INTRODUCTION
This chapter introduces strategic management and provides an overview of the rest of the book. Following a review of the history of strategic management as it has evolved into the form presented here, the research that has tested the advantages to organizations of strategic management is outlined. The major elements of the current structure of strategic management are modeled in the next part of the chapter. Exhibit 1-1 may be viewed as the skeleton of strategic management and of the book.

That an organization's mission statement is a manifestation of the culture intended for it by top-level management or owners is discussed next. Mission, or purpose, is an explanation of why the organization exits and of the guiding philosophies to be followed in the development of strategy at each major organizational level. Then, these four levels of strategy--enterprise, corporate, business, and functional--are explained. When strategic management is practiced effectively, formulation and implementation of strategies at the appropriate levels become the management processes that establish competitive advantage and drive the company forward.

In the final two sections, the nature of strategic decisions is discussed, followed by an explanation of contingency strategies.

EVOLUTION OF STRATEGIC MANAGEMENT
Accept for a moment that strategic management is a way of running an organization that recognizes the complexity of its environment and seeks to establish competitive advantage at all levels. It is a process by which the manager can transform environmental factors, along with various internal, personal, and political considerations, into decisions that result in strategies (goals and plans of action for reaching them) to help guide the organization into the future in a dominant competitive position.

Over the past few decades, the nature of strategic management as a management technique has changed in two important ways with the changing environment. It has increased both in its level of detail and in its importance as the complexity of the environment has increased. Between World War II and the early 1960s, business policy, following the so-called prestrategy paradigm,¹ addressed the problem of coordinating the operations of the various functional departments of the firm. Policies were established by top management to integrate activities that each department was to carry out. Thus policy served to standardize and specify behavior within functional departments. Strategy was usually viewed as an implicit concept reserved for the topmost managers. In the top manager's mind, this concept, environmental characteristics, certain organizational goals, and political circumstances, along with years of management experience, all came together to produce what was hoped would be the right collection of policies. Strategy was seldom analyzed, once it was decided on by top management, and rarely changed. When operations did not meet expectations, it was policy that typically was analyzed and modified. Most firms were single-line businesses; business policy making was conducted in large part at what is known today as the business level.

The rapid rise during the 1950s and early 1960s in the number of interest groups making demands on organizations of all kinds, along with the proliferation of mergers and acquisitions, began to strain the applicability of the relatively simple business-policy approach to management.² Divisionalized firms no longer had a single line of business. Thus a different set of policies was needed for each subsidiary and managers sought a common thread that might bind them together. The internal complexity of firms had increased in an attempt to deal with the complexity of a pluralistic society. Davis and Blomstrom describe social pluralism as a society "in which diverse groups maintain autonomous participation and influence in the social system."₃ Business is merely one such influence (interest group) and competes with many other groups for time, money, interest, allegiance, or attention. Increasingly organizations that were operated without an understanding of, or respect for, the various interest-group influences have been subjected to successful attacks by these groups. Electric utilities were forced by many interest groups to cease or radically change the nature of nuclear power plant construction projects. Through the pressure of consumer groups, automobile manufactures have been made to correct deficiencies in their products. Industrial polluters were required by environmental groups to clean up or stop harmful discharges. Product labeling requirements were tightened, Equal Employment Opportunity assurances became stricter and product safety standards were improved. These changes, and hundreds of others, were brought about largely by the political actions of interest groups. Their activities often resulted in enactment of legislation that today regulates the conduct of business.

In response to this growth in the dimensions of firms' environments, and also to the growth in the number of Divisionalized firms, strategy increasingly became interpreted as the link between an organization and its environment.⁴ All of the "policy" problems remained, but they were compounded by a baffling set of external claims, and also by the needs imposed by multiple product lines and business-level activities.

Because of its inability to deal with these factors, the business-policy model underwent several evolutionary changes and emerged as what was later called strategic planning. Dubbed the initial strategy paradigm,⁵ this view of corporate management focused heavily on the process of strategy formulation with emphasis on environmental pressures, yet it had four major shortcomings.⁶ First, it did not clearly differentiate between corporate-level strategy (questions related to the collection of business activities a divisionalized company owned) and business level strategy (how to compete within a particular business activity).

Second, the initial strategy paradigm was unclear about the nature of relationships between strategy and the operation of the various functional areas of business. How does the task of marketing management, for example, change with different strategic focuses⁷ and how can the functional areas be integrated into an effective whole? Such questions largely went unanswered.

Third, this paradigm was incomplete in its discussion of the role of general management. Some authors contended that strategic planning was the province of only top managers, whereas others claimed that all managers should be involved in strategic planning.

Finally, there was disagreement about whether strategy included both goals and action plans, or just action plans (this distinction is discussed in detail in Chapter 3).

 The strategic management paradigm, although still in its infancy, is the third step in the evolution of thought about strategy, and it addresses the shortcomings of strategic planning. As initially codified by Schendel and Hofer, strategic management is far from representing a consensus. Yet there is a perceptible movement toward consolidation around many of its principles. In particular, there is now a widely accepted distinction between corporate-level, business-level, and functional-level strategy. A fourth strategy level, enterprise strategy, has been proposed by Ansoff,⁸ but the concept has not endured (enterprise strategy was defined as describing the interaction of a firm with its environment--it is now felt by many that this interaction is best incorporated in each of the other strategy levels and not reserved only for a separate category of strategy.) In some ways related to Ansoff's concept of enterprise strategy, a more global strategic orientation is described by Magaziner and Reich; they call it international strategy.⁹ Here too, during the early 1990s the idea of isolating global issues and direction in a separate strategy level has given way to the practice of incorporating international competitive matters into all levels of strategic decision making.

The strategic management paradigm not only distinguishes among different levels of strategy but is sufficiently adaptable to accommodate the need for this expanded scope of strategic thinking.
 
Next, strategic management addresses the issue of functional integration by identifying various functional strategies. At the same time, responsibility for strategic thinking is viewed within this paradigm as the responsibility of all managers, not just top-level executives. Although there is much work to be done in learning how best to integrate functional strategy with other strategy levels, the strategic management paradigm lays the groundwork for the conduct of such research.

Finally, by separating the steps of goal formulation and strategy (action plan) formulation, this paradigm is more objective, more teachable, and less mysterious than earlier interpretations. It may help to continue the increase in popularity of strategy-focused management and thus expand the competitiveness of U.S. business in the international marketplace.

DOES STRATEGIC MANAGEMENT PAY OFF?
 One would expect that the primary benefit of practicing strategic management would be higher profitability. But the evidence of this is still inconclusive in a wide variety of applications, and there have been many attempts to resolve the issue. We therefore shall present examples of research results on both sides of this question, along with a discussion of the problems encountered in conducting this kind of research. We are confident you will agree not only that strategic management is beneficial in many ways, but also that it is nearly indispensable for most organizations.

Researching Strategic Management's Effectiveness
The weight of numbers tends to favor the studies that have supported the positive effects of strategic management. Only a few have not supported it. In 1957 the Stanford Research Institute analyzed some 400 firms and concluded that those that plan outperform those that do not in terms of sales and profit growth.¹⁰ One of the most convincing studies was undertaken by Thune and House in 1970.¹¹ They identified two groups, formal planners and informal planners, among eighteen matched pairs of companies in six industries. The two groups were then compared by sales, return on stockholders' equity and total capital, earnings per share and stock prices. One result that is important for our purposes is that the formal planners were significantly better performers on the three profit-related ratios that were the informal planners. Another test of the formal planners compared their performance before planning with their performance after planning was begun. After-planning performance was superior to preplanning performance. Also in 1970, Eastlack and McDonald showed correlation between planning and performance.¹²

In a replication of the Thune and House study by Herold in 1972,¹³ the previous findings were upheld--formal planners continued to outperform informal planners. Another often-cited study, by Rue and Fulmer in 1972, also lends support to the planning-performance relationship, at least for producers of durable goods.¹⁴ However, for businesses in service and nondurable product industries, planners were not significantly better performers than nonplanners.

In 1974 Wood and LaForge found that banks that planned formally performed better than those that did not.¹⁵ More support was offered by Karger and Amalik in 1975, when they showed the same results for the machinery, chemicals, drugs, and electronics industries.¹⁶ However, drug and electronic firms in their sample did not show as strong a relationship between planning and performance as did the other two types.

Later studies in this area have tended not to support the findings of the earlier work. In research conducted by Kallman and Shapiero and Kudla,¹⁸ and Leontiades and Tezel¹⁹ during 1980, no positive relationship was seen between planning and performance. The only study since the mid-1970s we found which showed a positive relationship was one by Burt in Australia in 1979.²⁰ He showed that the higher the quality of the planning program, the better was performance.

Research Problems
 The major problem encountered when trying to test the effectiveness of strategic management is research methodology. Although many studies have shown that companies that plan perform better than those that do not, the simultaneous presence of planning and good performance does not prove that one causes the other.

It is especially difficult to demonstrate the effectiveness of strategic management when one considers the many variables that would have to be controlled for to focus on the effects of planning. Among these are the type of industry, the size of the firm and the industry, management experience and personality, cultural factors, and various accounting conventions such as inventory valuation methods used and income tax expectations. If its results are to be conclusive, a study of the effectiveness of strategic management would have to involve firms matched according to many factors such as these.

Another problem with this line of research is ascertaining what is meant by strategic management in individual firms. Much of the work already done has used the presence of "formal planning" as the independent variable to test for variations in measures of performance, the dependent variable. Mangers often maintain they are performing formal planning when in fact they are not. Indeed, one of our recent executives in residence claimed to do formal planning. When questioned further about his methods, he admitted that he plans while driving his car.

The fact that planning has, or has not, had an effect on a certain dependent variable chosen by the researcher does not mean that management did not perceive a positive effect on some other variable not tested by the researcher. For example, a management group might institute strategic management as a way to decentralize management functions. That no effect was demonstrated on, say, return on assets, would not mean that the process had not been "successful" or beneficial in some other way.

Another explanation for the lack of overwhelming consistency among planning-performance studies is the contention that financially successful firms are the ones that can afford the start-up costs incurred in initiating strategic management. Therefore, the argument goes, such studies are biased in favor of planning companies that were successful first and planners second.

STRATEGIC MANAGEMENT MODEL AND OUTLINE OF BOOK

We can look at strategic management as a process that generates certain outputs and requires certain informational inputs, as shown in Exhibit 1-1. Understanding strategic management is a matter of understanding the contents of and the relationship among these three components. To develop that understanding in this book, we take the strategic management process as our focus and discuss each stage by explaining its management activities, its input requirements, and the nature of the results or outputs of each stage, according to the factors modeled in Exhibit 1-2. Thus the chapters correspond to stages in the strategic management process, and each chapter discusses the various inputs and outputs of each stage.

Of course, in practice one does not necessarily follow the sequence of strategic management stages in this fashion. Managers might formulate goals and the means for achieving them (action plans) simultaneously, rather than attempt to accomplish one completely and then the other. Or some might view organization structure as a prerequisite for strategy; that is, structure might be established before strategy rather than strategy before structure.²¹ Still others might prefer to establish the portions of a control system first, before turning attention to the details of strategy formulation. (This could be the case, for example, where strict federal reporting requirements, such as for defense contracting, necessitate structuring the organization and its strategy around particular control features.) However, the sequence of strategic management process phases shown in Exhibit 1-2 represents a logical ordering of activities for expository purposes. This sequence is also similar to structures prepared by other authors. Whereas it serves to identify the milestones for students being introduced to it for the first time, it also could be used as the outline for analyzing an ongoing strategic management system or one portrayed in a case study.

Although this point is developed more fully in Chapter 3 on strategy formulation, it should be mentioned here that strategy consists of two parts--goals, and the associated action plans for meeting them. Thus in the process column of Exhibit 1-2, the strategy formulation block contains a section representing the process of goal formulation and another section for the process of action-plan formulation. When we discuss strategy formulation, we mean the development of both goals and action plans, or, as others have said, ends and means.
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Insert Exhibit 1-1 Here

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Insert Exhibit 1-2 Here

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Turning again to Exhibit 1-2, an early concern in strategic management is constructing a set of data (facts and supporting information) that defines present and expected influences on, and characteristics of, the organization. The major categories of information sources for this process are the organization's present strategic management elements (mission and goals and action plans for each of the various levels of strategy), relevant characteristics of present and forecast environment, and pertinent features of internal operations. Information generated by these analyses can be organized in a strategic data set according to whether it constitutes threats and weaknesses, or strengths and opportunities. These, in turn, can be further categorized as internal or external factors that are either positive or negative in nature. This process is described in Chapter 2 (simulation of such processes for purposes of case analysis is explained in the appendix to this chapter).

Mintzberg distinguishes between goal formation and goal formulation by noting that formulation involves a conscious individual decision process. Goal formation is accomplished by implication; individuals form goals implicitly by the decisions they make.²²

In the first part of Chapter 3, we are concerned with the process of goal formulation. It results in goals for an organization's performance that apply to the corporate, business, and functional levels of its operation. Refinement of goals requires understanding of the political processes at work in the organization as well as of the system of individual values and preferences that characterize its managers. Whatever facts and predictions make up a firm's strategic data set, they are filtered through these two influences.

The activity of deriving action-plan choices for the overall process of strategy formulation is described in the second part of Chapter 3. Just as political processes and personal values and preferences influence goal formulation, they also shape the ways in which strategy choices are made. Also, relevant portions of the firm's strategic data set constitutes vital information inputs to this process. Chapter 3's two appendices address merger and global strategy.

Chapter 4 discusses several approaches that have appeared in the literature to explain the processes by which strategies are evaluated and selected. Both existing and new strategies have to be evaluated to (1) determine their acceptability in the present time frame, (2) estimate how well they can be expected to meet future goals in light of the firm's pro forma data set, and (3) ultimately select the particular strategy set to be implemented. Thus either an existing or a new strategy can be rejected as a whole, retained as is, or retained with alterations. Of course, evaluation of existing strategy ideally would take place during the first stage of the strategic management process as part of the internal analysis; proposed new strategies could be evaluated only after formulation.

The formulation and content of six areas of functional strategy--marketing, finance, personnel, research and development, production, and external relations--are addressed in chapter 5.

Since functional strategy is formulated to put into motion strategies developed at higher levels, it logically could be called either a formulation or an implementation process. We have chosen the former for two reasons. First, there is a necessary interplay between the formulation of functional strategy and the formulation of the other levels of strategy. Second, even for those who consider functional strategy an implementation problem, it still must be formulated before it can be used to implement business and corporate strategy.

The next stage in strategic management is to implement the entire set of strategies. This process is explained in the first part of Chapter 6. Strategy implementation is essentially an administrative process; the other processes of strategic management are primarily analytical in nature.²³ Strategy implementation involves the structural and behavioral aspects of assigning responsibility for carrying out strategic components. It results in an organization structure, complete with appropriate vertical and lateral linkages specifically related to the strategy elements selected.

The final strategic management process, control, is discussed in the second part of Chapter 6. In practice, strategic control might be the first concern of the manager. Certainly the issues of how to establish performance standards, how to measure results, what corrective actions to take at what time, and other control problems should be considered throughout the strategic management process and not ignored until everything else is decided. Indeed, control issues may significantly influence the content of strategy. It is discussed last simply to be consistent with tradition.

In addition to all the other strategic management process outputs, strategic control takes as an input the technology of control available to the organization. For example, the advent of sophisticated microprocessor-based decision support systems (DSS), customized to the needs of a particular set of strategies, has resulted in many new control method possibilities. The absence of this technology in a particular firm, however, may severely limit the strategic control options available to its managers.

Output of the strategic control process consists of a feedback system that can modify strategic implementation and organization operations so as to alter either strategies or performance as might be reasonably necessary. Thus one category of input information at each stage of strategic management consists of control system output. In this way evaluation of current performance vis-a-vis the organization's current strategy is always included in the analysis of each stage.

MAJOR ELEMENTS OF STRATEGIC MANAGEMENT

Mission
Mission is the description of an organization's reasons for existence, its fundamental purpose. It is the guiding principle that drives the processes of goal and action plan formulation, "a pervasive, although general, expression of the philosophical objectives of the enterprise."²⁴ Mission should focus on "long-range economic potentials, attitudes toward customers, product and service quality, employee relations, and attitudes toward owners."²⁵ It provides identity, continuity of purpose, and overall definition, and should convey the following categories of information.²⁶

1. Precisely why the organization exists, its purpose, in terms of (a) its basic product or service, (b) its primary markets, and (c) its major production technology.²⁷
2. The moral and ethical principles that will shape the philosophy and character of the organization.
3. The ethical climate within the organization.

1. serves as a basis for consolidation around the organization's purpose.
2. provides impetus to and guidelines for resource allocation.
3. defines the internal atmosphere of the organization, its climate.
4. serves as a set of guidelines for the assignment of job responsibilities.
5. facilitates the design of key variables for a control system.

The mission statement must be believable in that the company's behavior should correspond to it over both the short and long term. In this way it can serve as the foundation for the development of respect for and pride in the firm by management, employees, owners, customers, suppliers, and others who interact with it.

Broad-based acceptance of the values represented by mission can lead to three characteristics of firms that accomplish this acceptance:

1. They stand for something--the way in which business is to be conducted is widely understood.
2. From the topmost levels of management down through the firm's organization structure to the lowest level of production jobs, the values are accepted by all employees.
3. "Employees feel special because of a sense of identity which distinguishes the firm from other firms."³¹

* Dupont: "Better things for better living through chemistry--a belief that product innovation, arising out of chemical engineering...
* Sears, Roebuck: "Quality at a good price--the mass merchandiser from Middle America.
* Dana Corporation: "Productivity Though people-- enlisting the ideas and commitment of employees at every level in support of Dana's strategy of competing largely on cost and dependability rather than product differentiation...
* Chubb Insurance Company: "Underwriting excellence--an overriding commitment to excellence in a critical function.
* Price Waterhouse and Company: "Strive for technical perfection" (in accounting).

Levels of Strategy
There is wide diversity in the strategic management literature of labels attached to the different levels of strategy that may exist in a firm. For example, Thompson and Strickland propose four levels: corporate strategy, business strategy, functional area support strategy, and operating-level strategy.³³ They go on to say,"Each layer [is]...progressively more detailed to provide strategic guidance of the next level of subordinate managers."³⁴

Lorange defines three levels for a typical divisionalized corporation: Portfolio strategy (corporate level), business strategy (division level), and strategic programs (functional level).³⁵ He defines the focus of each as follows:³⁶

1. Portfolio strategy: Developing the desired risk/return balance among the businesses of the firm.
2. Business strategy: Source of competitive advantage of a particular business relative to its competition.
3. Strategic programs: Bringing to bear functional managers' specialized skills on the development of programs.

Newman and Logan present two levels--business strategy and functional policy--for nondiversified firms, and a total of three (with the addition of corporate strategy) for diversified firms.³⁹

Higgins identifies four levels of strategy: societal response strategy (enterprise strategy), mission determination strategy (corporate level), primary mission strategy (business level), and mission supportive strategy (functional level). He defines their contents as follows:⁴⁰

1. Societal response strategy: how the firm relates to its societal constituents.
2. Mission determination strategy: the organization's field of endeavor.
3. Primary mission strategy: how the organization will achieve its primary mission.
4. Mission supportive strategies: how primary mission strategy will be supported.

Corporate level planning is that which involves identifying trends and formulating strategy in global, technical, and market arenas, responsibility for which rests with corporate headquarters in most cases. Sector level planning, where sectors represent national and technological boundaries, may involve several SBU's, product categories, or even product/service-based divisions of an organization. Shared resource unit planning calls for the development of strategies for activities of the business that are shared by SBU's or the various product-market focuses which the company might have.

Natural business units, "...are largely self-contained businesses with control over the key factors that govern their success in the marketplace--their market position and cost structure".⁴² Finally, product-market unit planning is the lowest level at which planning takes place and those activities that directly relate the company's output to its markets.

There are many other interpretations of the levels of strategy. They differ primarily in terms of the organizational levels to which they apply. Those discussed above and most of the others have a number of commonalities. First, the uppermost levels in each scheme tend to concern the problem of fitting the organization to its environment; lower levels address the problem of integrating functional areas in ways consistent with upper-level strategy. Second, the topmost level tends to involve structuring the set of acquisitions of divisionalized firms and is usually called corporate-level strategy. Third, they contain a business or strategic business unit (SBU) level of strategy that applies almost equally to a firm comprised of only one line of business and to the individual subsidiaries of multibusiness corporations.

Finally, the various schemes include a functional level of strategy that represents the ways in which functional departments are expected to respond to business-level and, in turn, corporate-level goals and action plans.

During the mid-1980s some authors began to include the fourth level: enterprise or societal goals and action plans. Societal strategy was intended to capture the essential ways in which the firm was expected to respond to goals related to the major social issues confronting it.

Interpreted fundamentally, then, there are four primary levels of strategy: societal-level, corporate- level, business-level, and functional-level. The concerns of societal-, corporate-, and business-level strategy are clearly cross-functional. That is, they contain implications for each of a firm's functional areas (although more distantly removed in the case of societal-and corporate-level strategy), whatever they may be and regardless of the type of firm. By contrast, functional area strategies are more operationally focused than the others. The process of determining how each functional area should be managed is a more specialized problem, defined largely by the practice and theory applicable to each functional (or operational) area. That is, the content of marketing strategy is the subject of marketing texts and courses, finance strategy can be found in finance texts and courses, personal strategy in personal texts and courses, and so on.

Societal Strategy
Societal strategy consists of goals and action plans of which the overall purpose is to guide the ways in which management intends the organization to respond to the major social demands placed on it. It is an explicit definition of the organization's social responsibilities: how it is expected to react to the demands of particular groups of external constituents. The recent emergence of this level deserves further explanation.

The idea of isolating social responsibility in a separate (from corporate, business, and functional) strategy level was introduced in 1979 by Ansoff and modified by Schendel and Hofer.⁴³ Ansoff presented it as follows.⁴⁴

The original concept of product/market strategy appears as only one component of a much broader concept. We might call it enterprise strategy, which is needed to integrate and relate the new dimensions of the strategic problems.

The development of societal legitimacy (or enterprise) strategy is Ansoff's proposed solution to the increasing importance of... socio-political variables in the life of the firm.⁴⁵ Included in these variables are "new consumer attitudes, new dimensions of social control and, above all, a questioning of the firm's role in society."⁴⁶ In other words, Ansoff suggests concentrating managers' attempts to deal with new liberal views about the social role of business, growing egalitarianism, and the proliferation of constrictive regulation, among other social demands, in a societal legitimacy strategy that specializes in matters of social responsibility. Actually Ansoff's proposal for enterprise strategy goes beyond social responsibility issues to include other substrategy areas. Schendel and Hofer limit its contents to social-legitimacy concerns because of their belief that the other strategy areas are effectively addressed within prevailing definitions of corporate-business-and functional-level strategies. Thus they recommend,⁴⁷

Enterprise strategy attempts to integrate the firm with its broader noncontrollable environment, not in terms of product/market matches in a narrower economic sense, but in the sense of the overall role that business, as one of society's important institutions, should play in the everyday affairs of society... More explicit attention will have to be given to (societal legitimacy strategy) in the future, just as Ansoff suggests, just as it has been necessary to separate corporate and business strategy considerations from the problems of functional area interpretation, over the past two decades.

However, some strategists may prefer not to institute this new strategy level, for reasons explained by Dill:⁴⁸ "There has been less turbulence in the environment for companies which have spent time over the years listening to and assessing what various internal and external constituencies have to say about the powers they are and are not willing to delegate to corporations and corporate management."

Stated differently, some managers may prefer to address all social legitimacy issues within the rubric of existing strategy levels. For them social responsibility concerns would be addressed within the fabric of goals and action plans at the corporate, business, and functional levels.

Our conclusion about the usefulness of enterprise strategy is that it should be employed by organizations that have particularly sensitive relationships with the environment. Firms such as utility companies, toy manufacturers, and educational institutions, for which an especially sharply focused public scrutiny has devolved, would be well suited for development of separate social-legitimacy goals and action plans. For others, whose society interaction is less controversial, matters of social responsibility might be handled more efficiently, and even effectively, within goals and action plans at the corporate, business, and functional levels alone.

We have included the societal legitimacy level of goals and action plans in Exhibit 1-2. However, the advisability of their formulation for a given firm as a distinct activity is intended to be a matter of judgment depending upon whether or not sufficiently poignant social issues either confront the firm at present, or are expected to do so in the future.

Corporate-Level Strategy
A corporation's portfolio of business units (SBUs) can vary in its desirability just as a financial manager's portfolio of investments can. The acceptability of a particular business portfolio is determined by assessing whether it reflects mission and expected strengths, weaknesses, threats, and opportunities (determined through environmental, industry, and internal analyses of each business unit) as well as values and political exigencies. Additions to and deletions from the present portfolio would then be expressed in merger and/or divestment strategy. Finally, these strategies would be implemented by the appropriate organizational units and the machinery would thus be activated to adjust the present portfolio.

The content of corporate-level strategy is a set of action plans and corresponding corporate-level goals (Exhibit 1-2) expressed in terms of the firm's collection of subsidiaries. By comparison, business strategy focuses on expected operational results of a business unit. However, it also consists of action plans that relate to goals (at the business level).

The substance of corporate-level goals and action plans can be summarized as follows:⁴⁹

1. Corporate-level goals: the desired portfolio of business units by the end of the firm's planning period.
2. Corporate-level action plans: how to get from the present portfolio to that targeted in (1) in terms of
1. business unit strategies to be retained.
2. additions of business units expressed as either growth strategy parameters (for "home grown" units) or merger and acquisition strategy.
3. business units to be divested.

1. Identifying, characteristics of each objective or target.
2. Each target's substantive threshold value; that is, the hurdle value upon reaching which the target will be considered attained (often stated as a specific value of the evaluative criteria).
3. Evaluative criteria to be monitored in order to measure the firms progress toward the target.
4. Time frame threshold value; that is, the date by which, or the elapsed time during which, the substantive threshold value would be reached.

1. The strategic posture represented by the strategy (see the section entitled " Alternative and Complementary Strategic Postures", in Chapter 3).
2. The firm's product market scope; that is, the nature of the products or services provided and the markets served by the firm.
3. Input-output transformations in which the firm is engaged; that is, the nature of the activities with which the firm adds value to its labor and material inputs and what those inputs are.
4. What synergies are sought in the operation of the firm.

When taken together, these elements of business-level strategy should combine uniquely to (1) define the business of the SBU or firm, and (2) describe its competitive edge. Thus strategy aligns the strategic business unit or firm relative to its competitors, distinguishes it from them, and hopefully propels it beyond them.

Functional-Level Strategy
In contrast with the other levels of strategy, functional strategies serve as guidelines for the employees of each of the firms's subdivisions. Which ones of these segments or functional areas are included in a firm's functional strategy set is itself a matter of strategy. For example, whether to have an R&D department or not in the first place is a strategic decision.

Functional goals and action plans are developed for each of the functional parts of the firm to guide the behavior of people in a way that would put the other strategies into motion. If part of a firm's business-level strategy were a target of a 10 percent increase in sales to be brought about by market penetration, for example, marketing strategy might include a change in compensation policy for salespersons and a specified increase in the advertising budget. In that way marketing strategy would provide some detail about how the marketing aspects of the market penetration action plan would be implemented. Similarly, financial strategy would consist of a set of guidelines on how the financial elements of the firm would be put into effect. Personal strategy, production strategy, research and development strategy, and appropriate other functional strategy areas would do the same.

The Nature of Strategic Decisions And Strategic Thinking
Although the process of creating strategy is often discussed as if it were an unconstrained design process, keep in mind that while strategists evaluate strategy, the firm is operating. This evaluation involves assessing the extent to which present strategy is meeting expectations. It may be the case that only a small part of, say, marketing strategy would have to be changed to correct a problem. In effect, then, such a change would constitute an acceptance of corporate- and business-level strategy, and also of the firm's functional strategy set. Marketing strategy would be all that was rejected. When a firm's performance is less than satisfactory, the reason often is a functional strategy shortcoming. One might say that a "good" business-level strategy would have been poorly implemented by part of its functional strategy set. For this simple example, a change in marketing strategy could improve performance while other levels of strategy would remain unchanged.

Alternatively, a problem with the nature of a firm's or SBU's business brought about by a major environmental opportunity or threat, a change in that level's goals set, or the development of some internal capability or weakness could necessitate a business-level strategy change. The new strategy would probably include vestiges of the old along with some unfamiliar elements. In most cases a whole new functional strategy set would likely have to be designed and put into effect to implement the new business-level strategy.

More generally, one could conceivably change parts of a firm's functional strategy set without changing business-level strategy. However, rarely would one expect to encounter the case in which a change in business-level strategy did not trigger the necessity to alter functional-level strategy in some way, at least not in a successfully managed business.

There is a risk of incorrectly identifying the strategy level at which a problem exists. A tendency exists in business to change functional-level strategies or organizational structure in a attempt to remedy any problem. Of course, if the problem existed within the firm's corporate-or business-level strategy, for example, changing functional-level strategy would not correct it. In fact, this move would most likely aggravate the situation. The reason for this tendency is probably that functional strategy changes are potentially less disruptive than changes in the other levels. They certainly would affect fewer people than modifications at the corporate or business levels.

The results of trying to solve a business-level strategic problem with a functional-level solution is well illustrated by the "big four" U.S. automobile companies. With overseas competitors exporting fuel-efficient automobiles to the United States, and with widely acknowledged shrinkages of fossil fuel supplies, they still stubbornly tried to retain their old business and corporate strategies, well into the 1970s, by changing market strategy only. A set of major environmental threats, particularly at the business level, was met by minor model changes and increased efforts to convince the car-buying public that big autos were what we all really wanted. During the 1970s and early 1980s, these companies finally began to respond to their business strategy problems with business strategy changes--major philosophical alterations in the nature of their businesses. If U.S. auto firms were to rely on small cars instead of traditional American big cars as their primary sources of growth, far-reaching changes in their functional strategy sets were also necessary. New growth rates, profit targets, market-share goals, and the like, along with related broad action plans that centered around contraction in many forms, were implemented along with new functional strategy. They included such things as cash rebates, Chrysler's government-guaranteed loan, employee layoffs, close cooperation with UAW officials, R&D efforts focused on producing smaller, less powerful engines as a primary effort rather than as an inconvenience.  The U.S. auto firms' strategy changes were finally implemented during a period of chaos. However, by then they were all in the red, and the doomsayers were having a heyday.

South claims that the key to successful strategic decisions is the creation of competitive advantage--selection of competitive areas within which success is clearly achievable.⁵¹ The Japanese have taught us that there are really two very different forms of competition: Reciprocal and strategic. Reciprocal competition is the traditional form in which companies in mature industries compete with other firms having similar strategic positions while attempting to distinguish themselves on the basis of operations. Many colleges and universities offer similar programs, with traditional facilities and are significantly different only in terms of the geographical areas within which they operate. Strategic competition, on the other hand, involves competing primarily by establishing superior strategic position. That is, the main concern of strategists is selection of a strategically advantageous posture which affords their organization a position of strength from which to do battle. Lincoln Electric Company has successfully differentiated itself on the basis of price and quality. Their industrial welding equipment is regarded as the top quality product of its kind and the firm has consistently passed along cost savings to customers in the form of low prices. As a result, Lincoln is very difficult to compete with because of its strong price position.

Following this set of ideas, then, strategic decisions are those which involve "clear and favorable differentiation from competitors," so that one's competitive advantage is tangible, measurable, and preservable.⁵²

Defining strategic thinking is made especially difficult by the absence of a consensus on what strategic management is. On the latter point, Gluck, et al commented, "hardly anyone yet fully understands what strategic management is, knows exactly how to do it, or can clearly define its benefits."⁵³ Their explanation of strategic management is that it is an approach to management which fuses strategic planning (plan development through analysis of environment, competition, and strategy choices) and the firm's system of operational decision making.⁵⁴ This process has five dimensions. First, strategic management requires a widely understood strategic planning process tightly interwoven with a strategically centered organization structure. Second, it requires widely discussed, analyzed and negotiated goal choices from which are culled out the ones that are not adoptable. Third, strategic management relies on the shared ability to think strategically by managers throughout the company. Fourth, a performance evaluation system is necessary that focuses top level evaluators' attention on critical positive and negative strategic factors. Finally, it requires a strategy supportive motivational system and value orientation among managers.⁵⁵ These qualities, they say, define a strategically managed organization. Four of these qualities are readily understandable. But still subject to question is what is meant by the ability to think strategically.

Strategic thinking is that which generates (1) creative, environmentally relevant ideas and (2) concepts about how to turn them into systematically managed action plans. It has the following prerequisites:⁵⁶

1. Input information is based on facts and logical data.
2. Previously unquestioned assumptions are sought out and examined.
3. A burning desire for resource conservation, and
4. Indirect, spontaneous, and unexpected thought processes which are hard for competitors to predict.

Finally, strategic thinking must be done without setting patterns which competitors can identify and anticipate. The problems of predictable strategic thinking are analogous to the football coach sending in plays to his quarterback using hand signals that are understood by the opposing team's coaches.

Evolution of Strategic Management within an Organization
Gluck, Kaufman, and Walleck propose a model of the evolution of strategic management within organizations whose managers have a propensity to plan.⁵⁷ The model (Exhibit 1-3) is based on a study undertaken by McKinsey and Company. Part of the reason for including a summary of their model here is to help students recognize the strategic management stage in which a particular organization might be. Such information may provide additional insight into the operation of the firm and help understand the degree of strategic management progress made by managers. More importantly, however, it may be useful in helping students understand strategic management as the highest level of a hierarchy of management activities.
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Insert Exhibit 1-3

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The McKinsey analysis discovered four quite distinct phases of strategic management evolution. In Phase 1, financial planning, management focuses on the preparation of budgets with an emphasis on functional operations. Most organizations have a budgeting process, in at least rudimentary form, as a way of allocating resources among functional units, subsidiaries, or projects. The second, forecast-based planning, follows naturally from the first as managers project budget requirements beyond the one-year cycle. This phase represents an effort to extend managers' attention beyond the immediate future as scenarios are developed which describe their expectations about future time periods. Budgets are often constructed for several years at a time and are rolled over annually so that the appropriateness of a budgeted amount can be reviewed several times before it is operationalized. Phase 2 planning is very "now" oriented. Current operations and characteristics are stressed in analyses of the firm and there is little attention to or patience for considering operational options or development of strategic changes. The business portfolio of a Phase 2 firm is often viewed as the final expression of strategy rather than as an input to the strategy formulation process. Current structure and business activities may be considered fixed, not as strategic variables.

Phase 3, external oriented planning, requires a significant change in management viewpoint. Planners are required to adopt an external orientation and tools and procedures for environmental and internal assessment. Concern centers on understanding the organization's environment and competitive position and generating ideas about how the company might better fit its environment. Several choices, contingency plans, are often devised for how the company might fit its environment. Lower level planners and managers are often involved in the process of generating choices, an activity that soon puts top management in the position of choosing a plan in which it had little involvement in developing.

Phase 4, strategic management, evolves as top management senses the need to more heavily invest in the planning process because of its lack of understanding of or involvement in the details of earlier plan development. Strategic management is the meshing of Phase 3 planning and operational management into one process. It is analysis and conclusion that takes place year-round and ties performance evaluation and motivational programs to strategy.

Deliberateness of Strategy
Sometimes outsiders impute strategy to the behavior of firms. Obviously, students analyzing case studies are placed in this position when they impute strategy from the data they are able to generate on the firm's operations. Similarly, journalists and the managers of competing firms may impute strategy to a firm's behavior; and it may or may not accurately reflect the real strategy in place.

Outsiders may also imply intent to an imputed strategy. That is, they assume not only that the strategy they imputed from the firm's behavior is the real strategy its employees are implementing, but they imply that this strategy is the one intended for the firm by its management. Seldom is this the case.

Mintzberg developed a taxonomy which is useful for discussing the realism and deliberateness of strategy.  First, he distinguished between strategy that is the result of a plan, and of a pattern of behavior. He referred to them as "strategy as plan" and "strategy as pattern," respectively. Strategy as plan is a chosen course of action; it could be a real strategy (one intended for implementation) or a ploy (a tactical move whereby a competitor may be influenced into making a mistake). Some people think that Coca-Cola's rumored change in Coke's formula in the mid-1980s was such a ploy. The implication is that Coca-Cola had not intended to really change the formula. Instead, it is thought, they publicized their plan to change formula, intoduced a new product with a different formula that tasted a lot like a competitor's product, and finally graciously conceded to continue producing the old formula product when the public demonstrated a preference for it over the new--"similar to a competitor's--" formula. (Incidentally, if this was in fact a ploy, it has to rank among the top marketing moves ever attempted by any business. Coca-Cola reaped an immediate increase in market share of about 15 percent that thrust them once again into unquestioned dominance in the huge U.S. softdrink market.)

Strategy as plan, when implemented, may or may not be what the firm ends up with. That is, the planned strategy could ultimately be either realized or unrealized. If it is realized, then the entire process would be a textbook case of strategy formulation and implementation in the sense that the firm successfully implemented what was intended.

But what happens if the planned strategy is implemented and, for some reason, the strategy that is realized is not the intended one? We might say that the planned strategy was unrealized, and the realized strategy (the one that seems to describe what the company is actually doing) arises out of some consistency in the behavior of the company. Mintzberg and Waters call this unintended realized strategy, "strategy as pattern," or a pattern in a series of actions by the organization. Strategy as pattern is what you will end up with when you impute strategy to the behavior of a company you are analyzing in a case study, or what journalists produce when they attribute a strategy to a company based only on its actions.

Thus, a realized strategy could be either a deliberate strategy as plan, or an "undeliberate" strategy as pattern. If the realized strategy was planned and also accurately described the firm's actions, then strategy as pattern and strategy as plan would be synonymous. However, when realized strategy is not intended strategy (that is, it was either not what was intended by management when they drafted a planned strategy, or they drafted no strategy at all), then it simply "grew" out of the activities of the company. In Mintzberg's terms, it "emerged" as a pattern of behavior in the absence of intension, or despite unrealized intentions.

The following diagram may help summarize these important distinctions:

Intended Strategy----->Deliberate------\ | \ | \ Unrealized >--Realized Strategy / Strategy / Emergent------/ Strategy

A realized strategy is what a company is actually doing. If it is the one intended by management, then it is deliberate If not, then the intended strategy was unrealized, and the realized strategy is emergent. An emergent strategy is, by definition, not deliberate. However, a manager may choose not to consciously formulate strategy and, instead, "go with" the emergent one. But even here, the resultant emergent strategy would not have been deliberate in the same way an intended strategy would have been.

Often it is convenient to distinguish between intended and emergent strategies. When management performs no strategic management at all, they still will have a realized strategy that is emergent. This emergent strategy could be recognized by outsiders (and insiders for that matter) even though it may not have been intended my management.

Contingency Strategies
Managers may develop several versions of strategy, each of which is intended to fit a different environmental scenario. An environmental scenario consists of a set of environmental characteristics that describe a firm's external circumstances. By structuring external variables into sets of related variables, different scenarios result.

Thus several scenarios (usually three) can be arrayed on a probability distribution for which the horizonal axis is a measure of the extent to which they are viewed as "good" or "bad"--supportive or not supportive--to the firm. In Exhibit 1-4, the scenarios that fall on the left side of the distribution are considered pessimistic (undesirable but only a small probability that they might have to be dealt with); those on the right as optimistic (desirable but probably will not materialize either); and those in the middle as most likely to occur and having some good and bad features.

Next a strategy set is established for each scenario. These could be entirely different strategies or variations of one. Evaluative criteria then are formulated for each scenario. These are variables to be monitored in order to figure out which of the scenarios is going to apply in the future. Actually this is a matter of deciding whether the present scenario will continue to be the best description of the firm's environment or, instead, if one of the others seems to be emerging as most correct. By identifying critical values for evaluative criteria, the strategist knows beforehand under what set of conditions to switch from the present strategy set to the pessimistic or optimistic set.

INSERT EXHIBIT 1-4

Summary
This chapter serves to familiarize the reader with the underlying principles of strategic management and to outline the path through that field taken by the chapters. First, the history of strategic management as an academic discipline is reviewed to provide perspective on its current stage of development. Next, the chapter summarizes the results of some of the major studies conducted to answer the question "Does strategic management pay off?" Also discussed in this section are the primary methodological problems encountered in doing such research.

The heart of the chapter is the next section, in which the strategic management model followed in the book is presented and explained. The elements of the model are linked to the book's chapters in this section. Then the content and role of mission are presented. The mission statement is considered an input to the strategy formulation process, which is outlined in the next section. Strategy at four organizational levels comprise the focus of this section and the book's text. They are the enterprise, corporate, business, and functional levels.

The last section of this chapter discusses how strategic decisions differ from other types of decisions and how contingency strategies are structured.

The chapter's appendix is an important part of the fabric of the text. It outlines in detail our approach to case analysis. This approach is closely related to the processes of strategy formulation and implementation that would be followed in practice.
References
1. Dan Schendel and Charles A. Hofer, eds., Strategic Management: A New View of Business Policy and Planning (Boston: Little, Brown, 1979), pp 7-8.
2. See Keith Davis and Robert L. Blomstrom,Business, Society and Environment: Social Power and Social Response,2nd ed. (New York: McGraw-hill,1971), Chapter 2 and discussions of the use and effects of pluralism.
3. Ibid., p. 26
4. Schendel and Hofer, Strategic Management, p.10
5. Ibid., pp. 8-11
6. Ibid., pp. 10-11
7. See Michael A. Hitt, R. Duane, and K. A. Palia, "Industrial Firms' Grand Strategy and Functional Importance: Moderating Effects of Technology and Uncertainty," Academy of Management Journal, vol. 25, no. 2, pp. 256-298, June 1982, for a recent analysis of this question.
8. H. Igor Ansoff, "The Changing Shape of the Strategic Problem." in Schendel and Hofer, Strategic Management, pp. 30-44.
9. Ira C. Magaziner and Robert B. Reich, Minding America's Business: The Decline and Rise of the American Economy (New York: Harcourt, Brace, Jovanovich. 1982), pp. 135-142.
10. "Why Companies Grow," Nation's Business, November 1957, pp. 80-86.
11. Stanley Thune and Robert House, "Where Long Range Planning Pays Off," Business Horizons, August 1970, pp. 81-87.
12. J. Eastlack, Jr., and P. McDonald, "CEO's Role in Corporate Growth," Harvard Business Review, May-June 1970, pp. 150-163.
13.David Herold,"Long Range Planning and Organizational Performance: A Cross Validation Study," Academy of Management Review, March 1972, pp. 91-102.
14. Leslie W. Rue and Robert Fulmer, "Is Long Range Planning Profitable?" Academy of Management Proceedings, 1972.
15. Robert D. Wood, Jr., and R. Lawrence LaForge, "The Impact of Comprehensive Planning on Financial Performance," Academy of Management Journal, vol. 22, no. 3, pp. 516-526,
16. Delmar Krager and Zafar Malik, "Long Range Planning and Organizational Performance," Long Range Planning, December 1975, pp. 60-69.
17. E. A. Kallman and H. J. Shapiro, "The Motor Freight Industry: A Case Against Planning," Long Range Planning, April 1978, pp. 81-86.
18. R. Kudia, "The Effects of Strategic Planning on Common Stock Returns," Academy of Management Journal, vol. 23, no. 1. pp. 5-20. 1980.
19. Milton Leontiades and A. Tezel, "Planning Perceptions and Planning Results," Strategic Management Journal, vol. 1. no. 1. pp. 65-75. 1980.
20. David Burt," Planning and Performance in Australian Retailing," Long Range Planning, June 1978, pp. 62-28.
21. For a discussion of the chronology of strategy and structure, see Jay R. Galbraith and Daniel A. Nathanson, "The Role of Organizational Structure and Process in Strategy Implementation," in Schendel and Hofer , Strategic Management , pp.249-283.
22. Henry Mintzberg, The Structuring of Organizations (Englewood Cliffs, N.J.: Prentice-Hall, 1979), p. 443.
23. Schendel and Hofer, Strategic Management, p. 16.
24. Glenn A. Welch, Budgeting: Profit Planning and Control, 4th ed.,(Englewood Cliffs, N.J.: Prentice-Hall, 1976), p.63.
25. Ibid., p.64.
26. Welch, Budgeting, p. 64 citing Stewart Thompson, Management Needs and Philosophies, Research Study No. 32 (New York American Management Association, 1958), p. 9, and Alfred W. Schoennauer, The Foundation of Implementation of Corporate Objectives & Strategies, Research Series (Oxford, Ohio: The Planning Executives Institute, 1972).
27. Ibid.
28. Adopted from W. I. King and Clelland, Strategic Planning and Policy (New York: Van Nostrand Reinhold, 1979), p. 124.
29. Terrence E. Deal and Allan A. Kennedy, Corporate Cultures: The Rites and Rituals of Corporate Life (Boston : Addison-Wesley, 1982), pp. 13-15.
30. Ibid., p. 14.
31. Ibid., P. 22.
32. Ibid., pp. 23-28 (examples paraphrased with permission).
33. A.A.Thompson, Jr., and A.J. Strickland, III. Strategy and Policy: Concepts and Cases (Plano, Texas: B.P.I..,), pp.50-51.
34. Ibid., p. 50.
35. P. Lorange, Corporate Planning: The Educative Viewpoint (Englewood Cliffs, N.J.: Prentice-Hall, 1980), pp. 18-21.
36. Ibid.
37. Ibid., p. 21.
38. C.W. Hofer et al., Strategic Management (St. Paul, Minn,: West, 1980), pp. 11-15.
39. W.H. Newman and J.P. Logan, Strategy, Policy and Central Management, 8th ed. (Cincinnati: South-Western, 1981), pp. 352-356.
40. James M. Higgins, Organizational Policy and Management: Text and Cases, 2nd ed.(Chicago: Dryden, 1983), pp.4-5.
41. Frederick Gluck, Steven Kaufman, and A. Steven Walleck,"The Four Phases of Strategic Management," The Journal of Business Strategy, vol. 2, no. 3 (Winter 1982), 17 & 18, 20 & 21.
42. Ibid., p. 21.
43. H. Igor Ansoff, The Changing Shape of the Strategic Problem," in Schendel and Hofer, Strategic Management, pp.12 and 38, and the comments in William Dill's commentary in the same publication (pp. 47-51). An example of another text in which this new level appears is James M. Higgins, Organizational Policy and Strategic Management (Chicago: Dryden, 1983), pp.4-5.
44. Ansoff, "The Changing Shape, p. 35.
45. Ibid., p. 43.
46. Ibid.
47. Schendel and Hofer, Strategic Management, p. 49.
48. Dill, "Commentary," in Schendel and Hofer, Strategic Management, p. 49.
49. A similar interpretation is presented by Newman and Logan, P. 354 (paraphrased with permission).
50. For an excellent discussion of the strategic goal formulation process see C.H. Hofer et al., Strategic Management (St. Paul, Minn,: West, 1980) pp. 9-11.
51. Steven E. South, "Competitive Advantage: "The Cornerstone of Strategic Thinking," The Journal of Business Strategy, vol. 1, no. 4(spring 1981), pp. 15-25.
52. Ibid., p. 17.
53. Gluck, et al, p. 9.
54. Ibid., p. 16.
55. Ibid.
56. Ibid., p. 18.
57. Ibid., pp. 10-18.