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Description2- strategy discussion: External Growth Strategies and Implementation In this module, we explored the role of the corporate headquarters a


2- strategy discussion:

External Growth Strategies and Implementation

In this module, we explored the role of the corporate headquarters and its relationship with individual businesses, and how the corporate headquarters creates value by implementing mergers/acquisitions and strategic alliances strategies.

Select a Saudi Arabian company. Discuss the decisions and actions that the company took to sustain or create a competitive advantage with international growth.

What method of international growth did the KSA company use?

What source of competitive advantage does the KSA company have, and how is that position supported by its resources and capabilities?

How does the KSA Company deal effectively with its external environment?

What recommendations would you make to the KSA company concerning this or future expansion?

George Hoffman
Veronica Visentin
Lise Johnson
Jennifer Manias
Leah Michael
Judy Howarth
Lisa Wojcik
Nichole Urban
Nicole Repasky
Indirakumari S
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Library of Congress Cataloging-in-Publication Data
Names: Grant, Robert M., 1948– author.
Title: Contemporary strategy analysis / Robert M. Grant.
Description: Tenth edition. | Hoboken, NJ : Wiley & Sons, 2018. | Includes
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To Liam, Ava, Finn, Evie, Max, Lucy, and Bobby
Author Biography
Preface to Tenth Edition
The Concept of Strategy
Goals, Values, and Performance
Industry Analysis: The Fundamentals
Further Topics in Industry and Competitive Analysis
Analyzing Resources and Capabilities
Organization Structure and Management Systems:
The ­Fundamentals of Strategy Implementation
The Sources and Dimensions of Competitive Advantage
Industry Evolution and Strategic Change
Technology-Based Industries and the
Management of Innovation
10 Vertical Integration and the Scope of the Firm
11 Global Strategy and the Multinational Corporation
12 Diversification Strategy
13 Implementing Corporate Strategy: Managing
the Multibusiness Firm
14 External Growth Strategies: Mergers, Acquisitions,
and Alliances
15 Current Trends in S
­ trategic Management
Author Biography
Preface to Tenth Edition
The Concept of Strategy
Introduction and Objectives
The Role of Strategy in Success
The Basic Framework for Strategy Analysis
A Brief History of Business Strategy
Strategy Today
How is Strategy Made? The Strategy Process
Strategic Management of Not-For-Profit Organizations
Self-Study Questions
Goals, Values, and Performance
Introduction and Objectives
Strategy as a Quest for Value
Profit, Cash Flow, and Enterprise Value
Putting Performance Analysis into Practice
Beyond Profit: Values and Corporate Social Responsibility
Beyond Profit: Strategy and Real Options
Self-Study Questions
Industry Analysis: The Fundamentals
Introduction and Objectives
From Environmental Analysis to Industry Analysis
Analyzing Industry Attractiveness
Applying Industry Analysis to Forecasting Industry Profitability
Using Industry Analysis to Develop Strategy
Defining Industries: Where to Draw the Boundaries
From Industry Attractiveness to Competitive Advantage:
Identifying Key Success Factors
Self-Study Questions
Further Topics in Industry and Competitive Analysis
Introduction and Objectives
The Limits of Industry Analysis
Beyond the Five Forces: Complements, Ecosystems, and Business Models
Competitive Interaction: Game Theory and Competitor Analysis
Segmentation and Strategic Groups
Self-Study Questions
Analyzing Resources and Capabilities
Introduction and Objectives
The Role of Resources and Capabilities in Strategy Formulation
Identifying Resources and Capabilities
Appraising Resources and Capabilities
Developing Strategy Implications
Self-Study Questions
Organization Structure and Management Systems:
The ­Fundamentals of Strategy Implementation
Introduction and Objectives
Strategy Formulation and Strategy Implementation
The Fundamentals of Organizing: Specialization,
Cooperation, and Coordination
Developing Organizational Capability
Organization Design
Self-Study Questions
The Sources and Dimensions of Competitive Advantage
Introduction and Objectives
How Is Competitive Advantage Established?
How Is Competitive Advantage Sustained?
Cost Advantage
Differentiation Advantage
Can Firms Pursue Both Cost and Differentiation Advantage?
Self-Study Questions
Industry Evolution and Strategic Change
Introduction and Objectives
The Industry Life Cycle
The Challenge of Organizational Adaptation and Strategic Change
Managing Strategic Change
Self-Study Questions
Technology-Based Industries and the
Management of Innovation
Introduction and Objectives
Competitive Advantage in Technology-Intensive Industries
Strategies to Exploit Innovation: How and When to Enter
Standards, Platforms, and Network Externalities
Implementing Technology Strategies: Internal and External
Sources of Innovation
Implementing Technology Strategies: Organizing for Innovation
Self-Study Questions
10 Vertical Integration and the Scope of the Firm
Introduction and Objectives
Transaction Costs and the Scope of the Firm
The Benefits and Costs of Vertical Integration
Designing Vertical Relationships
Self-Study Questions
11 Global Strategy and the Multinational Corporation
Introduction and Objectives
Implications of International Competition for Industry Analysis
Analyzing Competitive Advantage in an International Context
Internationalization Decisions: Locating Production
Internationalization Decisions: Entering a Foreign Market
Multinational Strategies: Global Integration versus
National Differentiation
Implementing International Strategy: Organizing the
Multinational Corporation
Self-Study Questions
12 Diversification Strategy
Introduction and Objectives
Motives for Diversification
Competitive Advantage from Diversification
Diversification and Performance
The Meaning of Relatedness in Diversification
Self-Study Questions
13 Implementing Corporate Strategy: Managing the Multibusiness
Introduction and Objectives
The Role of Corporate Management
Managing the Corporate Portfolio
Managing Linkages Across Businesses
Managing Individual Businesses
Managing Change in the Multibusiness Corporation
Governance of Multibusiness Corporations
Self-Study Questions
14 External Growth Strategies: Mergers, Acquisitions,
and Alliances
Introduction and Objectives
Mergers and Acquisitions
Strategic Alliances
Self-Study Questions
15 Current Trends in ­Strategic Management
The New Environment of Business
New Directions in Strategic Thinking
Redesigning Organizations
The Changing Role of Managers
Tough Mudder Inc.: Building Leadership in Mud Runs
Kering SA: Probing the Performance Gap with LVMH
Pot of Gold? The US Legal Marijuana Industry
The US Airline Industry in 2018
The Lithium-Ion Battery Industry
Walmart Inc. in 2018: The World’s Biggest Retailer Faces
New Challenges
Harley-Davidson, Inc. in 2018
BP: Organizational Structure and Management Systems
Starbucks Corporation, March 2018
10 Eastman Kodak’s Quest for a Digital Future
11 The New York Times: Adapting to the Digital Revolution
12 Tesla: Disrupting the Auto Industry
13 Video Game Console Industry in 2018
14 Eni SpA: The Corporate Strategy of an International
Energy Major
15 Zara: Super-Fast Fashion
16 Manchester City: Building a Multinational Soccer Enterprise
17 Haier Group: Internationalization Strategy
18 The Virgin Group in 2018
19 Google Is Now Alphabet—But What’s the Corporate Strategy?
20 Restructuring General Electric
21 Walt Disney, 21st Century Fox, and the Challenge of New Media 617
22 W. L. Gore & Associates: Rethinking Management
Robert M. Grant is Professor of Strategic Management at Bocconi University, Milan,
Italy and a Visiting Professor at Cass Business School, London. He was born in Bristol,
England and has taught at Georgetown University, London Business School, University of British Columbia, California Polytechnic, UCLA, Insead, and University of South
Africa. His business experience includes making tires (Firestone) and meat pies (Kraft
Foods) and strategy consulting at American Express, Eni, BP, and other companies.
Contemporary Strategy Analysis equips managers and students of management with
the concepts and frameworks needed to make better strategic decisions. My goal is
a strategy text that reflects the dynamism and intellectual rigor of this ­fast-developing
field of management and takes account of the strategy issues that companies face today.
Contemporary Strategy Analysis endeavors to be both rigorous and relevant. While
embodying the latest thinking in the strategy field, it aims to be accessible to students
from different backgrounds and with varying levels of experience. I achieve this accessibility by combining clarity of exposition, concentration on the fundamentals of value
creation, and an emphasis on practicality.
This tenth edition maintains the book’s focus on the essential tasks of strategy: identifying the sources of superior business performance and formulating and implementing a strategy that exploits these sources of superior performance. At the same time,
the content of the book has been revised to reflect recent developments in the business
environment and in strategy research.
Distinctive features of the tenth edition include:
●● More explicit guidance on how to apply the tools of strategy to analyze strategic
situations and develop strategy recommendations. See, in particular: “Applying
Strategy Analysis” in Chapter 1, “Putting Performance Analysis into Practice”
in Chapter 2, “Using Industry Analysis to Develop Strategy” in Chapter 3, and
“Developing Strategy Implications” [from the analysis of resources and capabilities] in Chapter 5.
●● Increased emphasis on strategy making under conditions of technological
change—especially in digital markets where strategy analysis must take account
of complements, network externalities, platform-based competition, and the
application of innovative business models to complex business ecosystems (see
Chapters 4, 8, and 9).
●● Integration of stakeholder interests and corporate social responsibility within a
view of the firm as an institution for creating value (Chapter 2).
●● An updated approach to strategy implementation. While maintaining an
integrated approach to strategy formulation and strategy implementation,
­Chapters 6, 8, and 13 offers a systematic approach to strategy execution that
the role of organizational capabilities and capability development in guiding resource allocation, and the design of organizational structures and
management systems.
My thanks to my editorial and production team at Wiley, especially to Lise Johnson,
Judy Howarth, and S. Indirakumari; and to Mary Fogarty and Nitish Mohan for their
assistance. This tenth edition of Contemporary Strategy Analysis has benefitted hugely
from feedback and suggestions from users—both instructors and students. I thank you
and look forward to continuing my engagement with you. Please feel free to contact me at
[email protected].
Robert M. Grant
1 The Concept of Strategy
The Concept of Strategy
Strategy is the great work of the organization. In situations of life or death, it is the Tao
of survival or extinction. Its study cannot be neglected.
To shoot a great score you need a clever strategy.
Everybody has a plan until they get punched in the mouth.
◆◆ Introduction and Objectives
Corporate and Business Strategy
◆◆ The Role of Strategy in Success
Describing Strategy
◆◆ The Basic Framework for Strategy Analysis
Strategic Fit
◆◆ A Brief History of Business Strategy
Origins and Military Antecedents
From Corporate Planning to Strategic Management
◆◆ Strategy Today
What Is Strategy?
Why Do Firms Need Strategy?
Where Do We Find Strategy?
◆◆ How Is Strategy Made? The Strategy Process
Design versus Emergence
Applying Strategy Analysis
◆◆ Strategic Management of Not-For-Profit
◆◆ Summary
◆◆ Self-Study Questions
◆◆ Notes
Introduction and Objectives
Strategy is about achieving success. This chapter explains what strategy is and why it is important to
success, for both organizations and individuals. We will distinguish strategy from planning. Strategy is
not a detailed plan or program of instructions; it is a unifying theme that gives coherence and direction
to the actions and decisions of an individual or an organization.
The principal task of this chapter will be to introduce the basic framework for strategy analysis that
underlies this book. This framework comprises two components of strategy analysis: analysis of the
external environment of the firm (mainly industry analysis) and analysis of the internal environment
(primarily analysis of the firm’s resources and capabilities). We shall then examine what strategy is, how it
has developed over time, how to describe the strategy of a business enterprise, and how organizations
go about making strategy.
By the time you have completed this chapter, you will be able to:
◆◆ Appreciate the contribution that strategy can make to successful performance and rec-
ognize the essential components of an effective strategy.
◆◆ Comprehend the basic framework of strategy analysis that underlies this book.
◆◆ Recognize how strategic management has evolved over the past 60 years.
◆◆ Identify and describe the strategy of a business enterprise.
◆◆ Understand how strategy is made within organizations.
◆◆ Recognize the distinctive features of strategic management among not-for-profit orga-
Since the purpose of strategy is to help us to win, we start by looking at the role of strategy in success.
The Role of Strategy in Success
Strategy Capsules 1.1 and 1.2 describe the careers of two individuals, Queen Elizabeth
II and Lady Gaga, who have been outstandingly successful in leading their organizations. Although these two remarkable women operate within vastly different arenas,
can their success be attributed to any common factors?
For neither of them can success be attributed to overwhelmingly superior resources.
For all of Queen Elizabeth’s formal status as head of state, she has very little real power
and, in most respects, is a servant of the democratically elected British government.
Lady Gaga is clearly a creative and capable entertainer, but few would claim that
she entered the music business with outstanding talents as a vocalist, musician, or
CHAPTER 1 The Concept of Strategy   5
Nor can their success be attributed either exclusively or primarily to luck. Both have
experienced difficulties and setbacks at different stages of their careers. Central to their
success, however, has been their ability to respond to events—whether positive or negative—with flexibility and clarity of direction.
My contention is that, common to both the 60-year successful reign of Queen Elizabeth II and the short but stellar career of Lady Gaga, is the presence of a soundly formulated and effectively implemented strategy. While these strategies did not exist as
explicit plans, for both Queen Elizabeth and Lady Gaga we can discern a consistency
of direction based upon clear goals and an ability to bend circumstances toward their
desired outcomes.
Elizabeth Windsor’s strategy as queen of the UK and the Commonwealth countries
is apparent in the relationship she has created between herself and her people. As
queen she is figurehead for the nation, an embodiment of its stability and continuity, a
symbol of British family and cultural life, and an exemplar of service and professional
Lady Gaga’s remarkable success during 2008–18 reflects a career strategy that uses
music as a gateway to celebrity status, which she has built by combining the generic
tools of star creation—shock value, fashion leadership, and media presence—with a
uniquely differentiated image that has captured the attention and loyalty of teenagers
and young adults throughout the world.
What do these two examples tell us about the characteristics of a strategy that are
conducive to success? In both stories, four common factors stand out (Figure 1.1):
●● Goals that are consistent and long term: Both Queen Elizabeth and Lady
Gaga display a focused commitment to career goals that they have pursued
●● Profound understanding of the competitive environment: The ways in
which both Elizabeth II and Lady Gaga define their roles and pursue their
careers reveal a deep and insightful appreciation of the external environments in which they operate. Queen Elizabeth has been alert both to the
changing political environment in which the monarchy is situated and to the
mood and needs of the British people. Lady Gaga’s business model and strategic positioning show a keen awareness of the changing economics of the
music business, the marketing potential of social networking, and the needs
of Generation Y.
●● Objective appraisal of resources: Both Queen Elizabeth and Lady Gaga have
been adept at recognizing and deploying the resources at their disposal, and
also building those resources—for the Queen, this has included her family, the
royal household, and the recipients of royal patronage; for Lady Gaga, it comprises the creative talents of her Haus of Gaga.
●● Effective implementation: Without effective implementation, the best-laid strategies are of little use. Critical to the success of Queen Elizabeth and Lady Gaga
has been their effectiveness coordinating and leading “ecosystems” of supportive individuals and organizations.
These observations about the role of strategy in success can be made in relation
to most fields of human endeavor. Whether we look at warfare, chess, politics, sport,
or business, the success of individuals and organizations is seldom the outcome of a
Queen Elizabeth II and the House of Windsor
By late 2018, Elizabeth Windsor had been queen for 66
herself. According to her website, she “has a less formal
years—longer than any of her predecessors.
role as Head of Nation” where she “acts as a focus for
At her birth on April 21, 1926, 45 other countries were
national identity, unity and pride; gives a sense of sta-
hereditary monarchies. By 2018, the forces of democracy,
bility and continuity; officially recognises success and
modernity, and reform had reduced these to 26—mostly
excellence; and supports the ideal of voluntary service”
small autocracies such as Bahrain, Qatar, Oman, Kuwait,
Bhutan, and Lesotho. Monarchies had also survived in
How has Queen Elizabeth been able to retain not
Denmark, Sweden, Norway, the Netherlands, and Bel-
just the formal position of the monarchy but also its
gium, but these royal families had lost most of their
status, influence, and wealth despite so many chal-
wealth and privileges.
lenges? These include wrenching social and political
By contrast, the British royal family retains con-
changes and the trials of leading such a famously
siderable wealth—the Queen’s personal net worth
­dysfunctional family—including the failed marriages
is about $500 million—not including the $10 billion
of most of her children and the controversy that sur-
worth of palaces and other real estate owned by the
rounded the life and death of her daughter-in-law,
nation but used by her and her family. Queen Eliza-
Diana, Princess of Wales.
beth’s formal status is head of state of the UK and 15
At the heart of Elizabeth’s sustaining of the British
other Commonwealth countries (including Canada and
monarchy has been her single-minded devotion to what
Australia), head of the Church of England, and head of
she regards as her duties to the monarchy and to the
the British armed forces. Yet none of these positions
nation. In cultivating her role as leader of her nation, she
confers any decision-making power—her influence
has preserved her political neutrality—even when she
comes from the informal role she has established for
has disagreed with her prime ministers (notably with
purely random process. Nor is superiority in initial endowments of skills and resources
typically the determining factor. Strategies that build on these four elements almost
always play an influential role.
Look at the “high achievers” in any competitive area. Whether we review the
world’s political leaders, the CEOs of the Fortune 500, or our own circles of friends
and acquaintances, those who have achieved outstanding success in their careers
are seldom those who possessed the greatest innate abilities. Success has gone to
those who managed their careers most effectively, typically by combining these
four strategic factors. They are goal focused; their career goals have taken primacy over the multitude of life’s other goals—friendship, love, leisure, knowledge,
spiritual fulfillment—which the majority of us spend most of our lives juggling and
reconciling. They know the environments within which they play and tend to be
fast learners in terms of recognizing the paths to advancement. They know themselves well in terms of both strengths and weaknesses. Finally, they implement
CHAPTER 1 The Concept of Strategy   7
Margaret Thatcher’s “socially divisive” policies and Tony
Blair’s sending troops to Iraq and Afghanistan).
While respecting tradition and protocol, she adapts
in the face of pressing circumstances. The death of her
Through her outreach activities she promotes British
daughter-in-law, Diana, created difficult tensions bet-
influence, British culture, and British values within the
ween her responsibilities as mother and grandmother
wider world. She has made multiple visits to each of the
and her need to show leadership to a grieving nation.
54 Commonwealth nations, including 27 to Canada and
In responding to this crisis she recognized the need to
16 to Australia.
depart from established traditions.
The growing unacceptability of hereditary privilege
Elizabeth has made effective use of the resources
and the traditional British class system has required her
available to her—especially the underlying desire of
to reposition the royal family from being the leader of
the British people for continuity and their inherent
the ruling class to embodying the nation as a whole. To
distrust of their political leaders. By positioning
make her and her family more inclusive and less socially
­herself above the political fray and emphasizing her
stereotyped she has cultivated involvement with
lineage—including the prominent public roles of her
popular culture, with ordinary people engaged in social
mother and her children and grandchildren—she
service and charitable work, and she has endorsed the
­reinforces the legitimacy of herself, her family, and the
marriage of her grandsons William and Harry—the first
institution they represent. She has also exploited her
members of the royal family to marry outside the ranks
powers of patronage, using her formal position to cul-
of the aristocracy.
tivate informal relationships with both political and
Elizabeth has been adept at exploiting new media
cultural leaders.
for communicating both with her subjects and with a
The success of Elizabeth’s 66-year reign is indicated
wider global audience: initially through television, more
by the popular support for her personally and for the
recently using the web, Twitter, and Facebook. Her press
institution of the monarchy. Outside of Northern Ireland
and public relations staff comprises top professionals
and Quebec, republicanism is weak throughout the
who report to her private secretary.
British Commonwealth.
their career strategies with commitment, consistency, and determination. As the
management guru Peter Drucker observed: “we must learn how to be the CEO of
our own career.”1
There is a downside, however. Focusing on a single goal may lead to outstanding
success but may be matched by dismal failure in other areas of life. Many people who
have reached the pinnacles of their careers have led lives scarred by poor relationships
with friends and families and stunted personal development. These include Howard
Hughes and Jean Paul Getty in business, Richard Nixon and Joseph Stalin in politics,
Elvis Presley and Marilyn Monroe in entertainment, Tiger Woods and Boris Becker
in sport, and Bobby Fischer in chess. For most of us, personal fulfillment is likely to
require broad-based rather than narrowly focused goals.2
These same ingredients of successful strategies—clear goals, understanding the
competitive environment, resource appraisal, and effective implementation—form the
key components of our analysis of business strategy.
Lady Gaga and the Haus of Gaga
Stefani Joanne Angelina Germanotta, better known as
Lady Gaga has developed a business model adapted
Lady Gaga, is one of the most successful popular enter-
to the post-digital world of entertainment. Like Web 2.0
tainers of the 21st century. Since her first album, The
pioneers such as Facebook and Twitter, Gaga has fol-
Fame, in 2008, all four of her albums have topped the Bill-
lowed the model: first build market presence, and then
board charts; she has also topped Forbes Celebrity 100 list,
think about monetizing that presence. By 2012, her
and generated $560 million in ticket sales from her five
YouTube views, Facebook likes, and Twitter followers
concert tours between 2009 and 2017.
had made her the “most popular living musician online.”
Since dropping out of NYU’s Tisch School of the Arts
Her networking with fans includes Gagaville, an interac-
in 2005, Germanotta has shown total commitment to
tive game developed by Zynga, and The Backplane, a
advancing her musical career, first as a songwriter, and
­music-based social network.
then developing her Lady Gaga persona.
Her emphasis on visual imagery takes account of the
Gaga’s music is a catchy mix of pop and dance, well
means through which media popularity is converted
suited to dance clubs and radio airplay. It features good
into revenues. While music royalties are important, con-
melodies, Gaga’s capable vocals, and her reflections on
certs are her primary revenue source. Other revenue
society and life, but it is hardly exceptional or innovative:
sources—endorsements, product placement in videos
music critic Simon Reynolds described it as: “ruthlessly
and concerts, merchandizing deals, and media appear-
catchy, naughties pop glazed with Auto-Tune and under-
ances—also link closely with her visual presence.
girded with R&B-ish beats.”
A distinctive feature of Gaga’s market positioning
However, music is only one element in the Lady Gaga
is her relationship with her fans. The devotion of her
phenomenon—her achievement is not so much as a
fans—her “Little Monsters”—is based less on their desire
singer or songwriter as in establishing a persona which
to emulate her look as upon empathy with her values
transcends pop music. Like David Bowie and Madonna
and attitudes: Gaga’s images are social statements of
before her, Lady Gaga is famous for being Lady Gaga.
non-conformity rather than fashion statements. In com-
To do this she has created a multimedia, multifaceted
municating her experiences of alienation and bullying at
offering that comprises multiple components including
school and her values of individuality, sexual freedom,
music, visual appearance, newsworthy events, a distinc-
and acceptance of differences, she has built a global fan
tive attitude and personality, and a set of values with
base of unusual loyalty and commitment. The sense of
which fans can identify.
belonging is reinforced by gestures and symbols such as
Key among these is visual impact and theatricality.
the “Monster Claw” greeting and the “Manifesto of Little
Her hit records are promoted by visually stunning music
Monsters.” As “Mother Monster,” Gaga is spokesperson
videos that have won Grammy awards and broken
and guru for this community.
records for numbers of YouTube downloads. Most striking
Lady Gaga’s showmanship and theatricality are sup-
of all has been Lady Gaga’s dress and overall appearance,
ported by The Haus of Gaga, a creative workshop modeled
which have set new standards in eccentricity, innovation,
on Andy Warhol’s “Factory.” It comprises a creative director
and impact. Individual outfits—her plastic bubble dress,
who coordinates a team of choreographers, fashion
meat dress, and “decapitated-corpse dress”—together
designers, hair stylists, photographers, set designers, song-
with weird hair-dos, extravagant hats, and extreme foot-
writers, musicians, and marketing professionals.
wear—are as well-known as her hit songs. The range of
visual images she projects means that her every appearance creates a buzz of anticipation.
Sources: M. Sala, “The Strategy of Lady Gaga,” BSc thesis Bocconi University, Milan, June 2011;
people/lady-gaga-481598, accessed August 24, 2017.
CHAPTER 1 The Concept of Strategy   9
Common elements in successful strategies
Clear, consistent,
understanding of the
competitive environment
of resources
The Basic Framework for Strategy Analysis
Figure 1.2 shows the basic framework for strategy analysis that we shall use throughout
the book. The four elements of a successful strategy shown in Figure 1.1 are recast
into two groups—the firm and the industry environment—with strategy forming a
link between the two. The firm embodies three of these elements: goals and values
(“simple, consistent, long-term goals”), resources and capabilities (“objective appraisal
of resources”), and structure and systems (“effective implementation”). The industry
environment embodies the fourth (“profound understanding of the competitive environment”) and is defined by the firm’s relationships with competitors, customers, and
This view of strategy as a link between the firm and its industry environment has
close similarities with the widely used SWOT framework. However, as I explain in
Strategy Capsule 1.3, a two-way classification of internal and external forces is superior
to the four-way SWOT framework.
The task of business strategy, then, is to determine how the firm will deploy its
resources within its environment and so satisfy its long-term goals and how it will organize itself to implement that strategy.
FIGURE 1.2 The basic framework: Strategy as a link between the firm and its environment
• Goals and Values
• Resources and
• Structure and
• Competitors
• Customers
• Suppliers
What’s Wrong with SWOT?
Distinguishing between the external and the internal
days were behind him and whose dominant presence
environment of the firm is common to most approaches
intimidated his younger team-mates, he was a weakness.
to strategy analysis. The best-known and most widely
Is global warming a threat or an opportunity for the
used of these is the “SWOT” framework, which classifies
world’s automobile producers? By encouraging higher
the various influences on a firm’s strategy into four cat-
taxes on motor fuels and restrictions on car use, it is a threat.
egories: Strengths, Weaknesses, Opportunities, and
By encouraging consumers to switch to fuel-efficient and
Threats. The first two—strengths and weaknesses—
electric cars, it offers an opportunity for new sales.
relate to the internal environment of the firm, primarily its
The lesson here is that classifying external factors
resources and capabilities; the last two—opportunities
into opportunities and threats, and internal factors into
and threats—relate to the external environment.
strengths and weaknesses, is arbitrary. What is important
Which is better, a two-way distinction between
internal and external influences or the four-way SWOT
is to carefully identify the external and internal forces that
impact the firm, and then analyze their implications.
taxonomy? The key issue is whether it is sensible and
In this book, I will follow a simple two-way classification
worthwhile to classify internal factors into strengths
of internal and external factors and avoid any premature
and weaknesses and external factors into opportu-
categorization into strengths or weaknesses, and oppor-
nities and threats. In practice, these distinctions are
tunities or threats.
Was Zlatan Ibrahimovic a strength or a weakness for
Manchester United? As the team’s top scorer during the
2016–17 season and ranking among the world’s top-10
players, he was a strength. But as a player whose best
Note: For more on SWOT see: T. Hill and R. Westbrook, “SWOT
Analysis: It’s Time for a Product Recall,” Long Range Planning, 30
(February 1997): 46–52; and M. Venzin, “SWOT Analysis: Such
a Waste of Time?” (February 2015)
Strategic Fit
Fundamental to this view of strategy as a link between the firm and its external environment is the notion of strategic fit. This refers to the consistency of a firm’s strategy,
first, with the firm’s external environment and, second, with its internal environment,
especially with its goals and values and resources and capabilities. A major reason for
companies’ decline and failure is a strategy that lacks consistency with either the internal
or the external environment. The woes of the Italian airline, Alitalia, may be attributed to
a strategy that failed to respond to competition from budget airlines such as Ryanair and
EasyJet. Other companies struggle to align their strategies to their internal resources and
capabilities. A critical issue for Nintendo will be whether it possesses the financial and
technological resources to continue to compete head-to-head with Sony and Microsoft
in the market for video game consoles.
The concept of strategic fit also relates to the internal consistency among the different elements of a firm’s strategy. An effective strategy is one in which all the decisions
and actions that make up the strategy are aligned with one another to create a consistent strategic position and direction of development. This notion of internal fit is
central to Michael Porter’s conceptualization of the firm as an activity system. Porter
CHAPTER 1 The Concept of Strategy   11
Ryanair’s activity system
Low operating costs
High aircraft
737s only
Point-to-point routes
High labor
No-frills product
Low prices;
separate charging
for additional
Single class; no
reserved seating
No baggage
f lexibility
states that “Strategy is the creation of a unique and differentiated position involving a
different set of activities.”3 The key is how these activities fit together to form a consistent, mutually reinforcing system. Ryanair’s strategic position is as Europe’s ­lowest-cost
airline providing no-frills flights to budget-conscious travelers. This is achieved by a
set of activities that fit together to support that positioning (Figure 1.3).
The concept of strategic fit is one component of a set of ideas known as
contingency theory. Contingency theory postulates that there is no single best
way of organizing or managing. The best way to design, manage, and lead an organization depends upon circumstances—in particular, the characteristics of that organization’s environment.4
A Brief History of Business Strategy
Origins and Military Antecedents
Enterprises need business strategies for much the same reason that armies need military strategies—to give direction and purpose, to deploy resources in the most effective manner, and to coordinate the decisions made by different individuals. Many
of the concepts and theories of business strategy have their antecedents in military
strategy. The term strategy derives from the Greek word strategia, meaning “generalship.” However, the concept of strategy predates the Greeks: Sun Tzu’s classic, The Art
of War, from about 500 BC is regarded as the first treatise on strategy.5
Military strategy and business strategy share a number of common concepts and
principles, the most basic being the distinction between strategy and tactics. Strategy
is the overall plan for deploying resources to establish a favorable position; a tactic
is a scheme for a specific action. Whereas tactics are concerned with the maneuvers necessary to win battles, strategy is concerned with winning the war. Strategic
decisions, whether in military or business spheres, share three common characteristics:
●● They are important.
●● They involve a significant commitment of resources.
●● They are not easily reversible.
Many of the principles of military strategy have been applied to business situations.
These include the relative strengths of offensive and defensive strategies; the merits of
outflanking over frontal assault; the roles of graduated responses to aggressive initiatives; the benefits of surprise; and the benefits of deception, envelopment, escalation,
and attrition.6 At the same time, there are major differences between business competition and military conflict. The objective of war is (usually) to defeat the enemy. The
purpose of business rivalry is seldom so aggressive: most business enterprises seek to
coexist with their rivals rather than to destroy them.
Despite parallels between military and business strategy, we lack a general theory
of strategy. The publication of Von Neumann and Morgenstern’s Theory of Games in
1944 gave rise to the hope that a general theory of competitive behavior would emerge.
Since then, game theory has revolutionized the study of competitive interaction, not
just in business but in politics, military studies, and international relations as well.
Yet, as we shall see in Chapter 4, game theory has achieved only limited success as a
broadly applicable general theory of strategy.7
From Corporate Planning to Strategic Management
The evolution of business strategy has been driven more by the practical needs of
business than by the development of theory. During the 1950s and 1960s, senior executives experienced increasing difficulty in coordinating decisions and maintaining control in companies that were growing in size and complexity. While new techniques of
discounted cash flow analysis allowed more rational choices over individual investment
projects, firms lacked systematic approaches to their long-term development. Corporate planning (also known as long-term planning) was developed during the late1950s to serve this purpose. Macroeconomic forecasts provided the foundation for
the new corporate planning. The typical format was a five-year corporate planning
document that set goals and objectives, forecasted key economic trends (including
market demand, the company’s market share, revenue, costs, and margins), established
priorities for different products and business areas of the firm, and allocated capital
expenditures. The new techniques of corporate planning proved particularly useful for
guiding the diversification strategies that many large companies pursued during the
1960s.8 By the mid-1960s, most large US and European companies had set up corporate planning departments. Strategy Capsule 1.4 provides an example of this formalized
corporate planning.
By the early 1980s, confidence in corporate planning had been severely shaken. Not
only did diversification fail to deliver the anticipated synergies, but the oil shocks of
1974 and 1979 ushered in a new era of macroeconomic instability, while Western companies came under increasing pressure from Japanese, Korean, and Southeast Asian
competitors. Companies could no longer plan their investments and actions five years
ahead—they couldn’t forecast that far.
The result was a shift in emphasis from planning a company’s growth path to
positioning the company so that it could best exploit available opportunities for
profit. This transition from corporate planning to what became called strategic
management involved a focus on competition as the central characteristic of the
business environment and on performance maximization as the primary goal of
This emphasis on strategy as a quest for performance directed attention to the
sources of profitability. At the end of the 1970s, Michael Porter pioneered the application of industrial organization economics to analyzing the profit potential of different
CHAPTER 1 The Concept of Strategy   13
Corporate Planning in a Large US Steel Company, 1965
The first step in developing long-range plans was to
various district engineers. Alternative plans for achiev-
forecast the product demand for future years. After cal-
ing company goals were also developed for some areas,
culating the tonnage needed in each sales district to pro-
and investment proposals were formulated after consid-
vide the “target” fraction of the total forecast demand, the
ering the amount of available capital and the company
optimal production level for each area was determined.
debt policy. The vice president who was responsible for
A computer program that incorporated the projected
long-range planning recommended certain plans to the
demand, existing production capacity, freight costs, etc.
president, and, after the top executives and the board
was used for this purpose.
of directors reviewed alternative plans, they made the
When the optimum production rate in each area was
found, the additional facilities needed to produce the
desired tonnage were specified. Then, the capital costs
for the necessary equipment, buildings, and layout were
necessary decisions about future activities.
Source: H. W. Henry, Long Range Planning Processes in 45
Industrial Companies (Englewood Cliffs, NJ: Prentice-Hall,
1967): 65.
estimated by the chief engineer of the corporation and
industries and markets.9 Other studies examined how strategic variables—notably
market share—determined how profits were distributed between the firms within an
During the 1990s, the focus of strategy analysis shifted from the sources of profit in
the external environment to the sources of profit within the firm. The r­ esource-based
view of the firm identified the resources and capabilities of the firm as its main
source of competitive advantage and the primary basis for formulating strategy.11 This
emphasis on internal resources and capabilities has encouraged firms to identify how
they are different from their competitors and to design strategies that exploit these
During the 21st century, new challenges have continued to shape the principles and practice of strategy. Digital technologies have had a massive impact on
the competitive dynamics of many industries, creating winner-take-all markets
and standards wars.12 Disruptive technologies13 and accelerating rates of change
have meant that strategy has become less and less about plans and more about
creating options of the future,14 fostering strategic innovation,15 and seeking the
“blue oceans” of uncontested market space.16 The complexity of these challenges
has meant that being self-sufficient is no longer viable for most firms—alliances and
other forms of collaboration are an increasingly common feature of firms’ strategies.
The 2008–2009 financial crisis triggered closer scrutiny of purpose of business. Disillusion with the excesses and unfairness of market capitalism has renewed interest in
corporate social responsibility, ethics, sustainability, and the legitimacy of profit as the
dominant goal of business.17
Figure 1.4 summarizes the main developments in strategic management since the
mid-20th century.
Evolution of strategic management
Corporate Planning:
• Corporate plans based on medium-term
Financial Budgeting:
• Operational budgeting
• DCF capital budgeting
economic forecasts
• Industry analysis and competitive positioning
Emergence of Strategic Management:
The Quest for Competitive Advantage:
• Emphasis on resources and capabilities
• Shareholder value maximization
• Refocusing, outsourcing, delayering, cost
Adapting to Turbulence:
• Adapting to and exploiting digital technology
• The quest for flexibility and strategic innovation
• Strategic alliances
• Social and environmental responsibility
Strategy Today
What Is Strategy?
In its broadest sense, strategy is the means by which individuals or organizations
achieve their objectives. Table 1.1 presents a number of definitions of the term
strategy. Common to most definitions is the notion that strategy involves setting goals,
allocating resources, and establishing consistency and coherence among decisions
and actions.
Yet, as we have seen, the conception of firm strategy has changed greatly over
the past half-century. As the business environment has become more unstable and
unpredictable, so strategy has become less concerned with detailed plans and more
about guidelines for success. This is consistent with the introductory examples to
this chapter. Neither Queen Elizabeth nor Lady Gaga appears to have articulated any
explicit strategic plan, but the consistency we discern in their actions suggests both
possessed clear ideas of what they wanted to achieve and how they would achieve
it. This shift in emphasis from strategy as plan to strategy as direction does not imply
any downgrading of the role of strategy. The more turbulent the environment, the
more strategy must embrace flexibility and responsiveness. But it is precisely under
these conditions that strategy becomes more, rather than less, important. When the
firm is buffeted by unforeseen threats and where new opportunities are constantly
appearing, then strategy becomes the compass that can navigate the firm through
stormy seas.
CHAPTER 1 The Concept of Strategy   15
Some definitions of strategy
●● Strategy: a plan, method, or series of actions designed to achieve a specific goal or effect.
—Wordsmyth Dictionary (
●● The determination of the long-run goals and objectives of an enterprise, and the adoption of
courses of action and the allocation of resources necessary for carrying out these goals.
—Alfred Chandler, Strategy and Structure
(Cambridge, MA: MIT Press, 1962)
●● Strategy: “a cohesive response to an important challenge.”
—Richard Rumelt, Good Strategy/Bad Strategy
(New York: Crown Business, 2011): 6.
●● Lost Boy:
John Darling:
Lost Boy:
John Darling:
“Injuns! Let’s go get ’em!”
“Hold on a minute. First we must have a strategy.”
“Uhh? What’s a strategy?”
“It’s, er … it’s a plan of attack.”
—Walt Disney’s Peter Pan
Why Do Firms Need Strategy?
This transition from strategy as plan to strategy as direction raises the question of
why firms (or other types of organization) need strategy. Strategy assists the effective
management of organizations, first, by enhancing the quality of decision-making, second, by facilitating coordination, and, third, by focusing organizations on the pursuit
of long-term goals.
Strategy as Decision Support Strategy is a pattern or theme that gives coherence to the decisions of an individual or organization. But why can’t individuals
or organizations make optimal decisions in the absence of such a unifying theme?
Consider the 1997 “man versus machine” chess epic in which Garry Kasparov was
defeated by IBM’s “Deep Blue” computer. Deep Blue did not need strategy. Its phenomenal memory and computing power allowed it to identify its optimal moves
based on a huge decision tree.18 Kasparov—although the world’s greatest chess
player—was subject to bounded rationality: his decision analysis was subject to the
cognitive limitations that constrain all human beings.19 For him, a strategy offered
guidance that assisted positioning and helped create opportunities. Strategy improves
­decision-making in several ways:
●● It simplifies decision-making by constraining the range of decision alternatives
considered and acting as a heuristic—a rule of thumb that reduces the search
required to find an acceptable solution to a decision problem.
●● The strategy-making process permits the knowledge of different individuals to
be pooled and integrated.
●● It facilitates the use of analytic tools—the frameworks and techniques that we
will encounter in the ensuing chapters of this book.
Strategy as a Coordinating Device The central challenge of management is
coordinating the actions of multiple organizational members. Strategy acts as a communication device to promote coordination. Statements of strategy are a means by
which the CEO can communicate the identity, goals, and positioning of the company
to all organizational members. The strategic planning process provides a forum in
which views are exchanged and consensus developed; once formulated, strategy can
be translated into goals, commitments, and performance targets that ensure that the
organization moves forward in a consistent direction.
Strategy as Target Strategy is forward looking. It is concerned not only with how
the firm will compete now, but also with what the firm will become in the future.
A forward-looking strategy establishes direction for the firm’s development and sets
aspirations that can motivate and inspire members of the organization. Gary Hamel
and C. K. Prahalad use the term strategic intent to describe this desired strategic
position: “strategic intent creates an extreme misfit between resources and ambitions.
Top management then challenges the organization to close the gap by building new
competitive advantages.”20 The implication is that strategy should embrace stretch and
resource leverage and not be overly constrained by considerations of strategic fit.21
Jim Collins and Jerry Porras make a similar point: US companies that have been sector
leaders for 50 years or more have all generated commitment and drive through setting
“Big, Hairy, Ambitious Goals.”22 Striving, inspirational goals are found in most organizations’ statements of vision and mission. One of the best known is that set by President
Kennedy for NASA’s space program: “before this decade is out, to land a man on the
moon and return him safely to earth.” However, goals on their own do not constitute
a strategy. Unless an organization’s goals are backed by guidelines for their attainment,
they are likely to be either meaningless or delusional.23
Where Do We Find Strategy?
Strategy has its origins in the thought processes of organizational leaders. For the entrepreneur, the starting point of strategy is the idea for a new business. Until the new
business needs to raise finance, there is little need for any explicit statement of strategy.
At that point, the entrepreneur articulates the strategy in a business plan. In large
companies, strategy formulation is an explicit management process and statements of
strategy are found in board minutes and strategic planning documents, which are invariably confidential. However, most companies—public companies in particular—see
value in communicating their strategy to employees, customers, investors, and business
partners. Collis and Rukstad identify four types of statement through which companies
communicate their strategies:
●● The mission statement describes organizational purpose; it addresses “Why
we exist.”
●● A statement of principles or values outlines “What we believe in and how we
will behave.”
●● The vision statement projects “What we want to be.”
●● The strategy statement articulates the company’s competitive game plan, which
typically describes objectives, business scope, and advantage.24
These statements can be found on the corporate pages of companies’ websites. More
detailed statements of strategy—including qualitative and quantitative m
­ edium-term
targets—are often found in top management presentations to analysts, which are
­typically included in the “for investors” pages of company websites. Strategy Capsule
1.5 shows statements of strategy by McDonalds and Twitter.
CHAPTER 1 The Concept of Strategy   17
Statements of Company Strategy: McDonald’s and Twitter
Our goal is to become customers’ favorite place and
We have aligned our growth strategy around the
way to eat and drink by serving core favorites such
three primary constituents of our platform:
as our World Famous Fries, Big Mac, Quarter Pounder
Users. We believe that there is a significant oppor-
and Chicken McNuggets.
tunity to expand our user base…
The strength of the alignment among the
Company, its franchisees and suppliers (collectively
broad set of partnerships globally to increase rele-
referred to as the “System”) has been key to McDonald’s
vant local content … and make Twitter more acces-
success. By leveraging our System, we are able to iden-
sible in new and emerging markets.
tify, implement and scale ideas that meet ­customers’
changing needs and preferences.
Mobile Applications. We plan to continue to
develop and improve our mobile applications…
McDonald’s customer-focused Plan to Win (“Plan”)
provides a common framework that aligns our global
Geographic Expansion. We plan to develop a
Product Development. We plan to continue to
business and allows for local adaptation. We con-
build and acquire new technologies to develop
tinue to focus on our three global growth priorities
and improve our products and services…
of optimizing our menu, modernizing the customer
experience, and broadening accessibility to Brand
McDonald’s within the framework of our Plan. Our
initiatives support these priorities, and are executed
with a focus on the Plan’s five pillars—People, Prod-
Platform Partners. We believe growth in our
platform partners is complementary to our user
growth strategy…
Expand the Twitter Platform to Integrate More
ucts, Place, Price and Promotion—to enhance our
Content. We plan to continue to build and acquire
customers’ experience and build shareholder value
new technologies to enable our platform partners
over the long term. We believe these priorities align
to distribute content of all forms.
with our customers’ evolving needs, and—combined
with our competitive advantages of convenience,
menu variety, geographic diversification and System
alignment—will drive long-term sustainable growth.
Partner with Traditional Media … to drive more
content distribution on our platform…
Advertisers… [I]ncrease the value of our platform
for our advertisers by enhancing our advertising
services and making our platform more accessible.
Targeting. We plan to continue to improve the targeting capabilities of our advertising services.
Opening our Platform to Additional Advertisers.
We believe that advertisers outside of the United
States represent a substantial opportunity…
New Advertising Formats.
Source: Twitter, Inc. Amendment no. 4 to Form S-1, Registration
Statement, SEC, November 4, 2013.
All these are intentions and, as we shall see, strategic intent is not necessarily realized. Ultimately, strategy is realized as action. Hence, strategy is observable in where
and how a firm chooses to compete. For example, information on a firm’s business
scope (products and its markets) and how it competes within these markets can be
found in a company’s annual reports. For US corporations, the description of the
business that forms Item 1 of the 10-K annual report to the Securities and Exchange
Commission (SEC) is particularly informative about strategy.
Checking a company’s pronouncements about strategy against its decisions and
actions may reveal a gap between rhetoric and reality. As a reality check upon grandiose and platitudinous sentiments of vision and mission, it is useful to ask:
●● Where is the company investing its money? Notes to financial statements
provide detailed breakdowns of capital expenditure by region and by
business segment.
●● What technologies is the company developing? Identifying the patents that a
company has filed (using the online databases of the US and EU patent offices)
indicates the technological trajectory a firm is pursuing.
●● What new products have been released, major investment projects initiated, and
top management hired? These strategic decisions are typically announced in
press releases and reported in trade journals.
To identify a firm’s strategy it is necessary to draw upon multiple sources of
information in order to build an overall picture of what the company says it is doing
matches what it is actually doing. We will return to this topic when we discuss competitive intelligence in Chapter 4.
Corporate and Business Strategy
Strategic choices can be distilled into two basic questions:
●● Where to compete?
●● How to compete?
The answers to these questions define the two major areas of a firm’s strategy: corporate strategy and business strategy.
Corporate strategy defines the scope of the firm in terms of the industries and markets in which it competes. Corporate strategy decisions include choices over diversification, vertical integration, acquisitions, and new ventures, and the allocation of
resources between the different businesses of the firm.
Business strategy is concerned with how the firm competes within a particular
industry or market. If the firm is to prosper within an industry, it must establish a
competitive advantage over its rivals. Hence, this area of strategy is also referred to as
competitive strategy.
The distinction between corporate strategy and business strategy corresponds to the
organizational structure of most large companies. Corporate strategy is the responsibility of corporate top management. Business strategy is primarily the responsibility of
the senior managers of divisions and subsidiaries.
This distinction between corporate and business strategy also corresponds to the primary sources of superior profit for a firm. To survive and prosper over the long term,
CHAPTER 1 The Concept of Strategy   19
The sources of superior profitability
How do we
make money?
Where to compete?
How to
a firm must earn a rate of return on its capital that exceeds its cost of capital. There are
two possible ways of achieving this. First, by locating within industries that offer attractive rates of profit (corporate strategy). Second, by establishing a competitive advantage
over rivals within an industry (Figure 1.5). This distinction may be expressed even more
simply. The basic question facing the firm is “How do we make money?” This prompts
the two basic strategic choices we identified above: “Where to compete?” and “How
to compete?”
As an integrated approach to firm strategy, this book deals with both business and
corporate strategy. However, our primary emphasis will be on business strategy. This
is because the critical requirement for a company’s success is its ability to establish
competitive advantage. Hence, issues of business strategy precede those of corporate
strategy. At the same time, these two dimensions of strategy are intertwined: the scope
of a firm’s business has implications for the sources of competitive advantage, and the
nature of a firm’s competitive advantage determines the industries and markets it can
be successful in.
Describing Strategy
These same two questions—“Where is the firm competing?” and “How is it competing?”—also provide the basis upon which we can describe the strategy that a firm
is pursuing. The where question has multiple dimensions. It relates to the products the
firm supplies, the customers it serves, the countries and localities where it operates,
and the vertical range of activities it undertakes. The how question relates to the nature
of the firm’s competitive advantage: Is it seeking a cost advantage or a differentiation
advantage? How is the firm using its distinctive resources and capabilities to establish
a competitive advantage?
However, strategy is not simply about “competing for today”; it is also concerned
with “competing for tomorrow.” This dynamic aspect of strategy involves establishing
objectives for the future and determining how they will be achieved. Future objectives
relate to the overall purpose of the firm (mission), what it seeks to become (vision),
and how it will meet specific performance targets.
These two dimensions of strategy—the static and the dynamic—are depicted
in Figure 1.6. As we shall see in Chapter 8, reconciling these two dimensions of
the future
Describing firm strategy: Competing in the present, preparing for
Strategy as Positioning
• Where are we competing?
-Product market scope
-Geographical scope
-Vertical scope
• How are we competing?
-What is the basis of our
competitive advantage?
Strategy as Direction
• What do we want to become?
-Vision statement
• What do we want to achieve?
-Mission statement
-Performance goals
• How will we get there?
-Guidelines for development
-Priorities for capital expenditure,
-Growth modes: organic growth,
M & A, alliances
strategy—what Derek Abell calls “competing with dual strategies”—is one of the central
dilemmas of strategic management.25
How is Strategy Made? The Strategy Process
How companies make strategy and how they should make strategy are among the most
hotly debated issues in strategic management. The corporate planning undertaken by
large companies during the 1960s was a highly formalized approach to strategy making. Strategy may also be made informally: emerging through adaptation to circumstances. In our opening discussion of Queen Elizabeth and Lady Gaga, I discerned
a consistency and pattern to their career decisions that I identified as strategy, even
though there is no evidence that either of them engaged in any systematic process of
strategy formulation. Similarly, successful companies are seldom the products of grand
designs. The rise of Apple Inc. to become the world’s most valuable company (in terms
of stock market capitalization) has often been attributed to a brilliant strategy of integrating hardware, software, and design aesthetics to create electronic products that
offered a unique consumer experience. Yet, there is little evidence that Apple’s incredible success since 2004 was the result of an explicit strategy. Apple’s huge success with
its iPod, iPhone, and iPad was the outcome of a set of strategic decisions that combined
Steve Job’s penetrating insight into consumer preferences and technological trends with
Apple’s capabilities in design, marketing, the integration of hardware and software, and
the management of an ecosystem of partners.
So, what does this mean for strategy making by companies and other organizations?
Should managers seek to formulate strategy through a rational systematic process, or
is the best approach in a turbulent world to respond to events with opportunism and
Design versus Emergence
Henry Mintzberg is a leading critic of rational, analytical approaches to strategy design.
He distinguishes intended, emergent, and realized strategies. Intended strategy is
CHAPTER 1 The Concept of Strategy   21
strategy as conceived of by the leader or top management team. Even here, intended
strategy may be less a product of rational deliberation and more an outcome of
inspiration, negotiation, bargaining, and compromise among those involved in the
strategy-making process. However, realized strategy—the actual strategy that is
implemented—is only partly related to that which was intended (Mintzberg suggests
only 10–30% of intended strategy is realized). The primary determinant of realized
strategy is what Mintzberg terms emergent strategy—the decisions that emerge from
the complex processes in which individual managers interpret the intended strategy
and adapt it to changing circumstances.26
According to Mintzberg, rational design is not only an inaccurate account of how
strategies are actually formulated but also a poor way of making strategy: “The notion
that strategy is something that should happen way up there, far removed from the
details of running an organization on a daily basis, is one of the great fallacies of
conventional strategic management.”27 The emergent approaches to strategy-making
permit adaptation and learning through a continuous interaction between strategy formulation and strategy implementation in which strategy is constantly being adjusted
and revised in the light of experience.
The debate between those who view strategy-making as a rational, analytical process of deliberate planning (the design school) and those who envisage strategy-making
as an emergent process (the process or learning school of strategy) has centered on the
case of Honda’s successful entry into the US motorcycle market during the early 1960s.28
The Boston Consulting Group lauded Honda for its single-minded pursuit of a global
strategy based on exploiting economies of scale and learning to establish ­unassailable
cost leadership.29 However, subsequent interviews with the Honda managers in charge
of its US market entry revealed a different story: a haphazard, experimental approach
with little analysis and no clear plan.30 As Mintzberg observes: “Brilliant as its strategy
may have looked after the fact, Honda’s managers made almost every conceivable mistake until the market finally hit them over the head with the right formula.”31
In practice, strategy-making involves both thought and action: “Strategy exists in the
cognition of managers but also is reified in what companies do.”32 Top-down rational
design is combined with decentralized adaptation:
●● The design aspect of strategy comprises organizational processes through which
strategy is deliberated, discussed, and decided. These include board meetings, a strategic planning process, and informal participative events, such as
strategy workshops. I will discuss processes of strategic planning more fully in
Chapter 6.
●● The enactment of strategy through decisions and actions being taken throughout
the organization is a decentralized process where middle managers play a central
role. These emergent processes are typically viewed as occurring when formal
strategic plans are being implemented. However, these emergent processes may
come first. Intel’s historic decision to abandon memory chips and concentrate on
microprocessors was initiated in the operational decisions of business unit and
plant managers and subsequently adopted as strategy by top management.33
I refer to this process of strategy-making that combines design and emergence as
“planned emergence.”34 The balance between the two depends greatly upon the stability and predictability of the organization’s business environment. The Roman Catholic
Church and La Poste, the French postal service, inhabit relatively stable environments;
they can plan activities and resource allocations in some detail quite far into the future.
For WikiLeaks, the Somali Telecom Group, and Islamic State, strategic planning will
inevitably be restricted to a few guidelines; most strategic decisions must be responses
to unfolding circumstances.
As the business environment becomes more turbulent and less predictable, so
strategy-making becomes less about detailed decisions and more about guidelines
and general direction. Bain & Company advocates the use of strategic principles—
“pithy, memorable distillations of strategy that guide and empower employees”—to
combine consistent focus with adaptability and responsiveness.35 McDonald’s strategy
statement in Strategy Capsule 1.5 is an example of such strategic principles. Similarly,
Southwest Airlines encapsulates its strategy in a simple statement: “Meet customers’
short-haul travel needs at fares competitive with the cost of automobile travel.”
For fast-moving businesses, strategy may be reduced to a set of “simple rules.” For
example, Lego evaluates new product proposals by applying a checklist of rules:
“Does the product have the Lego look?” “Will children learn while having fun?” “Does
it stimulate creativity?”36
Applying Strategy Analysis
Despite the criticisms leveled at rational, analytical approaches to strategy formulation,
the emphasis of this book will be the application of analytical tools to strategy issues.
This is not because I wish to downplay the role of intuition, creativity, or spontaneity—
these qualities are essential ingredients of successful strategies. Nevertheless, whether
strategy formulation is formal or informal, deliberate or emergent, systematic analysis
leads to better decisions and helps protect strategic decision-making from power battles,
whims, fads, and wishful thinking. Concepts, theories, and analytic tools are complements to, and not substitutes for, intuition and creativity, and they provide a framework
for organizing discussion, processing information, and developing consensus.
We must also recognize limitations of strategy analysis. Unlike many of the a­ nalytical
techniques in accounting, finance, market research, or production management, strategy
analysis does not offer algorithms or formulae that tell us the optimal strategy to adopt.
The purpose of strategy analysis is not to provide answers but to help us to probe
the relevant issues. By providing a framework that allows us to examine the factors
that influence a strategic situation and organize relevant information, strategy analysis
places us in a superior position to a manager who relies exclusively on experience
and intuition. Finally, to the extent that our analytic tools are not specific to individual
businesses or situations, they can improve our flexibility as managers. The concepts
and frameworks we shall cover are not specific to particular industries, companies, or
situations. Hence, they can help increase our confidence and effectiveness in understanding and responding to new situations and new circumstances.
So, how do we go about applying our tools of strategy analysis in a systematic and
productive way that allows us to make sound strategy recommendations? Developing a
strategy for a business typically involves four main stages. These are shown in Figure 1.7.37
1. Setting the strategic agenda. Any strategy-making exercise must begin by identifying the important issues that the strategy must address. For an existing
company, this involves assessing whether the current strategy is working, which
requires that we:
●● Identify the current strategy. A vital preliminary step is to establish consensus
around what the current strategy is. The above sections on Where Do We Find
Strategy? and Describing Strategy offer guidance in this.
CHAPTER 1 The Concept of Strategy   23
●● Appraise performance. How well is the current strategy performing? In
the next chapter, we shall how to apply financial analysis to assess firm
2. Analyzing the situation
●● Diagnose performance. Having determined the level and trend of the firm’s
performance, the next challenge is diagnosis: In the case of poor performance,
what are the sources of unsatisfactory performance? In the case of good
performance, what are the factors driving this? Chapter 2 offers guidance on
performance. Dick Rumelt puts it even more succinctly: the core question in
most strategy situations is, “What’s going on here?”38
●● Industry analysis. To determine whether the current strategy needs to be
changed, we need to look not just at how it is currently performing, but how
it will perform in the future. This requires looking at the likely changes in the
firm’s industry and their implications. Chapters 3 and 4 address industry
●● Analysis of resources and capabilities. Having established likely external
changes, what do these mean for the firm’s competitive position? This
requires analysis of the firm’s resources and capabilities—which we address
in Chapter 5.
3. Formulating strategy. Performance diagnosis, industry analysis, and resource
and capability analysis provide a basis for generating strategic options, the most
promising of which can be developed into a recommended strategy. Recommended strategies tend to avoid precise specifications of what is to be done, they
are more likely to articulate the primary basis for a firm’s competitive advantage
and what this means for how it will compete. Chapter 7 discusses how the intersection of internal strengths and external success factors create the basis for a
firm’s competitive advantage.
4. Implement strategy. Without action, a strategy is merely an idea expressed
in words. Implementing strategy requires allocating resources and motivating people. As we shall see in Chapter 6, this requires putting in place the
organizational structure and management systems within which action can
take place.
Applying strategy analysis
Setting the
strategic agenda
Identify the
Analyzing the
Analysis of
resources and
Strategic Management of Not-For-Profit Organizations
When strategic management meant top-down, long-range planning, there was little distinction between business corporations and not-for-profit organizations: the techniques
of forecast-based planning applied equally to both. As strategic management has become
increasingly oriented toward the identification and exploitation of sources of profit, it has
become more closely identified with for-profit organizations. So, can the concepts and
tools of corporate and business strategy be applied to not-for-profit organizations?
The short answer is yes. Strategy is as important in not-for-profit organizations as it is in
business firms. The benefits I have attributed to strategic management in terms of improved
decision-making, achieving coordination, and setting performance targets (see the section
“Why Do Firms Need Strategy?” above) may be even more important in the nonprofit sector. Moreover, many of the same concepts and tools of strategic analysis are readily applicable to not-for-profits—albeit with some adaptation. However, the not-for-profit sector
encompasses a vast range of organizations. Both the nature of strategic planning and the
appropriate tools for strategy analysis differ among these organizations.
The basic distinction here is between those not-for-profits that operate in competitive environments (most nongovernmental, nonprofit organizations) and those
that do not (most government departments and government agencies). Among the
for-profits that inhabit competitive environments, we may distinguish between
TABLE 1.2 The applicability of the concepts and tools of strategic analysis to
different types of not-for-profit organizations
in competitive
environments that
charge users
in competitive
environments that
provide free services
Royal Opera House
­Guggenheim Museum
Stanford University
Salvation Army
Habitat for Humanity
Greenpeace Linux
Analysis of goals
and performance
Identification of mission, goals, and performance indicators and establishing consistency between them is a critical area of strategy analysis for all
Analysis of the
Main tools of competitive
analysis are the same as
for for-profit firms
Main arena for competition and competitive
strategy is the market
for funding
Not important.
However, there is
interagency competition for public funding
Analysis of
resources and
Identifying and exploiting distinctive resources and
capabilities critical to designing strategies that confer
competitive advantage
Analysis of resources
and capabilities
essential for determining priorities and
designing strategies
The basic principles of organizational design, performance management, and
leadership are common to all organizational types
sheltered from
UK Ministry of Defence,
European Central
Bank, New York Police
Department, World
Health Organization
CHAPTER 1 The Concept of Strategy   25
those that charge for the services they provide (most private schools, non profit-making
private hospitals, social and sports clubs, etc.) and those that provide their services
free—most charities and NGOs (nongovernmental organizations). Table 1.2 summarizes some key differences between each of these organizations with regard to the
applicability of the basic tools of strategy analysis.
Among the tools of strategy analysis that are applicable to all types of not-for-profit
organizations, those that relate to the role of strategy in specifying organizational goals
and linking goals to resource-allocation decisions are especially important. For businesses, profit is always a key goal since it ensures survival and fuels development. But
for not-for-profits, goals are typically complex. The mission of Harvard University is to
“create knowledge, to open the minds of students to that knowledge, and to enable
students to take best advantage of their educational opportunities.” But how are these
multiple objectives to be reconciled in practice? How should Harvard’s budget be
The Strategic Plan of the International Red Cross
The International Federation of Red Cross and Red
2020 provides the basis for the strategic plans of National
Crescent Societies (IFRC) coordinates activities of 190
Societies.” It included the following:
National Red Cross and Red Crescent Societies. “Strategy
Enabling Actions
Expected Impact
Humanity, Impartiality, Neutrality, Independence, Voluntary service, Unity, Universality
To inspire, encourage, facilitate and promote at all times all forms of humanitarian
­activities by National Societies, with a view to preventing and alleviating human
suffering, and thereby contributing to the maintenance and promotion of human
­dignity and peace in the world.
2. Enable healthy and
3. Promote social
1. Save lives, protect
safe living
inclusion and a culture
livelihoods, and strengthen
of non violence and
recovery from disasters
and crises
Function effectively
Build strong National Red
Pursue humanitarian
as the IFRC
Cross and Red
diplomacy to prevent
­Crescent Societies
and reduce vulnerability
in a globalized world
Stronger cooperation,
Greater access to help
Expanded sustainable
people who are vulnerable coordination and support
national and local capacities
and earlier attention to
of National Societies
Improved accountability
causes of vulnerability
A stronger culture of
for IFRC activities
Deeper public,
voluntary service and
Greater IFRC contribution
participation in National
to meeting vulnerability
and partner support
More resources to address needs at global, national
Scaled-up services for the
and local levels
most vulnerable people
Stronger recognition of
community perspectives
Source: International Federation of Red Cross and Red Crescent Societies, Strategy 2020 (Geneva, 2010).
allocated between research and financial aid for students? Is Harvard’s mission better
served by investing in graduate or undergraduate education? The strategic planning
process of not-for-profits needs to be designed so that mission, goals, resource allocation, and performance targets are closely aligned. Strategy Capsule 1.6 shows the
10-year strategic planning framework for the International Red Cross.
Similarly, most of the principles and tools of strategy implementation—especially in
relation to organizational structure, management systems, techniques of performance
management, and choice of leadership styles—are common to both for-profit and
not-for-profit organizations.
In terms of the analysis of the external environment, there is little difference between the techniques of industry analysis applied to business enterprises and those
relevant to not-for-profits that inhabit competitive environments and charge for their
services. In many markets (theaters, sports clubs, vocational training), for-profits and
not-for-profits may be in competition with one another. Indeed, for these types of
not-for-profit organizations, the pressing need to break even in order to survive may
mean that their strategies do not differ significantly from those of for-profit firms.
In the case of not-for-profits that do not charge users for the services they offer
(mostly charities), competition does not really exist at the final market level: different homeless shelters in San Francisco cannot really be said to be competing for
the homeless. However, these organizations compete for funding—raising donations
from individuals, winning grants from foundations, or obtaining contracts from funding agencies. Competing in the market for funding is a key area of strategy for most
The analysis of resources and capabilities is important to all organizations that
inhabit competitive environments and, hence, must deploy their resources and capabilities to establish a competitive advantage. However, even for those organizations
that are monopolists—such as government departments and other public agencies—
performance is enhanced by aligning strategy with internal strengths in resources and
This chapter has covered a great deal of ground—I hope that you are not suffering from indigestion. If
you are feeling a little overwhelmed, not to worry: we shall be returning to the themes and issues raised
in this chapter in the subsequent chapters of this book.
The key lessons from this chapter are:
◆◆ Strategy is a key ingredient of success both for individuals and organizations. A sound strategy
cannot guarantee success, but it can improve the odds. Successful strategies tend to embody four
elements: clear, long-term goals; profound understanding of the external environment; astute
appraisal of internal resources and capabilities; and effective implementation.
◆◆ The above four elements form the primary components of strategy analysis: determination of goals,
industry analysis, analysis of resources and capabilities, and strategy implementation.
CHAPTER 1 The Concept of Strategy   27
◆◆ Strategy is no longer concerned with using forecasts as the basis for detailed planning; it is increas-
ingly about direction, identity, and exploiting the sources of superior profitability.
◆◆ To describe the strategy of a firm (or any other type of organization), we need to recognize where the
firm is competing, how it is competing, and the direction in which it is developing.
◆◆ Developing a strategy for an organization requires a combination of purpose-led planning (rational
design) and a flexible response to changing circumstances (emergence).
◆◆ The principles and tools of strategic management have been developed primarily for business enter-
prises; however, they are also applicable to the strategic management of not-for-profit organizations,
especially those that inhabit competitive environments.
Our next stage is to delve further into the basic strategy framework shown in Figure 1.2. The
elements of this framework—goals and values, the industry environment, resources and capabilities, and structure and systems—are the subjects of the five chapters that form Part II of the book.
We then deploy these tools to analyze the quest for competitive advantages in different industry
contexts (Part III), and then in the development of corporate strategy (Part IV). Figure 1.8 shows the
framework for the book.
The structure of the book
Ch. 1 The Concept of Strategy
Analysis of the Firm
Analysis of Industry and Competition
Ch. 2 Goals, Values, and Performance
Ch. 5 Analyzing Resources and Capabilities
Ch. 3 Industry Analysis:
The Fundamentals
Ch. 6 Organization Structure and Management Systems:
The Fundamentals of Strategy Implementation
Ch. 4 Further Topics in Industry and
Competitive Analysis
Ch. 7 The Sources and Dimensions of Competitive Advantage
Ch. 8 Industry Evolution and Strategic Change
Ch. 9 Technology-based Industries and the Management of Innovation
Ch. 10 Vertical Integration and the Scope of the Firm
Ch. 11 Global Strategy and the Multinational Corporation
Ch. 12 Diversif ication Strategy
Ch. 13 Implementing Corporate Strategy: Managing the Multibusiness Firm
Ch. 14 External Growth Strategies: Mergers, Acquisitions, and Alliances
Ch. 15 Current Trends in Strategic Management
Self-Study Questions
1. In relation to the four characteristics of successful strategies in Figure 1.1, assess the US government’s Middle East strategy since the invasion of Iraq in 2003.
2. What is your career strategy for the next five years? To what extent does your strategy fit with
your long-term goals, the characteristics of the external environment, and your own strengths
and weaknesses?
3. The discussion of the evolution of business strategy (see the section “From Corporate Planning
to Strategic Management”) established that the characteristics of a firm’s strategic plans and its
strategic planning process are strongly influenced by the volatility and unpredictability of its
external environment. On this basis, what differences would you expect in the strategic plans
and strategic planning processes of Coca-Cola Company and Spotify SA, the Swedish-based
music streaming service?
4. I have noted that a firm’s strategy can be described in terms of the answers to two questions:
“Where are we competing?” and “How are we competing?” Applying these two questions, provide a concise description of Lady Gaga’s career strategy (see Strategy Capsule 1.2).
5. Using the framework of Figure 1.6, describe the strategy of the university or school you attend.
6. Your business school is considering appointing as dean someone whose entire career has
been spent in business management. What challenges might the new dean face in applying
her strategic management skills to a business school?
1. P. F. Drucker, “Managing Oneself,” Harvard Business
Review (March/April 1999): 65–74.
2. Stephen Covey (in The Seven Habits of Highly Effective
People, New York: Simon & Schuster, 1989) recommends
that we develop lifetime goals based on the multiple roles
that we occupy: in relation to our career, partner, family,
friends, and spiritual quest.
3. M. E. Porter, “What Is Strategy?” Harvard Business Review
(November/December 1996): 61–78.
4. See A. H. Van De Ven and R. Drazin, “The Concept of
Fit in Contingency Theory,” Research in Organizational
Behavior 7 (1985): 333–365.
5. Sun Tzu, The Art of Strategy: A New Translation of Sun
Tzu’s Classic “The Art of War,” trans. R. L. Wing (New
York: Doubleday, 1988).
6. W, Pietersen, “Von Clausewitz on War: Six Lessons for
the Modern Strategist,” Columbia School of Business
(February 2016); and E. Clemons and J. Santamaria,
“Maneuver Warfare,” Harvard Business Review (April
2002): 46–53.
7. On the contribution of game theory to business strategy
analysis, see F. M. Fisher, “Games Economists Play: A Noncooperative View,” RAND Journal of Economics 20 (Spring
1989): 113–124; C. F. Camerer, “Does Strategy Research
Need Game Theory?” Strategic Management Journal 12
(Winter 1991): 137–152; A. K. Dixit and B. J. Nalebuff,
The Art of Strategy: A Game Theorist’s Guide to Success in
Business and Life (New York: W. W. Norton, 2008).
8. H. I. Ansoff, “Strategies for Diversification,” Harvard
Business Review (September/October, 1957): 113–124.
9. M. E. Porter, Competitive Strategy (New York: Free
Press, 1980).
10. See Boston Consulting Group, Perspectives on Experience
(Boston: Boston Consulting Group, 1978) and studies
using the PIMS (Profit Impact of Market Strategy) database, for example R. D. Buzzell and B. T. Gale, The PIMS
Principles (New York: Free Press, 1987).
11. R. M. Grant, “The Resource-based Theory of Competitive Advantage: Implications for Strategy Formulation,” California Management Review 33 (Spring 1991):
114–135; D. J. Collis and C. Montgomery, “Competing
on Resources: Strategy in the 1990s,” Harvard Business
Review ( July/August 1995): 119–128.
12. E. Lee, J. Lee, and J. Lee, “Reconsideration of the WinnerTake-All Hypothesis: Complex Networks and Local Bias,”
Management Science 52 (December 2006): 1838–1848;
C. Shapiro and H. R. Varian, Information Rules (Boston:
Harvard Business School Press, 1998).
CHAPTER 1 The Concept of Strategy   29
13. C. Christensen, The Innovator’s Dilemma (Boston:
Harvard Business School Press, 1997).
14. P. J. Williamson, “Strategy as Options on the Future,”
Sloan Management Review 40 (March 1999): 117–126.
15. C. Markides, “Strategic Innovation in Established Companies,” Sloan Management Review ( June 1998): 31–42.
16. W. C. Kim and R. Mauborgne, “Creating New Market
Space,” Harvard Business Review ( January/February
1999): 83–93.
17. See, for example, N. Koehn, “The Brain—and Soul—of
Capitalism,” Harvard Business Review (November 2013);
and T. Piketty, Capital in the Twenty-First Century (Cambridge, MA: Harvard University Press, 2014).
18. “Strategic Intensity: A Conversation with Garry Kasparov,”
Harvard Business Review (April 2005): 105–113.
19. The concept of bounded rationality was developed by
Herbert Simon (“A Behavioral Model of Rational Choice,”
Quarterly Journal of Economics 69 (1955): 99–118.
20. G. Hamel and C. K. Prahalad, “Strategic Intent,” Harvard
Business Review (May/June 1989): 63–77.
21. G. Hamel and C. K. Prahalad, “Strategy as Stretch and
Leverage,” Harvard Business Review (March/April
1993): 75–84.
22. J. C. Collins and J. I. Porras, Built to Last: Successful Habits
of Visionary Companies (New York: HarperCollins, 1995).
23. R. Rumelt, Good Strategy/Bad Strategy: The Difference and
Why It Matters (New York: Crown Business, 2011): 5–6.
24. D. J. Collis and M. G. Rukstad, “Can You Say What Your
Strategy Is?” Harvard Business Review (April 2008): 63–73.
25. D. F. Abell, Managing with Dual Strategies (New York:
Free Press, 1993).
26. H. Mintzberg, “Patterns of Strategy Formulation,”
Management Science 24 (1978): 934–948; “Of Strategies:
Deliberate and Emergent,” Strategic Management Journal
6 (1985): 257–272.
27. H. Mintzberg, “The Fall and Rise of Strategic Planning,”
Harvard Business Review ( January/February
1994): 107–114.
28. The two views of Honda are captured in two Harvard
cases: Honda [A] and [B] (Boston: Harvard Business
School, Cases 384049 and 384050, 1989).
29. Boston Consulting Group, Strategy Alternatives for the
British Motorcycle Industry (London: Her Majesty’s Stationery Office, 1975).
30. R. T. Pascale, “Perspective on Strategy: The Real Story
Behind Honda’s Success,” California Management Review
26, no. 3 (Spring 1984): 47–72.
31. H. Mintzberg, “Crafting Strategy,” Harvard Business Review
( July/August 1987): 70.
32. G. Gavetti and J. Rivkin, “On the Origin of Strategy: Action
and Cognition over Time,” Organization Science 18
(2007): 420–439.
33. R. A. Burgelman and A. Grove, “Strategic Dissonance,”
California Management Review 38 (Winter 1996):
34. R. M. Grant, “Strategic Planning in a Turbulent
Environment: Evidence from the Oil and Gas Majors,”
Strategic Management Journal 14 ( June 2003):
35. O. Gadiesh and J. Gilbert, “Transforming Corner-office
Strategy into Frontline Action,” Harvard Business Review
(May 2001): 73–80.
36. K. M. Eisenhardt and D. N. Sull, “Strategy as Simple
Rules,” Harvard Business Review ( January 2001):
37. A similar, but more detailed, approach is proposed in
M. Venzin, C. Rasner, and V. Mahnke, The Strategy Process:
A Practical Handbook for Implementation in Business
(London: Cyan, 2005).
38. Rumelt, op cit., 79.
2 Goals, Values, and Performance
3 Industry Analysis: The Fundamentals
4 Further Topics in Industry and Competitive Analysis
5 Analyzing Resources and Capabilities
6 Organization Structure and Management Systems: The
Fundamentals of Strategy Implementation
Goals, Values,
and Performance
The strategic aim of a business is to earn a return on capital, and if in any particular case
the return in the long run is not satisfactory, then the deficiency should be corrected
or the activity abandoned for a more favorable one.
Profits are to business as breathing is to life. Breathing is essential to life, but is not the
purpose for living. Similarly, profits are essential for the existence of the corporation,
but they are not the reason for its existence.
◆◆ Introduction and Objectives
◆◆ Strategy as a Quest for Value
Value Creation
Value for Whom? Shareholders versus Stakeholders
◆◆ Profit, Cash Flow, and Enterprise Value
Types of Profit
Linking Profit to Enterprise Value
Enterprise Value and Shareholder Value
Appraising Current and Past Performance
Performance Diagnosis
Setting Performance Targets
◆◆ Beyond Profit: Values and Corporate Social
Values and Principles
Corporate Social Responsibility
◆◆ Beyond Profit…
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