). excluding SgM and the unfavorable foreign currency exchange impact, Hershey’s
international net sales increased approximately 10 percent in 2014.
Segments
Hershey’s primary operations and markets are in the United States. the percentage of total Hershey net
sales outside of the U.S. was 17.5 percent for 2014, 16.6 percent for 2013, and 16.2 percent for 2012.
the percentage of total consolidated assets outside of the U.S. was 35.4 percent as of December 31,
cHaPter 1 • tHe nature Of Strategic ManageMent
2014, and 19.4 percent as of December 31, 2013. although Hershey does not report sales and income by
product category, the company keeps internal records by three product segments: chocolate, Sweets and
refreshments, and Snacks and adjacencies. the chocolate category consists of fancier options such as
acquired cadbury, traditional products such as Mr. goodbar and Hershey’s Kisses, and Dagoba organic
chocolates. twizzlers, Jolly rancher, PayDay, and others are included under the confectionary Products
umbrella. Breath Savors, Bubble Yum, and icebreakers fall under Sweets and refreshments, and Hershey’s baking chocolates and syrups are included under Snacks and adjacencies. Hershey also offers a
full 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
for 85.6, 86.8, and 87.5 percent of the company’s sales in 2014, 2013, and 2012, respectively. note
in exhibit 2 that Hershey’s income from outside north america has declined steadily. all sales and
income from Hershey stores are included in the international and Other segment.
exhibiT 2 Hershey’s Net Sales and Income (in millions)
Sales
north america
international and Other
total
Income
north america
international and Other
total
2014
2013
2014
$6,352.7
$6,200.1
$5,812.7
1,069.1
7,421.8
946.0
7,146.1
831.6
6,644.3
1,916.2
40.0
$1,956.2
1,862.6
44.6
$1,907.2
1,656.1
51.4
$1,707.5
Source: Based on Hershey’s 2014 Form 10K, p. 25.
Finance
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 company’s international net sales increased
nearly 15 percent, including the negative impact of foreign currency exchange rates and positive contribution 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
prices on many items 10 percent over the same period. in fact, Hershey has produced higher earnings
every year but two since 2000. with a 34 percent market share in north america, Hershey instituted an
8 percent price hike in late 2014 on most of its chocolate products, partly in response to higher cocoa
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.
exhibiT 3 Hershey’s Income Statements (in thousands, except per share amounts)
2014
Sales
costs and expenses
cost of sales
Selling, marketing, and administrative
Business realignment and impairment
total costs and expenses
income before interest and taxes
interest expense
income before taxes
income taxes
Net Income
net income per share
Dividends paid per share
2013
2012
$7,421,768
$7,146,079
$6,644,252
4,085,602
1,900,970
45,621
6,032,193
1,389,575
83,532
1,306,043
459,131
846,912
3.91
2.04
3,865,231
1,922,508
18,665
5,806,404
1,339,675
88,356
1,251,319
430,849
820,470
3.76
1.81
3,784,370
1,703,796
44,938
5,533,104
1,111,148
95,569
1,015,579
354,648
660,931
3.01
1.56
Source: Based on Hershey’s 2014 Form 10K, p. 45.
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exhibiT 4 Hershey’s Balance Sheets (in thousands)
2014
Assets
cash and cash equivalents
Short-term investments
accounts receivable—trade (net)
inventories
Deferred income taxes
Prepaid expenses and Other
total current assets
net Property, Plant, and equipment
goodwill
Other intangibles
Other assets
2013
$ 374,854
97,131
596,940
801,036
100,515
276,571
2,247,047
2,151,901
792,955
294,841
142,772
$ 1,118,508
—
477,912
659,541
52,511
178,862
2,487,334
1,805,345
576,561
195,244
293,004
Total Assets
Liabilities and Stockholders’ Equity
Short-term Borrowings
accounts Payable
accrued Liabilities
accrued income taxes
total current Liabilities
Long-term Debt
Other Long-term Liabilities
Deferred income taxes
$ 5,629,516
$ 5,357,488
$ 635,501
482,017
813,513
4,616
1,935,647
1,548,963
526,003
99,373
$ 166,875
461,514
699,722
79,911
1,408,022
1,795,142
434,068
104,204
Total Liabilities
Stockholders’ Equity
Preferred stock shares issued: none in 2014 and 2013
common stock, shares issued: 299,281,967 in 2014 and
299,281,527 in 2013
class B common stock, shares 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
in 2013
accumulated other comprehensive loss
Stockholders’ equity
noncontrolling interests in subsidiaries
$ 4,109,986
$ 3,741,436
754,186
5,860,784
(5,161,236)
664,944
5,454,286
(4,707,730)
(358,573)
1,455,062
64,468
(166,567)
1,604,834
11,218
1,519,530
1,616,052
$ 5,629,516
$ 5,357,488
total stockholders’ equity
Total liabilities and stockholders’ equity
Source: Hershey’s 2014 Form 10K, p. 47.
Competitors
the chocolate industry is dominated by five companies: (1) Hershey, (2) nestlé, (3) Mars, (4) Lindt &
Sprungli ag, and (5) tootsie roll industries. europe, the United States, and South america account
for 54, 32, and 8 percent of total chocolate and nonchocolate candy revenues, respectively, or a
dominant 94 percent. thus, there is 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 comparison of competitors is provided in exhibits 5 and 6. note that Mars dominates in
nonchocolate candy. also note that nestlé is about 10 times larger than Hershey.
cHaPter 1 • tHe nature Of Strategic ManageMent
exhibiT 5 Hershey versus Rival Firms, Market Share (percent)
Product type
USa chocolate
USa nonchocolate candy
global chocolate and nonchocolate
candy (non-USa)
Hershey
Mars
nestle
Others
37
21
5
28
35
14
5
2
9
*30
42
**72
Source: Based on information at iBiS and a Wall Street Journal article on 2-18-15, p. B6. numbers are
rounded.
* Lindt & Sprungli ag contributed about 10 percent of others market share.
** Mondelez international inc. and ferrero Spa contributed 11 and 8 percent market shares, respectively.
exhibiT 6 Hershey versus Rival Firms
# employees
$ revenue
$ revenue per employee
$ net income
$ Market capitalization
% Operating Margin
earnings per Share
Hershey
nestlé
Tootsie Roll
industry avg.
20,800
7.5B
360,575
840M
20.7B
0.19
3.76
333,000
105.47B
316,000
11.15B
242B
0.15
3.49
2,000
541M
270,500
62.6M
2.08B
0.15
1.03
1,730
3.79B
219,000
3B
675M
0.05
–0.11
Source: a variety of sources.
Nestlé S.A. (stock symbol = NSRGY)
Headquartered in vevey, Switzerland, nestlé is a large food-processing company with 2014 revenues
of 96.2 billion U.S. dollars (USD) and a net income of $15.14 billon. according it its website, nestlé
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. nestlé’s mission statement is
simply “good food, good Life.” the company produces a wide array of products ranging from baby
foods, chocolate, coffee, juices, dairy, ice cream, pet care, and more. notable chocolate products include
Butterfinger, crunch, aero, KitKat, and toll House chocolate chips. wonka is also owned by nestlé
and includes nerds, Sweetarts, Spree, Laffy taffy, runts, gobstopper, fun Dip, and many other sugary
candy options. in 2013, nestlé 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 were 44, 28, and 28 percent, respectively.
nestlé is much more diversified than all of its chocolate competitors, except for Mars, and continues to expand its brands. recently, nestlé paid $12 billion to acquire Pfizer nutrition to bolster
its market share in the child nutrition market, as well as Pamlab, a U.S.-based health-care products
company. in february 2014, nestlé sold an 8 percent stake in french cosmetics firm L’Oreal and is
currently planning a large share buyback of its own stock. analysts anticipate that nestlé 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.
nestlé and google agreed in 2014 to name google’s new android operating system KitKat after
nestlé’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, including the United States, where nestlé licenses KitKat to Hershey. the 50 million KitKat bars are timed to
be released with the launch of google KitKat. the special wrappers lead consumers to google-affiliated websites where they can win prizes such as the google nexus 7, and credits to spend at google Play.
Mars, Inc.
Mars is the second-largest candy manufacturer in the United States and the third-largest privately
held company in the United States according to Forbes. Headquartered in McLean, virginia, and
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having annual sales over $30 billion, Mars, like nestlé, 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,
Starburst, and Skittles, among others. the annual revenue of Mars in 2014 was about $35 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 euromonitor international recently reported 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 million peanut M&M’s every day.
Like nestlé, Mars advocates global sustainability of the cocoa resource but has received criticism
in recent years over purchasing cocoa from west african farms that use child 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, greenies, Sheba,
and whiskas. interestingly, chocolate is Mars’ second-largest business globally, behind pet care.
Lindt & Sprungli AG
Headquartered in Switzerland, Lindt purchased U.S.-based and privately 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 share), behind Hershey and Mars, and ahead of nestlé. with the russell
Stover addition, Lindt 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 nestlé. 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 chocolates and these products
are not cost-effective options for many of the customers in china and india.
Tootsie Roll Industries (stock symbol = TR)
Headquartered in chicago, illinois, 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 together created one of the most secretive
corporate cultures among publicly traded companies in the United States. the gordons rarely gave interviews; indeed, they shunned media attention, issued only scant 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 roll’s manufacturing plant is by jumping over the fence and sneaking in.”
Over the decades, the gordans acquired other well-known candy brands, assembling a portfolio of
similarly time-worn-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 famous. tootsie roll reported earnings of $12.9 million in Q1 of 2015, down from $15.0 million the prior
year. the company’s sales were $105 million in Q1 of 2015, down from $106 million the prior year. tootsie roll industries 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 for its
commercials. it claims to have received more than 20,000 letters from children trying to answer 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 nestlé. ellen gordan, age 83, is the largest tootsie roll shareholder, and was even prior to her husband’s death. the gordon family holds a controlling stake in the
company. tootsie roll trades at about 20 times its profit and has about 2,000 employees. that gives
it a higher price tag than any other similar-sized public candy maker target in the last decade, even
before accounting for a premium. tootsie roll’s shares rose 8 percent to a 17-month high of $33.28
following the announcement of Mr. gordon’s death, but by May 2015, shares were back down to $30.
cHaPter 1 • tHe nature Of Strategic ManageMent
Ferrara Candy Company
ferrara, not to be confused with italy-based ferrero maker of nutella and other chocolate products,
was founded in 1908 in chicago and is a rapidly growing american candy company. top products
include atomic fireball, Lemonhead, now&Later, fruit Strip, and Boston Baked Beans. the firm
has one plant in Mexico and produces almost exclusively nonchocolate candy. total revenues in 2009
were $563 million, growing to over $1 billion by year end 2013. ferrara, a rapidly growing company,
generally finances through equity over debt to help improve credit ratings.
External Issues
Hershey is replacing high-fructose corn syrup in some of its products with sugar, making the firm
a high-profile example of the move away from high-fructose corn syrup that may fuel weight gain
and diabetes. examples of Hershey products that use corn syrup include almond Joy, fifth avenue,
take 5, and York; the american Medical association has said there is not enough evidence to specifically restrict the use of the syrup. the corn refiners association recently hired market-research firms
Mintel and nielsen to study perceptions of sweeteners, and reported “67% of consumers agree that
moderation is more important than specific sweetener types.” in the food and beverage industry, soda
accounts for a majority of the market for high-fructose corn syrup. interestingly, Hunt’s ketchup is an
example product that switched to more sugar but then switched back to corn 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 “corn 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
food. the chocolate increases are recorded despite a trend toward more healthful eating.
Due to growing consumer demand for healthier food, nestle Sa recently removed artificial flavors and colors from its crunch 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,
Yellow 5, and vanillin. for example, natural vanilla flavor is replacing vanillin in crunch bars, and
annatto is replacing artificial food colorings.
Cocoa Prices
when Hershey was founded over 100 years ago, chocolate was generally considered a luxury for the
rich and out of the grasp of lower-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 consumers in emerging worldwide markets being able to afford increasingly higherquality chocolates that require better and higher percentages of cocoa. Unlike other crops, such as
corn or soybeans, cocoa is more difficult to produce and cocoa prices are expected to rise substantially
moving forward, according to the international cocoa Organization (icO).
typically, cocoa trees take as many as 10 years to mature, and many of today’s trees are old, not
yielding the same number or quality of beans. farmers are also switching to more profitable crops,
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 current production rates from farmers. in fact, the icO expects the
demand to production ratio to be the highest ever by 2018, since it started keeping records in 1960. in
2013 alone, worldwide consumption of cocoa 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 nestlé
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 Blommer chocolate company is a top cocoa processor and one of the
main suppliers to Hershey and other chocolate-producing companies. Blommer is expanding its
processing capacity to meet strong U.S. chocolate demand. nevertheless, chocolate companies are
facing tough choices that include raising prices, reducing portion sizes, or even using less cocoa in
its products. as early as 2006, Hershey started using 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)
protocols for the labeling of chocolate food items. Hershey, however, is now switching both Krackel
and Mr. goodbar back to solid milk chocolate, meaning the bars will contain at least 10 percent cocoa
per fDa regulations to be called milk chocolate. also hurting Hershey are lower grain prices used in
potentially substitute snack products such as pretzels, cookies, and other snacks.
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Potential Taxes and Health-Minded Public
there is a growing awareness worldwide of the dangers of unhealthful eating, especially when it
comes to sugars, processed foods, and animal fats. Many different governments (local, regional, and
national) have increased (or plan to) taxes or have flat out banned unhealthy items. taxes are viewed
by governments much like tobacco taxes as a way not only to curb citizens’ consumption but also as
an additional 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 consumption 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 fatty snacks and soda, up from the current level of 5
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 all junk 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 actions and trends are a threat to Hershey.
increasing obesity is a major problem among the world’s population. 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 comparison, a Hershey Milk chocolate bar contains 24g
of sugar, a Hershey Dark chocolate bar contains 21g of sugar, and a can of cola contains around 39g of
sugar. Sugar is also believed to be damaging to one’s skin, looks, and overall mood. Moving forward,
Hershey could consider increased marketing of dark chocolate, which contain good antioxidants, but
is much higher in saturated fat than milk chocolate and contains high levels of sugar. Sugar-free candy
has also been linked to cancer and weight gain, partly because artificial sweeteners are not healthy.
Panera Bread company is removing 150 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 eliminating unnatural and unhealthy ingredients.
for example, Kraft foods group 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 removing titanium
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
dioxide, could cause damage to cells and tissues.
Conclusion
Developed in partnership with 3-D Systems (stock symbol = DDD), Hershey company’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 world 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 Krave, or acquire firms in the candy business, such as tootsie roll industries, or simply grow
more organically by building manufacturing plants and distribution facilities globally. there are more
than 150 countries on the planet where Hershey products are still not available. Most people in those
countries would welcome chocolate.
Hershey needs a clear strategic plan going forward. 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 Milton Hershey
School but also to its thousands of shareholders who expect to see the company grow both revenues
and profits annually.