Chapter 2
The Organizational Context:
Seeing the Big Picture
The Need for Strategy
• When Lou Gerstner took over as Chairman and CEO of
IBM, he faced monumental challenges. Critics saw IBM as
bureaucratic, slow, bloated, and self-absorbed.
• Gerstner was an outsider to the computer industry and
lacked technical knowledge, but was a strong manager who
could bring fresh perspectives.
• He said, “What IBM needs now is a series of very toughminded, market-driven, highly effective strategies in each of
its businesses.”
• The chapter considers the “big picture” facing firms, and
how highly effective strategies are developed in the face of
environmental demands.
Four Strategic Questions
• How do we respond to new opportunities in the
environment, lessen the impact of threats from the
environment, and strengthen the mix of the organization’s
activities by doing more of some things and less of others?
• How do we assign resources among the various subunits,
divisions, and activities of the organization?
• How do we compete with other organizations for customers
through allocation of existing or new products and services?
• How do we effectively manage organizational activities at
the departmental, divisional, and corporate levels of the
organization?
Environmental Domains of an
Organization (Figure 2-1)
Economic
Political
Technological
Organization
Competitive
Physical
Social
The Economic Domain
• Many economic factors, such as interest rates, trade
deficits, inflation rates, gross domestic product
indicators, and the money supply, may influence an
organization’s activities.
• Factors in the economic domain influence the ability of
managers to get resources needed to produce goods and
services and distribute them to a market.
• Also, employees are likely to behave differently
depending on the nature of the economic environment.
The Political Domain
• The political domain of the organization environment rests
on the laws and regulations passed by governmental
agencies and legislative bodies.
• Legislation has been directed toward:
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–
–
–
–
–
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eliminating discrimination based on gender, race, and age
ending sexual harassment in the workplace
preventing unfair pricing in markets
restricting pollution
protecting customers
discouraging unethical behavior
regulating corporate taxation
• As corporations are more global, they must consider
political risk associated with foreign governments.
The Social Domain
• The social domain of an organization’s environment
consists of societal values, attitudes, norms, customs,
and demographics.
• Values are what people believe to be proper goals for
members of society to maintain or achieve.
• Attitudes reflect what individuals think about issues and
behaviors that occur within a society.
• Values and attitudes may change over time. Examples
in the U.S. include changing attitudes toward mothers in
the workplace and toward providing benefits to samesex partners of employees.
The Technological Domain
• The technological domain, or technology, refers to the
application of knowledge to the production and
distribution of goods and services.
• Technology is greatly affected by innovation;
innovation is the creation or modification of a process,
product, or service.
• Technology transfer involves the application of
innovation to processes, products, or services either
within or between industries.
• Technology and technological change are transforming
organizations.
The Competitive Domain
• Organizations can face a wide variety of competitive
conditions in their environment.
• Some large organizations compete only with small
organizations, often giving them an advantage in pricing of
their products.
• Other competitive conditions arise from different mixes of
the strategies that competitors pursue.
• Within a capitalistic system, organizations can compete in
one of four competitive market structures.
• Deregulation -- relaxation of government controls to
encourage greater competition -- is transforming many
industries.
Competitive Market Structures
• Monopoly exists when an organization has sole access
to the market for its goods and services.
• Oligopoly exists when only a few firms are in
competition to provide goods and services to a market.
• Monopolistic competition exists when many firms
offer a similar good or service with only minor price
differentials.
• Perfect competition exists when many organizations
offer essentially the same good or service; price thus
becomes the primary discriminator.
The Physical Domain
• All organizations must respond in some manner to
their physical domains.
• Weather conditions, for instance, may greatly
influence the activities of a firm. This is especially
true, for instance, of airlines, construction companies
in the upper Midwest, and orange growers.
• The physical domain may also influence things such
as the availability of qualified talent. For instance,
companies located in one of the “Best Places to
Live” may find themselves at an advantage.
Environmental Dimensions
• Three important environmental dimensions are
munificence, dynamism, and complexity:
– Munificence of an organization’s environment refers to the
level of resources available to the organization.
– Dynamism refers to the rate of change in environmental
factors.
– Complexity is the number of components in an organization’s
environment and the degree to which they are similar or
different.
• High levels of dynamism and complexity result in perceived
environmental uncertainty (PEU). When PEU is high, firms
may have to emphasize creativity and flexibility over efficiency.
Perceived Environmental Uncertainty
Environmental
Dynamism
Perceived
Environmental
Uncertainty
Environmental
Complexity
Organizational Effectiveness
• Organizational effectiveness can be
defined as the degree to which an
organization achieves its goals, maintains its
health, secures resources needed for
survival, and satisfies parties that have a
stake in it.
• This definition suggests that effectiveness
has many dimensions.
Approaches to Assessing Organizational
Effectiveness
• Goals assessment is concerned with whether the
organization reaches the growth, sales, profitability, or
other goals management has set for it.
• Internal process assessment focuses on organizational
health. According to this approach, an unhealthy
organization cannot be considered effective.
• Systems resource assessment considers whether an
organization is able to acquire the resources it needs to
survive and prosper.
• Strategic constituencies assessment considers whether
an organization satisfies important its constituencies.
Approaches to Assessing Organizational
Effectiveness (Figure 2-2)
CONSTITUENTS
(Strategic
Constituencies
Assessment)
INPUTS
(Systems
Resource
Assessment)
ACTIVITIES
(Internal
Process
Assessment)
OUTPUTS
(Goals
Assessment)
America’s Most Admired and Least
Admired Companies (Figure 2-3)
The Top Ten
The Bottom Ten
1. General Electric
495. Humana
2. Microsoft
496. Revlon
3. Dell Computer
497. Trans World Airlines
4. Cisco Systems
498. CKE Restaurants
5. Wal-Mart Stores
499. CHS Electronics
6. Southwest Airlines
500. Rite Aid
7. Berkshire Hathaway
501. Trump Resorts
8. Intel
502. Fruit of the Loom
9. Home Depot
503. Amerco
10. Lucent Technologies
504. Caremark Rx
The Malcolm Baldrige Quality Award
• The Malcolm Baldrige National Quality
Award was established in 1987 to
enhance U.S. competitiveness by
promoting quality awareness,
recognizing quality and business
achievements of U.S. companies, and
publicizing those companies’ successful
performance.
• The award is based on rated performance
on seven criteria.
Malcolm Baldrige Award Criteria
Leadership
Customer Focus
and Satisfaction
Business
Results
Information
and Analysis
Baldrige Award
Criteria
Process
Management
Strategic
Planning
HR Development
and Management
Strategies
• Strategies are methods of competition.
• The strategic plan of an organization is a
comprehensive plan that reflects the longer-term
needs and directions of the organization or subunit.
• Strategic planning consists of several components,
as shown in Figure 2-5.
The Strategic Planning Process
(Figure 2-5)
Strategic
Analysis
Establish the
Purpose, Vision,
and Mission
Evaluate the
Strategic Plan
Define
Strategic
Objectives
Implement the
Strategic Plan
Focus on Management: Alagasco Puts
Customers Second
• Alagasco, Alabama’s largest utility -- and the
only utility on Fortune magazine’s 100 Best
Companies to Work for in America list -- is
proud of its philosophy of “putting customers
second.”
• Alagasco believes that by putting employees
first and treating them well, good service to
customers will naturally follow.
• Each year Alagasco employees at all levels meet
to refine the corporate strategic plan for the
coming year.
SWOT Analysis
Internal
Strengths
Weaknesses
External
Opportunities
Threats
SWOT Analysis Questions Regarding
Internal Strengths
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A distinctive competence?
Adequate financial resources?
Good competitive skills?
Well thought of by buyers?
An acknowledged market leader?
Well-conceived functional strategies?
Access to economies of scale?
SWOT Analysis Questions Regarding
Internal Strengths (Continued)
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Insulated from competitive pressures?
Technology leader?
Cost advantages?
Competitive advantages?
Product innovation abilities?
Proven management?
Other?
SWOT Analysis Questions Regarding
Internal Weaknesses
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•
•
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No clear strategic direction?
A deteriorating competitive position?
Obsolete factories?
Subpar profitability?
Lack of managerial depth and talent?
Missing any key skills or competencies?
Poor track record in implementing strategy?
Plagued with internal operating problems?
Vulnerable to competitive pressures?
SWOT Analysis Questions Regarding
Internal Weaknesses (Continued)
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•
•
•
•
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Falling behind in research?
Too narrow a product line?
Weak market image?
Competitive disadvantages?
Below-average marketing skills?
Unable to finance needed changes in strategy?
Other?
SWOT Analysis Questions Regarding
External Opportunities
• Serve additional customer groups?
• Enter new markets or segments?
• Expand product line to meet broader range of
customer needs?
• Diversify into related products?
• Vertical integration?
• Ability to move to better strategic group?
• Complacency among rival firms?
• Faster market growth?
• Other?
SWOT Analysis Questions Regarding
External Threats
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•
•
•
•
•
•
•
•
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Likely entry of new competitors?
Rising sales of substitute products?
Slower market growth?
Adverse government policies?
Growing competitive pressures?
Vulnerability to recession and business cycle?
Growing power of customers or suppliers?
Changing buyer needs and tastes?
Adverse demographic changes?
Other?
Focus on Management: SWOT Analysis
at Ruby Tuesday
• As the first step in a thorough strategic
planning process, Ruby Tuesday conducted a
SWOT analysis.
• Strengths identified included “growth rate of
20%,” “strong technical skills,” and “fast
reaction time from management team.”
• Weaknesses included “lack of proactive
approach,” “internal communications could be
improved,” and “need comprehensive review
of compensation system.”
• Opportunities and threats were also identified.
Purpose, Vision, and Mission
• The purpose of the organization is the
reason for the organization’s existence.
• Vision is a vivid description of a preferred
future.
• The organizational mission is the path
managers choose to achieve the purpose and
vision.
• The mission is often written down in the
form of a mission statement.
Focus on Management: Ben & Jerry’s
Mission Statement
• Product: “To make, distribute and sell the finestquality all-natural ice cream and related products in a
wide variety of innovative flavors made from Vermont
dairy products.”
• Economic: “To operate the company on a sound
financial basis of profitable growth, increasing value
for our shareholders, and creating career opportunities
and financial rewards for our employees.”
• Social: “To operate the company in a way that actively
recognizes the central role that business plays in the
structure of society by initiating innovative ways to
improve the quality of life of a broad community -local, national, and international.”
Bottom Line: Developing a Mission
Statement
Identify the
Basic Reasons
Why the
Organization
Exists
List the Core
Values of the
Organization
That Drive How
It Will Do Business
Identify the
Primary
Business or
Businesses of
the Organization
Finalize the
Mission Statement
in a Way That is
Understandable
and Inspiring
Draft the Mission
Statement in
Writing, Evaluate
It, and Modify It
As Needed
Identify the
Primary
Customers of
the Organization
Focus on Management: Strategic
Objectives at Dana Corporation
• Dana Corporation, one of the world’s largest independent
suppliers to vehicle and engine manufacturers, was
selected as a “Most-Admired Manufacturer” in the U.S.
by Start Magazine.
• Start emphasized Dana’s strategic objectives, focus on
technology, employee involvement, and reputation.
• In 1998, Dana had 41% of its sales outside the U.S. and
44% from diversified (as opposed to highway vehicle
sales) markets. Among its key strategic objectives are to
have 50% international sales and 50% diversified sales.
Choose Corporate-Level Strategies
• Corporate-level strategies provide direction
for the total organization.
• Managers at the corporate level define a
strategic direction that includes business
units and departments within those business
units.
• Managers often select either grand
strategies or portfolio strategies for guiding
their company.
Grand Strategies
• A grand strategy is a broad plan to guide the organization
toward reaching its goals.
• Managers may choose to implement one of three grand
strategies:
– A growth strategy is common in new, emerging industries or
industries that are undergoing rapid growth and gaining new
external opportunities.
– A stability strategy is selected when managers want to protect the
existing market share of the firm from external threats or have just
completed a phase of rapid growth or divestment.
– A retrenchment strategy is often selected when managers are
faced with declining performance due to internal weaknesses and
external threats.
Focus on Management: The Risks of
“Growth at Any Cost”
• The danger of “growth at any cost” was dramatically
evident in the crash of ValuJet Flight 592 in the Florida
Everglades.
• ValuJet -- which had grown from its inception to serve 17
states -- was only two years old.
• ValuJet had attempted to achieve growth through
aggressive efforts to cut costs. It paid low salaries, used
planes averaging older than 26 years, and turned planes
around so fast that FAA inspection was difficult.
• ValuJet pictured itself as the Wal-Mart of airlines but, as
noted by one writer, “Wal-mart does not conduct business
35,000 feet above the ground.”
Global Perspectives: Retrenchment of
the Chaebols
• Korea’s largest family-owned conglomerates, or
chaebols, have fallen on hard times.
• These conglomerates pursued growth at any cost.
• They sprawl across industries, have heavy debt loads,
and are bloated, making little attempt to focus on core
businesses.
• In the face of Korea’s economic crisis, smaller chaebols
have had to radically downsize to raise cash.
• For the larger chaebols, the crisis -- and government and
bank pressure -- is forcing downsizing and streamlining.
Grand Strategy Selection Matrix
(Figure 2-7)
Stability
Growth
Retrenchment
Stability
Major Environmental Threats
Substantial Internal Strengths
Critical Internal Weaknesses
Numerous Environmental Opportunities
Portfolio Strategies
• A portfolio strategy considers the business
mix of the firm -- that is, the types of
business units and product lines the firm
controls.
• The BCG matrix and the GE matrix are two
models used by many corporations in
selecting a portfolio strategy.
The BCG Portfolio Matrix
(Figure 2-8)
Relative Market Share
High
High
Low
Stars
Question
Marks
Cash
Cows
Dogs
Market
Growth Rate
Low
Strategic Types in the BCG Matrix
• A star is a business unit that has both a high
market growth rate and a relatively large share of
the market.
• A cash cow has a large share of the market, but
there is little growth.
• Question marks exist in a rapidly growing market
but have a small market share.
• A dog is a poor performer because of little growth
in the market and a small market share.
Implications of the Strategic Types
• Stars typically need large amounts of cash to support rapid
growth. Stars have the potential to increase sales and
generate large amounts of profit in the future.
• Large amounts of cash can be “milked” from cash cows and
channeled into stars.
• Managers must decide whether to invest more cash into
question marks to take advantage of high growth
opportunities (and transform them into stars) or to divest it to
emphasize other business units and products in the portfolio.
• Management must sell dogs to another company or liquidate
their assets.
The GE Matrix (Figure 2-9)
Strong
Attractiveness
Long-Term Industry
Business Strength/Competitive Position
Average
Weak
High
Medium
Low
Investment
Growth
Selective
Investment
Divestment
The Adaptation Model
• Raymond Miles and Charles Snow developed the
adaptation model of organizational strategy.
• The model contends that a major thrust of strategic
management should be the aligning organizational activities
with key dimensions of the organizational environment.
• To do this, managers must set up a strategy that will adapt to
environmental conditions and also manage internal
organizational activities to support the selected strategy.
• Adaptation is accomplished by simultaneously solving three
critical strategic problems: entrepreneurial, engineering, and
administrative.
Critical Strategic Problems in the
Adaptation Model
• The entrepreneurial problem considers what
managers believe to be their market.
• The engineering problem is one of deciding
which methods are appropriate for the production
and distribution of goods or services.
• The administrative problem addresses the need to
develop an appropriate administrative system
within the organization.
Organizational Types in the Adaptation
Model
• The defender strategy is carried out when management
seeks or creates an environment that is stable.
• The prospector strategy -- the opposite of the defender
strategy -- seeks or creates an unstable environment in the
form of rapid change and high growth rate in the market.
• The analyzer strategy exists between the two extremes of
defender and prospector. It involves adapting solutions
from both the defender and prospector strategies to the three
problems.
• The reactor strategy is adopted in an organization that has
experienced strategic failure.
Lighten Up: Ambushes and Golden
Parachutes
Some of the language of mergers and acquisitions:
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•
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Afterglow: Postmerger euphoria of acquirer and/or acquiree, but
soon lost.
Cyanide pill: Antitakeover finance strategy in which the potential
target arranges for long-term debt to fall due immediately and in
full if it is acquired.
Golden parachute: Provision in the employment contract of top
executives that ensures them a lucrative financial landing if the
firm is acquired in a takeover.
Mushroom treatment: Postmerger problems from an acquired
executive’s viewpoint: “First they buried us in manure, then they
left us in the dark awhile, then they let us stew, and finally they
canned us.”
The Competitive Model
• The competitive model of organizational strategy
was developed by Michael Porter.
• This model contends that the nature and degree of
competition in an industry determine the strategy
that is appropriate for managers to formulate and
implement.
• The model considers five industry forces and three
competitive strategies.
Industry Forces in the Competitive Model
• The threat of new entrants to compete in the
industry.
• The bargaining power of suppliers in the
industry.
• The bargaining power of customers in the
industry.
• The threat of substitute products or services
from potential competitors.
• Competitive rivalry among existing firms.
Strategies in the Competitive Model
• Overall cost leadership. This strategy requires
management to formulate and implement a strategic plan
that will lead to an efficient and low-cost organization.
• Differentiation. This strategy recognizes that a firm’s
product is unique in relation to other products produced in
the industry.
• Focus. This strategy pursues either an overall cost
leadership strategy or a differentiation strategy by
focusing on a narrow customer group, product line, or
geographic market.
Implement the Strategic Plan
• Vince Lombardi said, “The best game plan in the
world never blocked or tackled anybody.”
• Managers must see that strategic plans are
converted into action.
• To do this, they must:
– effectively communicate the plan
– assign responsibility and authority for activities within
the plan
– motivate employees to achieve the plan
– develop methods for measuring the results of activities
– develop procedures for taking any corrective action
Evaluate the Strategic Plan
• Since there are many facets of effectiveness, we must assess
effectiveness of the strategic plan on those multiple facets.
• The balanced scorecard (BSC) is a conceptual framework
for translating an organization’s vision into a set of
performance indicators distributed among four perspectives:
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–
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financial
customer
internal business processes
learning and growth
• Using the BSC, companies can monitor both their current
performance and their efforts to learn and improve.
Balanced Scorecard Indicators
• Financial-based measures. Examples: return on
investment, cost reduction, profits.
• Customer-based measures. Examples: customer
satisfaction, retention, market share.
• Internal business process measures. Examples:
quality, response time, new product introductions.
• Learning- and growth-based measures.
Examples: employee satisfaction, employee
productivity, employee retention.