Scanned with CamScanner Bloomberg Businessweek BATTLE THE OF August 19, 2019 LACROIX WAS ONCE THE DARLING OF SPARKLING WATERS. TODAY IT’S STRUGGLING AGAINST A CROWDED MARKET AND A RAFT OF LAWSUITS BY LAUREN ETTER AND CRAIG GIAMMONA PHOTOGRAPHS BY SARAH ANNE WARD Bloomberg Businessweek 42 August 19, 2019 hen the value of Nick Caporella’s company, National Beverage Corp., reached $2 billion in the spring of 2016, its top executives raised a congratulatory toast not with Champagne, but with cans of LaCroix, its marquee brand of flavored sparkling water. That summer, Caporella wrote a press release attributing the recent success to “Genius innovation!” By April 2017, the company was worth $4.1 billion. It’s been a thrilling ride for LaCroix, which for more than two decades languished in obscurity on the bottom shelf of the water aisle, in the shadows of Perrier’s and S.Pellegrino’s green glass bottles. Around 2013 the brand began rising from the dust that had been collecting on its 12-packs as consumers collectively shunned sugary sodas. Over the next five years, LaCroix’s sales jumped almost eightfold, accelerated by a social media machine that excited young people with its Instagrammable rainbow of cans and zero-­additive innocence. “They were really the first large brand to go after millennials that way and target their health and wellness concerns,” says Alexander Esposito, a research analyst at Euromonitor International. LaCroix is still the king of the sparkling water aisle, but the competition is crowding in. Last year, PepsiCo Inc. released Bubly, a sparkling water backed by a marketing arsenal that LaCroix has struggled to match. In 2017, Coca-Cola Co. paid $220 million for Topo Chico, a Mexican mineral water with a cult following. Meanwhile, a legion of startups has rolled out “craft” sparkling water brands that promote artisanal ingredients, antioxidant boosts, and cannabidiol infusions. LaCroix’s sales for the four weeks ended July 14 fell more than 15% from the prior-year period, even as its main competitor, Bubly, saw sales surge 96%, according to Bloomberg Intelligence. Then things only got more combative for National Beverage. It’s been sued by shareholders and former employees, and reports of internal strife and personality clashes suggest deeper problems. Interviews with a dozen current and former employees, executives, and business associates describe Caporella as a hard-driving, idiosyncratic boss. Even though National Beverage is publicly traded (its ticker is FIZZ), he retains ultimate control. He’s chairman and chief executive officer, owns almost 74% of the company’s shares, and even pilots his own corporate jet. As the stock has plummeted, his net worth has fallen from $4.7 billion to about $1.9 billion. The siege phase of the water wars has begun, and LaCroix is behind the castle walls. called Burnup & Sims Inc. Within 10 years, he was named CEO. Caporella got into the soda industry in 1978, when he sought to diversify Burnup’s business by purchasing a chain of drive-in movie theaters and a soft-drink bottling plant. He defended the company fiercely through the 1980s, as the corporate raider Victor Posner acquired shares and incited a shareholder revolt, a saga that appeared regularly in the New York Times and the Miami Herald. In 1985, Caporella created National Beverage, headquartered in Fort Lauderdale, to purchase Sara Lee’s Shasta soda brand, later using the new company to buy enough Burnup shares to dilute Posner’s stake and effectively end the takeover attempt. National Beverage also added Faygo, Big Shot, and other sodas. Meanwhile, in 1992, WinterBrook Beverage Group in Seattle purchased a sparkling water called LaCroix from G. Heileman Brewing Co., a bankrupt beermaker in La Crosse, Wis. When WinterBrook too filed for bankruptcy four years later, National Beverage swooped in to acquire the company’s assets, including LaCroix, which at the time was sold in bottles and came in three flavors—pure, lemon, and lime. Caporella became entirely devoted to his beverage business, a transformation he once described as “being reborn.” National Beverage’s portfolio grew to include Creepy Coolers soda and VooDoo Rain, an herbal drink with flavors called Moon Glow and Lucky Devil that’s packaged in psychedelic colors. Caporella added juices such as Mr. Pure and rolled out Rip It energy shots. In the early 2000s, the company expanded distribution of LaCroix in cans. It also unveiled a new logo with a calligraphic font and brushstroked waves, which Caporella personally helped design, according to two longtime business associates. He also boosted the carbonation so the fizz would retain its “bite.” This served to contrast LaCroix with the more lightly carbonated mineral waters on the market, says Bill Phillips, a former president at National Beverage who began working with Caporella in 1985 and remains an adviser to the company. In 2006, Beverage Digest released a report showing that soda sales in the U.S. had declined for the first time in two decades, as consumers grew concerned about obesity and Type 2 diabetes. That year, LaCroix staked out an early position as a health-­ conscious alternative to soda, becoming a sponsor of the Susan G. Komen Breast Cancer Foundation. Still, the brand languished amid National Beverage’s syrupy bacchanal. In 2010 the company’s annual report described Shasta and Faygo as its “flagship brands” and barely mentioned LaCroix. Even as LaCroix gained steam, longtime executives reminded Caporella not to forsake the company’s roots. “I would say to him, ‘It’s great to be behind it a hundred percent, but we should remember to dance with the one who brung us,’ ” says Dennis Thompson, another former longtime National Beverage executive. “This company was built on soft drinks.” In the meantime, a small team of executives quietly began working to revitalize LaCroix. They decided to market it as different from both elegant mineral waters and sugary sodas, “WE’RE LACROIX. THEY NEED US MORE THAN WE NEED THEM” ver 35 years, Caporella turned a family construction business into a sparkling water dynasty. Born in the western Pennsylvania town of Connellsville to Italian immigrant parents, he was raised in a home built above a coalash dump. As a boy he earned money by selling scrap metal and coal pieces he’d collected alongside the railroad tracks. His father, a miner, later moved the family to South Florida and began working in construction. In the 1960s, Nick founded his own construction company, Caporella & Sons, which was later purchased by a telecommunications conglomerate DATA: EUROMONITOR INTERNATIONAL Bloomberg Businessweek aiming squarely at diet soda drinkers. The company expanded LaCroix’s distribution outside its traditional regional markets and into major retailers such as Target and upscale national grocers like Whole Foods that would prominently feature the product. By 2013, National Beverage was touting “double-digit volume gains” for LaCroix. Even though Caporella had largely stepped back from daily duties and handed over operations to his son Joe, he remained intensely focused on LaCroix, which one former employee describes as “his baby.” He took classes in graphic design and flavor development, worked on package designs, visited the flavor lab in California, and conceived of marketing the iconic grapefruit flavor as “pample­mousse,” according to his associates. In 2014 he oversaw the release of LaCroix’s first major spinoff, Cúrate, which was packaged in taller, slimmer cans and featured flavors like “cerise limón” and “pomme bayá.” The brand relied on Instagram, Twitter, and recipe blogs instead of traditional advertising. Brides posted pictures of themselves with LaCroix on Instagram, and hashtags such as #LaCroixLove and #LiveLaCroix started trending. Fans posted locations of where to buy the newest flavor, sending consumers on treasure hunts. Whole Foods bakeries made cakes shaped like LaCroix boxes. A turning point was 2015, when the New York Times Magazine published a “Letter of Recommendation” for LaCroix. “Aside from the can, everything about LaCroix is gentle,” it read. “Even the bubbles are small and frothy rather than spiky—a Vinho Verde, not a cava—­making it easy to put away a couple in one sitting, totally guilt-free.” Over the years, LaCroix rolled out a rainbow of flavors—cola, passion fruit, key lime, hibiscus—to keep consumers’ attention and excitement high. Soon cases of LaCroix were bursting from the endcap towers of supermarkets, which became Instagramworthy tourist attractions in their own right—one was formed in the shape of the Empire State Building. As LaCroix took off, so did Caporella’s personal wealth. The taste of victory drew him deeper into the fray. “The faster it grew, the more excited he got,” Thompson says. Caporella became more hands-on with the marketing of the brand, to the point where every decision—from the testing of new flavors to the timing of product releases—had to be approved by him, according to former employees. His domination rubbed some the wrong way—and led to intense personality clashes. Around the same time, top LaCroix executives began leaving. In 2016, BevNet, an industry publication, printed a story with the headline “National Exodus” that described how two LaCroix executives left for a competitor, prompting Caporella to sue. A third, Vanessa Walker, LaCroix’s longtime marketing executive, who was instrumental in building the brand, left and ultimately started Millennial Brands Consulting, Inc. National Beverage executives in Florida treated LaCroix as a delicacy. Company meetings included “tasting ceremonies” complete with unsalted crackers to cleanse the palate, bottles of still water to swish, and coffee beans to sniff. Caporella often referred to LaCroix as “the Tiffany of sparkling water.” Breathlessness is his trademark style, and he writes most of National Beverage’s annual reports and press releases August 19, 2019 RETAIL SALES OF CARBONATED WATER, SELECT BRANDS ◼ Flavored carbonated water ◼ Unflavored carbonated water $800m LaCroix $318m Perrier S.Pelle grin o Per rie r $214m Fruit2 O Polar $169m Schw eppe s Topo Ch ico $118m $103m Poland Spring Canada Dry $66m $46m $41m $40m $39m 20132018 himself. In one from 2015, he wrote that the company was in a stage of “metamorphic” transition. “Ultimately, this evolution will generate our true value while significantly improving the health of our society! What a gratifying bouquet of goodness for everyone.” Caporella was so confident in his ability to transform water into money that he’d made a personal investment in Smuttynose Brewing Co., a famed New Hampshire craft brewer, according to four people familiar with the transaction. In 2017, with Smuttynose and other craft brewers facing a downturn in the market and LaCroix enjoying some of its headiest days, Caporella dispatched George Bracken and Rod Liddle, two National Beverage executives, to the brewery. A spokesman for National Beverage says Bracken and Liddle are technically employed by a separate entity, called Corporate Management Advisors Inc., a management services company Caporella owns. The pair helped Smuttynose with its financial statements and hammered out financial models they hoped would save the brewery—and Caporella’s personal investment. Ultimately the brewery fell into foreclosure. That same summer, LaCroix competitors began circling. or all the genius Caporella once attributed to LaCroix, it turns out that just about anyone can inject carbon dioxide into water, flavor it, and package it. By 2017, Coca-Cola had introduced its sparkling varieties of Dasani and Smartwater. PepsiCo’s Bubly generated serious social media buzz, and that was followed by a Super Bowl ad featuring 43 Bloomberg Businessweek 44 Michael Bublé. (Get it?) A little more than a year in, Bubly has surpassed $170 million in sales, and its share of the ­sparkling water market has jumped about 3 percentage points, to 7.7%. What’s more, LaCroix can’t match the distribution heft of the beverage giants like Coke and Pepsi, which send convoys of trucks directly to stores and restaurants in the U.S. National Beverage depends largely on retailers picking up the product from warehouses. That limits LaCroix’s reach, analysts say. A flood of private equity money has backed other competition, including Spindrift, the Boston-area startup that lured away National Beverage executives. It touts “farm to bubble” flavors extracted from real fruit juices. Waterloo Sparkling Water Corp., from Texas, promises “a bigger, brighter bubble.” Pep Talk, out of Minneapolis, has “energetic bubbles” (i.e., caffeine). Mountjoy Sparkling, from Petaluma, Calif., boasts no carbs, no sugars, and “fast-acting” CBD. With so much money sloshing around, another, bigger bubble could be forming, but until it pops, LaCroix has a bull’seye on its back. “There’s more share to be taken from LaCroix because they’ve had the top spot for the longest time,” says Brandon Cason, Waterloo’s co-founder and chief marketing officer. His company is seeking to compete primarily on flavor. “If you’re drinking a LaCroix, there’s a hint of a flavor, but it’s very tinny, it’s very thin. There’s not a lot there,” Cason says. A Waterloo in-house food scientist has helped develop flavors that Cason calls more “realistic” and “delightful,” such as a grape modeled after the grape soda of his youth and a watermelon he says is “playful, almost like a Jolly Rancher.” With all this competition, LaCroix’s market share in the four weeks ended June 16 had dropped by almost 4 percentage points from the same period in 2018, to 14.5%, while Bubly, Spindrift, and Waterloo saw their market share increase, according to data from Bloomberg Intelligence. And whereas analysts once viewed National Beverage’s sugary soda brands as a drag on the company, LaCroix has become the cause for worry. Based on Nielsen data, sales are now falling faster than those of the company’s soda categories, says Sean King, a U.S. beverage analyst at UBS. he 83-year-old Caporella rarely discusses details of his life, even with his closest advisers; he declined multiple interview requests for this story. A number of former employees, executives, and business associates agreed to speak about him only on condition of anonymity, citing fear of retribution. These people say he almost never shakes hands; upon greeting people, August 19, 2019 he clenches his fist and offers a “pinkie shake.” Employees ­preparing to meet him for the first time are coached not to speak to him unless spoken to first. Multiple people describe a man who could explode at any moment, berate anyone who crossed his path, and veer into what some describe as verbal abuse. “If somebody made a mistake, it would be ‘you’re a good-for-nothing’ or ‘you’re an expletive this and an expletive that,’ ” says a former employee. In meetings, Caporella often speaks for the duration, regaling managers with tales of his battles and successes, to the point that they’re known internally as “Nick Parables.” Top managers are urged to write “letters to the chairman” congratulating Caporella whenever the company achieves something big, such as a stock price high. They’re also expected to write apology letters if, say, they come unprepared to a meeting. Few dare incur Caporella’s wrath or that of his son by challenging them. Anything short of adoration for one of Caporella’s new package designs could result in being excluded from future meetings. Disagreement could be met with a stern reminder that LaCroix was “M-I-N-E,” according to a person who heard him say it. With National Beverage’s resurgence, some employees began to feel that the celebration of LaCroix, at least internally, had become more like worshipping in the Cult of Caporella. They recall a Thanksgiving event that turned into a “Nick love fest.” It was “This is Nick’s brainchild, this is Nick who’s gotten us to where we are,” one former employee says. “It was all about Nick and the money that was being generated because of Nick.” The company, which employs 1,640 people, disputes this characterization, as do some current and former associates. “I’ve seen Nick not happy with outcomes of things,” Phillips says. “But I’ve never heard him raise his voice.” He and Thompson say in meetings Caporella can be critical and “harsh” toward his son Joe, but the tough love doesn’t extend to others. “Nick is passionate and can be demanding of himself and others, but is always fair and level-headed in dealing with people,” Bracken said in an email. Even some of Caporella’s strongest critics acknowledge his generosity. Every Christmas, he hands out gift bags to employees containing a h ­ oney-baked ham. He recently sat on a fundraising board for St. Jude Children’s Research Hospital. n late 2017, the biggest sparkling water brands began flooding the market with heavily discounted products. Retailers in turn asked for discounts on LaCroix and more in-store spending to continue prominently displaying the Bloomberg Businessweek brand. National Beverage instead raised prices of LaCroix and in some cases reduced spending on promotions, befuddling employees and retail partners, according to three people ­familiar with the strategy. As LaCroix’s biggest rivals dipped into their massive marketing budgets, National Beverage’s historically spare marketing spending slipped as a percentage of sales, according to company filings. The Caporellas maintained that LaCroix was beyond reproach. “The arrogance level reached an all-time high,” says a former employee. “They’d say, ‘We’re LaCroix. They need us more than we need them.’” In 2018 top managers at Whole Foods, a major LaCroix customer, called their bluff. They’d implored the Caporellas to provide concessions to the retailer as a way to secure prominent positioning in the stores, according to three people familiar with the negotiations. In particular, the company wanted LaCroix to match the aggressive discounts and promotions being offered by the new brands. When the company didn’t yield, Whole Foods eventually decided to reduce the number of prominent in-store LaCroix displays and replace them with its competitors’, according to people familiar with the decision. A Whole Foods spokesman declined to comment. Phillips says he didn’t have firsthand knowledge of the Whole Foods incident, but noted that Caporella has long had an aversion to making concessions for even his biggest retail customers if it requires taking a hit on margins. “One of the things that helped save the company before LaCroix is that Nick is first and foremost a businessman,” he says. “The overwhelming philosophy in the past has been that you really can’t start taking an individual retail customer and cutting them a sweetheart deal.” As Caporella worked internally to maintain a grasp on the brand, outside problems mounted. In July 2018 the Wall Street Journal reported on two lawsuits previously filed by former co-pilots of Caporella’s who sued him for sexual harassment and an alleged “hostile work environment” in the cockpit of his Falcon 2000EX airplane. One of the pilots claimed that Caporella slapped him in the face and subjected him to “angry tirades,” and that after complaining about it he was told by Caporella and others that he’d have to write a “letter of apology” to retain his job, according to the lawsuit. The company denied the claims. National Beverage settled the lawsuits, without admitting liability, and the pilots retracted their allegations and said they were “factually unsupportable.” Despite that, shareholders have sued Caporella and National Beverage, arguing among other things that the company failed to tell investors about alleged workplace misconduct, including the conduct reported by the pilots. The company has called these claims “nonsense” based on unadjudicated and retracted allegations. In October 2018, National Beverage was sued by a consumer whose lawyers argued the “all-­natural” claim printed on LaCroix’s cans was misleading because it allegedly contains synthetic “chemical compounds,” including an ingredient “used in cockroach insecticide.” After the lawsuit was filed, the stock dropped, and by the end of the year it had fallen 32%. Then, this January, a second lawsuit was filed, on grounds similar to those of the first. The company responded in court that the claims were “nothing more than a vicious attack” and reiterated that August 19, 2019 “National Beverage properly labels LaCroix sparkling water, and LaCroix sparkling water is created from natural ingredients.” y the spring of 2019, National Beverage executives were referring internally to the situation as a crisis, according to documents Bloomberg Businessweek reviewed. In March, the quarterly earnings report showed revenue had fallen for the first time since 2014, leading Caporella to issue one of his most unconventional statements yet. “We are truly sorry for these results,” he wrote. “Negligence nor mismanagement nor woeful acts of God were not the ­reasons—much of this was the result of injustice!” His missive did little to assuage the concerns of traders, who sent the shares spiraling once again. Currently, more than half of the company’s available shares are in the hands of short sellers, according to Bloomberg Intelligence. In June a former LaCroix ­executive, Albert Dejewski, sued National Beverage for wrongful termination. A former senior director at Pepsi and marketing vice president at Chobani, Dejewski alleged that he’d been fired in retaliation for raising concerns earlier this year about the company’s plans to publicize its transition to cans free of the liner containing the chemical bisphenol A, or BPA. The lawsuit said that Joe Caporella, under pressure to “drive positive buzz and awareness for the suffering brand,” had planned to “prematurely announce that LaCroix cans would be BPA-free going forward” despite the company being “months away” from replacing the cans. This was because National Beverage had a “large stockpile” of LaCroix in cans with the BPA liners, “which the company planned to use,” according to the suit. The filing detailed that on April 10, Dejewski had written an email to Joe saying he was concerned about the impending announcement. In response he received an angry email from Joe saying, “Don’t know how you heard about BPA, but tell your source if they want to stay with the company, what’s said in Ft Lauderdale, stays in here!” Dejewski was fired the following day. Today, National Beverage states on its website that “as of April 2019, all cans produced for LaCroix products were produced without BPA liners.” National Beverage has taken steps to contain the damage. In March the company named Joy Bauer, a well-known dietitian and expert on the Today show, an ambassador for the brand. The following month the company announced it was introducing LaCroix in the U.K. But Kenneth Shea, a senior beverage and consumer analyst at Bloomberg Intelligence, says he doesn’t see a “quick fix” for LaCroix, largely because the company’s competitors are “tougher” than they’ve ever been in this category and appear to be in it for the long term. Caporella can’t simply outwait his enemies. Laurent Grandet, a consumer analyst at Guggenheim Partners, says it isn’t enough to roll out another flavor or a d ­ ifferent-shaped can. The company needs to think about how it can “disrupt the market,” he says, perhaps by introducing its own premium ­sparkling mineral water to compete with Topo Chico and Perrier, or using specialty ingredients such as real fruit juice. Caporella once wrote in an annual report that innovation “runs as liquid miracle through the arteries of Team National.” For LaCroix, another liquid miracle can’t come soon enough. 45 Copyright of Bloomberg Businessweek is the property of Bloomberg, L.P. and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder’s express written permission. However, users may print, download, or email articles for individual use. ◼ BUSINESS Bloomberg Businessweek Cathay’s compromise could encourage Beijing to further suppress free speech and expression among Cathay staff—and possibly among workers at other big Hong Kong companies. “This can be really dangerous,” Choy says. “It can lead to even stronger anti-Beijing sentiment in society and more social unrest.” Still, the public drubbing of Cathay was an intentional show of government might. “The message China wanted to send was that they have the power and the will to do what they want to do,” says Shukor Yusof, founder of aviation consultant Endau Analytics. “Cathay is caught between a devil and the deep blue sea. Like many others in Hong Kong, the future of the airline is in China.” �Blake Schmidt, Shirley Zhao, and Kit Chellel live elements that many viewers find irresistible. “Crime is hot,” says Scott Robson, an analyst who follows television for S&P Global Market Intelligence, citing everything from crime-focused networks, such as Investigation Discovery, to the surge in serialized crime podcasts. Live PD added a new twist: unpredictability. “With the live format,” Robson says, “you never know what’s going to happen next.” The show, now in its third season, is often the No. 1 program on American cable TV on Friday and Saturday nights. A&E is one of only two cable channels to show growth in 18-to-49-year-old viewers since September 2018, along with TLC. A&E, jointly owned by Walt Disney Co. and Hearst Corp., runs six hours of new Live PD episodes a week. There are hours more of reruns and seven spinoffs, including Live PD Presents: Women on Patrol and Live Rescue, which focuses on firefighters and other first responders. Top Dog, which features police dogs competing on an obstacle course, is set to make its debut in the fall. In a way Live PD is a return to the network’s heyday six years ago when it thrived on red-state reality shows such as Duck Dynasty and Dog the Bounty Hunter. Programming at A&E—which had started out showcasing fine arts such as opera and classical dance in the 1980s—drifted after those reality hits ended, and the channel even toyed with scripted dramas. In 2017, less than a year after Live PD’s debut, A&E canceled all its scripted shows and went all-in on reality. Says A&E President Paul Buccieri: “We think we’ve struck a real opportunity with live unscripted storytelling.” Live PD has flown largely under the radar of national media. That’s partly because police departments in New York, Los Angeles, and Chicago haven’t been interested in participating. “I think that more people in other parts of the country are probably touched by law enforcement,” says the show’s host, longtime network TV legal commentator Dan Abrams. “They have friends, relatives that are in some ways connected to it.” Live PD is the creation of Big Fish Entertainment, a production company acquired last year by MetroGoldwyn-Mayer Inc. Prior to Live PD, Big Fish was best known for shows such as VH-1’s tattoo parlor reality show Black Ink Crew. Company founder Dan Cesareo says his team got the idea for Live PD after reading an article about how police were streaming arrests on Twitter. The nation had been roiled by protests over police killings of unarmed suspects such as Michael Brown in Ferguson, Mo. Cesareo pitched the program to police chiefs as a way for the general public to see the whole story, not just clips that end up on the evening news. He’s still THE BOTTOM LINE Cathay Pacific, which gets half its revenue from Greater China, has become ensnared in the politics of Hong Kong’s protests. That could make the airline a target for both sides. 14 How to Save A Network ● A live reality-TV cop show gives cable channel A&E a weapon to combat its streaming rivals On a Saturday night in July in Salinas, Calif., officer Cameron Mitchell began pursuing a suspected stolen car. As a couple million TV viewers watched at home, Mitchell chased the vehicle over curbs and through crowded intersections. He attempted what’s known as a PIT maneuver, nosing his car into the side of the fleeing vehicle to get the driver to spin to a stop. But Mitchell instead lost control and his squad car skidded frighteningly to a halt on a median. In the end, the officer was fine and the suspect gave himself up a few blocks later after other Salinas police vehicles surrounded him. It’s all in a typical night on Live PD, the hit show that’s helped lift the fortunes of A&E Networks Group and is showing at least one way TV companies can survive competition from streaming services like Netflix. Continually switching between cameras recording the real-time exploits of officers in eight locations around the U.S., Live PD combines a classic TV staple—the police show—with August 26, 2019 ● Ratings of the top five cable shows on Aug. 10 among viewers age 18-49 Live PD, A&E 0.59 NFL preseason, NFL Network 0.51 Dragon Ball Super, Adult Swim 0.33 NFL Total Access, NFL Network 0.30 SpongeBob SquarePants, Nickelodeon 0.28 ◼ BUSINESS Bloomberg Businessweek August 26, 2019 PHOTOGRAPH BY DOLLY FAIBYSHEV FOR BLOOMBERG BUSINESSWEEK. DATA: SHOWBUZZDAILY.COM ◀ Abrams and Buccieri surprised so many said yes. “We were asking them to sign up for what could be their worst nightmare,” Cesareo says. “Let’s broadcast your worst day at work live on television.” A typical Live PD episode follows two officers each in eight cities or counties. A camera person rides in the cars, which are also equipped with cameras. Abrams hosts the show from A&E’s Manhattan headquarters, switching between live feeds to highlight whichever story seems most compelling. (An occasional segment is identified as having taken place “earlier,” which could mean hours or days.) Current and former police officers provide in-house analysis, while Abrams offers a steady stream of deadpan quips. “She wanted the UberX version of that car,” Abrams said one Friday night in August after a woman stopped for walking in the middle of a busy road in East Providence declined a ride in the back of a squad car. The officers put her in an ambulance instead. Live PD offers a mix of the mundane and the terrifying. In the first season, viewers watched a fleeing suspect flip his car and try to run holding his two-year-old daughter as a human shield. As the camera rolled and a crowd gathered with cellphones out, Richland County, S.C., sheriff’s deputy Chris Mastrianni wrestled the man for more than two minutes until backup arrived. At one point, the suspect reached into his pocket for what might have been a weapon. Richland County Sheriff Leon Lott was among the first to sign on to the show and he says he has no regrets. The department gets fan mail and job inquiries from across the country, he says. Some 5,000 fans came to Columbia, the county’s largest city, for a celebration of the 200th episode in April. “I think Live PD is the future of law enforcement,” says Lott. “Five to 10 years from now, everything that law enforcement does is going to be live­streamed somewhere. I saw this as an opportunity to get on the front end of something everybody’s going to be doing.” Some departments, including Bridgeport, Conn.’s, have stopped working with the show. And last year, the Spokane City Council passed an ordinance making it difficult for police shows to film there after some residents objected to how the city was portrayed. Dan Taberski, host of the Running from Cops podcast, which dissects the long-running syndicated show Cops, devoted a couple of episodes to Live PD earlier this year. Taberski’s team interviewed residents of Spokane and Tulsa who appeared on the show. They complained that police targeted them for minor infractions because they knew they’d make for good television and that the show never asked permission to feature them. “A show that presents itself as being transparent asks no hard questions of police,” Taberski says. Live PD producers say that if some of those being filmed object, their faces are blurred out. But mostly Cesareo says the show doesn’t need to get the subjects to sign releases to include them because the events are playing out in public, live. That immediacy keeps viewers engaged, as during an incident in June in Williamson County, Texas, where a man pulled over for a missing license plate and suspected of being intoxicated tried to run after officers asked him to get out of the car. It took four deputies, using their fists, a chokehold, and a taser to subdue him. Half the people watching probably thought the officers used too much force; half probably felt that it was justified, Cesareo says. “That’s the perfect moment for the show,” he says. “You want those discussions.” �Christopher Palmeri THE BOTTOM LINE A&E’s Live PD is the most-viewed show on cable on many weekend nights, thanks to its mixture of mundane and frightening episodes at eight police departments. “Let’s broadcast your worst day at work live on television” 15 Copyright of Bloomberg Businessweek is the property of Bloomberg, L.P. and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder’s express written permission. However, users may print, download, or email articles for individual use. 3 20 F I N A N C E Edited by Eric Gelman Bloomberg Businessweek August 26, 2019 ◼ FINANCE Bloomberg Businessweek concentrated among households that are averse to spending it,” says Matt Fellowes, a former Brookings Institution fellow who’s founder and chief executive officer of United Income, a retirement planning startup. “It’s trillions and trillions of wealth that is not benefiting anyone except asset managers.” Americans’ combined net worth is $109 trillion, according to the balance sheet for all individuals and charities tallied by the Fed each quarter. That’s up from less than $57 trillion during the worst of the Great Recession 10 years ago. The money disproportionately flowed to the rich. Of course, some of these people have no problem spending their fortunes on luxury real estate, private jets, or generous philanthropy. Your more typical millionaire, though, is often tightfisted. Retirement experts and financial advisers disagree on exactly why. Some caution with money is rational when Even wealthy American there’s so much uncertainty about investment returns, medical costs, and longevity. “The rearetirees are often reluctant son they don’t spend in retirement is because they to enjoy their money worry about running out of money,” says David Lau, founder and CEO of DPL Financial Partners. “You don’t know when someone is going to die, The U.S. economic recovery, the longest in you don’t know when someone is going to get sick.” recorded history, has increased Americans’ Yet Miller says that even truly wealthy retirees, wealth by $52 trillion, according to the Federal who have more than enough assets to cover any Reserve. Wall Street is bursting with new money. eventuality, often ignore her advice on what’s safe U.S. stocks trade near record highs. Private equity to spend. That’s even though she assures them firms search high and low for places to deploy more her calculations are done with sophisticated planthan $1 trillion of investor cash. Banks, enjoying a ning software that can game out various scenarios, glut of deposits, pay savers interest rates that are including living to 100 and severe market down­minuscule from an historic perspective. turns such as the one in 2008. “They keep denyAll these riches should generate lots of economic ing themselves today for fear of what could happen activity. The well-off could be buying themselves tomorrow,” she says. little luxuries or doing something more producMany clients think they’re doing something tive, like starting new businesses or expanding old wrong if they spend money in a way that causes ones. Or they could donate more to charity. At the portfolio balances to drop. “Never touch the prinvery least, the extra financial cushion should make cipal” is classic advice that’s a relic of an era of ­double-digit interest rates, when even conserAmericans feel more secure. If only. Many of the recovery’s biggest ben­ vative investments could produce substantial eficiaries feel anxious. And financial advisers say income. Despite ultralow interest rates, advisers even very rich clients often have a crippling reluc- say it can be difficult to persuade retirees to tap tance to fully enjoy their money. “I am surprised savings rather than just live on their tiny bond how often I sit with a retired couple and have to coupons and dividend checks. “Wealth is really encourage them to spend more,” says Liz Miller, a source of identity for people,” Fellowes says. president of Summit Place Financial Advisors, “By spending their wealth, they’re losing some of a New Jersey-based firm specializing in high-­ their identity. There’s an aversion to seeing their net-worth clients. balances go down, even if it’s excess wealth” that If well-off retirees are more frugal than neces- they’ll never need. sary, they end up denying themselves the fruits Age is a crucial factor. The older people are, of a lifetime of hard work. Their heirs eventually studies have found, the less risk they’ll take. And benefit, but the vitality of the American econ- today’s wealth holders are older than the affluomy suffers. “Wealth is getting more and more ent of previous decades. The Fed’s most recent August 26, 2019 ILLUSTRATION BY JOE MELHUISH. DATA: BUREAU OF LABOR STATISTICS Too Scared To Spend 21 ● Change in average annual spending of Americans since ’97-’98 ll consumers 65 or A older onsumers 65 or C older earning at least $70k a year 80% 40 0 ’97-’98’16-’17 22 ◼ FINANCE Bloomberg Businessweek August 26, 2019 Survey of Consumer Finances, its comprehensive study of household wealth completed every three years, shows the typical U.S. household was poorer in 2016 than in 2007, adjusted for inflation. Only one age group saw its median net worth completely recover from the Great Recession in that time: ­families headed by someone 75 or older. Even as some workers and retirees enjoy healthier nest eggs, millions of other Americans are struggling. “Affluent folks who are adequately prepared” often need to be encouraged to enjoy their retirement, says Marguerita Cheng, a financial planner at Blue Ocean Global Wealth in Gaithersburg, Md. Meanwhile, she adds, “there are people who are woefully ill-prepared for retirement. Perhaps they didn’t save enough, but job loss, illness, divorce, and family situations compounded an already ­precarious situation.” While many current retirees can rely on defined-benefit pensions to produce income that supplements Social Security and protects against longevity risks, most future retirees won’t be so lucky. They’ll end their careers with just a 401(k) or other retirement account, a pot of money they need to make last. “Collectively as a country we’re still saving not enough to accomplish retirement,” says David Blanchett, head of retirement research for Morningstar Inc.’s Investment Management Group. “The question now is what comes next.” Meanwhile, trillions of dollars sit in bank accounts and conservative investments that struggle to keep up with inflation. Corporations hold almost $2 trillion in cash and buy back their own stock instead of making large capital investments. The rate of new business creation in the U.S. is stagnant. Individual giving as a percentage of disposable income has been roughly flat for more than a decade, according to the Giving USA Foundation, and it actually dropped 3.4% last year in terms of inflation-adjusted dollars. The biggest beneficiaries of the wealth generated over the past 10 years may be the children of the rich. The more conservatively their parents spend, the more they’ll inherit. There’s one complication, though: The gap in life expectancy between the average American and the wealthy and well-­educated is growing. While longevity is flat and even falling for many in the U.S., the well-off can expect to live well into their 80s and 90s. In other words, if the next generation is waiting for an inheritance check, it could take quite a while to arrive. �Ben Steverman “Collectively as a country we’re still saving not enough to accomplish retirement” THE BOTTOM LINE Wealthy retirees’ reluctance to draw down their savings is trapping millions of dollars that could be stimulating the economy. The $115 Billion Bond Con rari n Few prominent investors have been punished harder for being on the wrong side of plummeting bond yields than Franklin Templeton’s Michael Hasenstab, who manages funds with total assets of about $115 billion, including the Templeton Global Bond Fund. The flip side of falling yields and interest rates has been a rally in the bond markets. As yields drop, bond prices rise, and in recent months, owning U.S. Treasuries has been an easy way to make money. So it’s been a tough time to hold the view that the long era of low rates—which began with the financial crisis more than a decade ago—is about to reverse. Hasenstab’s not only less bullish than most bond managers, he’s actively shorting ● Michael Hasenstab has amassed a big bet against Treasuries Treasuries—betting that rates will rise and bond prices will fall. This puts him at the epicenter of a debate that’s split global markets. If he’s right, the world economy is turning a corner, central banks will finally be able to raise interest rates back to their precrisis levels, and global bond yields will stop grinding ever lower. If he’s wrong, it may be because the global economy is too weak for central banks to stop trying to pump it up. So far, the scoreboard doesn’t look good, either for the economy or for Hasenstab: After increasing rates for the first time in almost a decade in 2015, the U.S. Federal Reserve is back to cutting, and the Templeton Global Bond Fund has lost 4.8% in the past month. 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Strategic Management creating competitive advantages sixth edition chapter ONE Strategic Management: Creating Competitive Advantages ___________________________ _ After reading this chapter, you should have a good understanding of: LOl.l The definition of strategic management and its four key attributes. LOl.2 The strategic management process and its three interrelated and principal activities. LOl.3 The vital role of corporate governance and as well as how “symbiosis” can be achieved stakeholder management among an organization’s stakeholders. LOl.4 The importance of social responsibility, including environmental sustainability, and how it can enhance a corporation’s innovation strategy. LOl.5 The need for greater empowerment throughout the organization. LOl.6 How an awareness of a hierarchy of strategic organization achieve coherence in its strategic direction. goals can help an PART 1: STRATEGIC ANALYSIS W e define strategic management as consisting of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages. At the heart of strategic management is the question: How and why do some firms outperform others? Thus, the challenge to managers is to decide on strategies that provide advantages that can be sustained over time. There are four key attributes of strategic management. It is directed at overall organizational goals, includes multiple stakeholders, incorporates short-term as well as long-term perspectives, and recognizes trade-offs between effectiveness and efficiency. We discuss the above definition and the four key attributes in the first section. The second section addresses the strategic management process. The three major processes are strategy analysis, strategy formulation, and strategy implementation. These three components parallel the analyses, decisions, and actions in the above definition. We discuss how each of the 12 chapters addresses these three processes and provide examples from each chapter. The third governance and section discusses stakeholder two management. important Corporate and interrelated governance concepts: addresses the corporate issue of who “governs” the corporation and determines its direction. It consists of three primary participants: stockholders (owners), management (led by the chief executive officer), and the board of directors (elected to monitor management). Stakeholder management recognizes that the interests of various stakeholders, such as owners, customers, and employees, can often conflict and create challenging decision-making dilemmas for managers. However, we discuss how some firms have been able to achieve “symbiosis” among stakeholders wherein their interests are considered interdependent and can be achieved simultaneously. We also discuss the important role of social responsibility and explain the concept of “shared value.” Further, we emphasize the need for corporations to incorporate environmental sustainability in their strategic actions. The fourth section addresses factors in the business environment that have increased the level of unpredictable change for today’s leaders. Such factors have also created the need for a greater strategic management perspective and reinforced the role of empowerment throughout the organization. The final section focuses on the need for organizations to ensure consistency in their vision, mission, and strategic objectives which, collectively, form a hierarchy of goals. While visions may lack specificity, they must evoke powerful and compelling mental images. Strategic objectives are much more specific and are essential for driving toward overall goals.* Learning from Mistakes What makes the study of strategic management so interesting? For one, struggling firms can become stars, while high flyers can become earthbound very rapidly. As colorfully noted by Arthur Martinez, Sears’ former chairman: “Today’s peacock is tomorrow’s feather duster.” Consider, for example, the change in membership on the prestigious Fortune 500 list of the largest U.S. firms:1 • Of the 500 companies that appeared on the first list in 1955, only 62, ranked by rev­ • enue, have appeared on the list every year since. Some of the most powerful companies on today’s list—businesses like Intel, Apple, and Google—grew from nothing to great on the strength of new technologies, bump­ ing venerable old companies off the list. • • Nearly 2,000 companies have appeared on the list since its inception, and most are long gone from it. Just making the list guarantees nothing about your ability to endure. In 2009 and 2010, admittedly more volatile years than most, 71 companies—including Bear Stearns, Circuit City, Merrill Lynch, and Tribune—dropped off the 500. Let’s take a look at another fallen star, Nokia, the Finnish phone manufacturer. Nokia captured the emerging market for mobile phones and built the industry’s most powerful brand in the 1990s.2 Its handsets virtually defined the industry from the time it launched the first GSM phone in 1992. Then from 1996 to 2001, its revenues increased almost fivefold, and in 1998 it was the world’s largest mobile manufacturer. In 2005 it sold its billionth handset, an 1100 model, to a customer in Nigeria. Unfortunately, Nokia’s market dominance was short-lived. What happened? While Nokia focused on emerging markets, it took its eye off the ball in developed economies, where the smartphone revolution was on its way. Nokia’s focus on mobile phones for voice communication turned out to be their most disastrous call in the past 10 years. In addition to voice communications, customers also demanded interactive applica­ tions, Web browsing, and global positioning systems—as provided by Apple’s iPhone and RIM’s BlackBerry. As noted in The Economist: “Apple’s iPhone and Google’s Android range compete on ‘cool.’ BlackBerry is synonymous with business. But what does Nokia stand for?” Nokia’s inability to meet customer needs in both established and emerging markets resulted in a significant drop in its market share. It dropped from almost 51 percent in the fourth quarter of 2007 to less than 41 percent in the fourth quarter of 2008. Since Apple introduced its first iPhone on January 9, 2007, Nokia’s stock dropped 45 percent over the next three years—wiping out about $77 billion in the firm’s market capitalization. Over the same period, Apple’s shares soared 234 percent! Further, the 2010 global brands ranking by Millward Brown Optimor, placed Nokia in 43rd place, i.e., 30 places down compared to its position in 2009. Its profit margins had also been shrinking, along with its market share and the average price of its phones. Finally, at its peak, Nokia accounted for 4 percent of Finland’s gross national product—by 2009, that share was down to only 1.6 percent, according to Helsinki-based economic research institute, ETLA. Nokia also suffered from its location. Building a mobile telephone giant in Finland was a great achievement. However, Nokia wasn’t surrounded by Internet companies or consumer electronics manufacturers. It wasn’t exposed to a culture of innovation which would have forced it to question its assumptions and business decisions. Maybe in short, Nokia needed to be where the action was, that is, in the middle of the computer industry as well as the film, music, and Internet businesses. As suggested by Bloomberg BusinessWeek: Nokia should have relocated to California a decade ago. It would have caused an outcry in Finland, and probably Brussels as well. And it would have been worth it. Nokia needed to pitch itself into the cauldron of technological change. Maybe that way it could have held onto its brand leadership, rather than surrender it to a computer manufacturer that looked dead on its feet a decade ago. The cruel truth—for all its residual market share—is that Nokia misread the way the mobile phone industry was merging with the computer industry and social networking. And now, maybe it’s too late to turn that around. Today’s leaders, such as those at Nokia, face a large number of complex challenges in the global marketplace. In considering how much credit (or blame) they deserve, two perspectives of leadership come immediately to mind: the “romantic” and “external con­ trol” perspectives.3 First, let’s look at the romantic view of leadership. Here, the implicit assumption is that the leader is the key force in determining an organization’s success—or lack thereof.4 This view dominates the popular press in business magazines such as For­ tune, BusinessWeek, and Forbes, wherein the CEO is either lauded for his or her firm’s success or chided for the organization’s demise.5 Consider, for example, the credit that has been bestowed on leaders such as Jack Welch, Andrew Grove, and Herb Kelleher for the tremendous accomplishments of their firms, General Electric, Intel, and Southwest Airlines, respectively. Similarly, Apple’s success in the last decade has been attributed almost entirely to Steve Jobs, its CEO.6 Apple’s string of hit products such as iMac computers, iPods, and iPhones are testament to his genius for developing innovative, user-friendly, and aesthetically pleas­ ing products. In addition to being a per­ fectionist in product design. Jobs also is a master showman with a cult following. On January 14, 2009, he announced that he was taking a medical leave through June. Per­ haps not surprisingly, Apple’s stock imme­ diately dropped 10 percent. And, almost exactly two years later, on January 17, 2011, Jobs announced that he was taking another medical leave. The immediate reaction: Apple’s shares went down 6 percent the fol­ lowing week—this reflects a drop of around $20 billion in the firm’s market value.7 Finally, consider how George Buckley reinvigorated 3M’s focus on innovation. 3M, with $23 billion in 2010 revenues, pro­ duces an astonishing 55,000 different prod­ ucts. Its goal has always been to generate 30 percent of its sales from products introduced in the past five years. However, when the board asked Buckley in 2005 to assume the CEO position, this benchmark had dropped to only 21 percent. Strategy Spotlight 1.1 describes Buckley’s strong initiatives to accelerate 3M’s rate of innovation. romantic view of leadership situations in which the leader is the key force determining the organization’s success—or lack thereof. • The BP oil spill in April 2010, severely affected many industries along the Gulf Coast. Chapter 1:: Strategic Management: Creating Competitive Advantages 5 strategy spotlight How CEO George Buckley Turned Around 3M Why is innovation important to 3M? As their older prod­ ucts become outmoded or become commodities, they must be replaced. According to Larry Wendling, head of 3M’s corporate research, “Our business model is literally new-product innovation.” However, when James McNerney left the company to become Boeing’s CEO, the per­ centage had slid to 21 percent. And, what’s worse, much of the new product revenue came from a single category: optical films. The board went outside the firm for its new CEO and appointed George Buckley, who had previously served as CEO of Brunswick, an Illinois company known for bowling gear and boats. What is perhaps most important to know about Buckley, however, is that he has a Ph.D. in electri­ cal engineering and is a scientist at heart, with several patents to his name. He states: “This is to me an engi­ neer’s and scientist’s Toys’R’Us,” and “There is no com­ pany like it in America. There is no company like it in the world.” When Buckley took over 3M, he quickly set some clear business goals for the company. He wanted his managers to protect and strengthen 3M’s core busi­ nesses, which included abrasives, optical film, and indus­ trial tapes. He also wanted 3M to develop lower-cost Sources: Gunther. M. 2010. 3M’s innovation revival. Fortune. September 27: 73- 76; Hindo, B. 2007. 3M chief plants a money tree, www.businessweek .com. June 11: np; and. Gunther. M. Why 3M is unique, theenergycollective .com. December 10: np. external control view of leadership situations in which external forces — where the leader has limited influence — determine the organization’s success. 1.1 products to compete in emerging markets, as well as for the firm to play a key role in future growth markets such as renewable energy, water infrastructure, and mobile digital media. Perhaps most important, Buckley has been an out­ spoken champion for 3M’s labs. In 2009, despite the deep recession, he kept R&D spending at more than $1 billion and asserted that “even in the worst economic times in memory, we released over 1,000 new products.” He also removed the stringent focus on efficiency, particularly in basic research. This had a huge psychic payoff for staff at the science-centric company. Ram Charan, a worldfamous consultant who advises the firm claims “George has accelerated the innovation machine by devoting his personal time, his energy, his focus, to empowering the researchers, opening up their minds and urging them to restore the luster of 3M.” Buckley’s results are impres­ sive: The percentage of 3M’s revenue from products intro­ duced in the past five years is back to 30 percent and is expected to reach the mid-30s by 2012. In closing, Marc Gunther, a contributing editor at Fortune magazine, provides some interesting personal insights: “Buckley is a charming and, above all, enthusi­ astic guy … who, in his spare time, likes taking apart and putting together old motorcycles or restoring Victorian furniture . . . While he surely needs traditional manage­ ment skills to oversee a global company of 75,000 people, my sense is that his scientific curiosity about how the world works and boyish delight in how things get invented make him a perfect fit for 3M.” On the other hand, when things don’t go well, much of the failure of an organiza­ tion can also, rightfully be attributed to the leader/’ Nokia’s leadership failed to see the changes taking place in the mobile phone industry. In contrast, Apple fully capitalized on the emerging trend toward sophisticated smartphones. The contrasting fortunes of Hewlett-Packard under two different CEOs also demon­ strate the influence leadership has on firm performance.9 When Carly Fiorina was fired as CEO of the firm, HP enjoyed an immediate increase in its stock price of 7 percent—hardly a strong endorsement of her leadership! Her successor, Mark Hurd, led the firm to five years of outstanding financial results. Interestingly, when he abruptly resigned on August 6, 2010, the firm’s stock dropped 12 percent almost instantly! (To provide some perspec­ tive, this represents a decrease in HP’s market value of about S12 billion.) However, this reflects only part of the picture. Consider another perspective called the external control view of leadership. Here, rather than making the implicit assumption that the leader is the most important factor in determining organizational outcomes, the focus is on external factors that may positively (or negatively) affect a firm’s success. We don’t have to look far to support this perspective. Developments in the general environment, such as economic downturns, governmental legislation, or an outbreak of major internal conflict or war, can greatly restrict the choices that are available to a firm’s executives. In addition, major unanticipated developments can often have very negative consequences for businesses regardless of how well formulated their strategies are. Let’s look at a few recent examples:10 Hurricane Katrina in 2007 had a disastrous effect on businesses located along the Gulf Coast. The financial meltdown of 2008 and the resultant deep recession during the follow­ ing two years forced once proud corporations like General Motors and Citigroup to ask for government bailouts. Others, such as Merrill Lynch and Washington Mutual, had to be acquired by other firms. In the aftermath of BP’s disastrous oil well explosion on April 20, 2010, the fishing and tourism industries in the region suffered significant downturns. BP itself was forced to pay a $20 billion fine to the U.S. government. In April 2010, a volcanic eruption in Iceland disrupted air traffic all over Europe for well over a week. It is estimated that major airlines lost approximately $1.7 billion. On March 11, 2011, a 9.0 earthquake and tsunami devastated Japan and resulted in the loss of more than 20.000 lives. During the next two trading days, the country’s stock exchange (Nikkei) suffered its biggest loss in 40 years. The disaster hit nearly every industry hard—especially energy companies. For example, Tokyo Electric Power Co., which operates a nuclear power plant that was severly damaged, fell 24.7 percent, and Toshiba Corp., a maker of nuclear power plants, slid 19.5 percent. Firms as diverse as Toyota. Honda, and Sony were forced to halt production because extensive damage to roads and distribution systems made it nearly impossible to move products. Before moving on, it is important to point out that successful executives are often able to navigate around the difficult circumstances that they face. At times it can be refreshing to see the optimistic position they take when they encounter seemingly insurmountable odds. Of course, that’s not to say that one should be naive or Pollyannaish. Consider, for example, how one CEO is handling trying times:11 Name a general economic woe, and the chances are that Charles Needham is dealing with it. Market turmoil has knocked 80 percent off the shares of South Africa’s Metorex, the mining company that he heads. The plunge in global commodities is slamming prices for the copper, cobalt, and other minerals Metorex unearths across Africa. The credit crisis makes it harder to raise money. And fighting has again broken out in the Democratic Republic of Congo, where Metorex has a mine and several projects in development. Such problems might send many executives to the window ledge. Yet Needham appears unruffled as he sits down at a conference table in the company’s modest offices in a Johannesburg suburb. The combat in northeast Congo, he notes, is far from Metorex’s mine. Commodity prices arc still high, in historical terms. And Needham is confident he can raise enough capital, drawing on relationships with South African banks. “These are the kinds of things you deal with, doing business in Africa,” he says. What Is Strategic Management? Given the many challenges and opportunities in the global marketplace, today s managers must do more than set long-term strategies and hope for the best.12 They must go beyond what some have called “incremental management,” whereby they view their job as making Chapter 1:: Strategic Management: Creating Competitive Advantages 7 strategic management the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages. a series of small, minor changes to improve the efficiency of their firm’s operations.1. That is fine if your firm is competing in a very stable, simple, and unchanging indus­ try. But there aren’t many of those left. The pace of change is accelerating, and the pres­ sure on managers to make both major and minor changes in a firm’s strategic direction is increasing. Rather than seeing their role as merely custodians of the status quo, today’s leaders must be proactive, anticipate change, and continually refine and. when necessary, make dramatic changes to their strategies. The strategic management of the organization must become both a process and a way of thinking throughout the organization. Defining Strategic Management >L01.1 The definition of strategic management and its four key attributes. strategy The ideas, decisions, and actions that enable a firm to succeed. competitive advantage A firm’s resources and capabilities that enable it to overcome the competitive forces in its industry(ies). operational effectiveness performing similar activities better than rivals. Strategic management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages. This definition captures two main elements that go to the heart of the field of strategic management. First, the strategic management of an organization entails three ongoing processes: analyses, decisions, and actions. Strategic management is concerned with the analysis of strategic goals (vision, mission, and strategic objectives) along with the analysis of the internal and external environment of the organization. Next, leaders must make strategic decisions. These decisions, broadly speaking, address two basic questions: What indus­ tries should we compete in? How should we compete in those industries? These questions also often involve an organization’s domestic and international operations. And last are the actions that must be taken. Decisions are of little use, of course, unless they are acted on. Firms must take the necessary actions to implement their strategies. This requires leaders to allocate the necessary resources and to design the organization to bring the intended strategies to reality. Second, the essence of strategic management is the study of why some firms outper­ form others.14 Thus, managers need to determine how a firm is to compete so that it can obtain advantages that are sustainable over a lengthy period of time. That means focusing on two fundamental questions: • How should we compete in order to create competitive advantages in the market­ place? Managers need to determine if the firm should position itself as the low-cost producer or develop products and services that are unique and will enable the firm to charge premium prices. Or should they do some combination of both? How can we create competitive advantages in the marketplace that are unique, valu­ able, and difficult for rivals to copy or substitute? That is, managers need to make such advantages sustainable, instead of temporary. Rivals almost always copy ideas that work. In the 1980s. American Airlines tried to establish a competitive advantage by introducing the frequent flyer program. Within weeks, all the airlines did the same thing. Overnight, frequent flyer programs became a necessary tool for competitive parity instead of a competitive advantage. The challenge, therefore, is to create competitive advantages that are sustainable. Sustainable competitive advantage cannot be achieved through operational effective­ ness alone.1′ The popular management innovations of the last two decades—total quality, just-in-time, benchmarking, business process reengineering, outsourcing—are all about operational effectiveness. Operational effectiveness means performing similar activities better than rivals. Each of these is important, but none lead to sustainable competitive advantage because everyone is doing them. Strategy is all about being different. Sustain­ able competitive advantage is possible only by performing different activities from rivals or performing similar activities in different ways. Companies such as Walmart, Southwest Airlines, and IKEA have developed unique, internally consistent, and difficult-to-imitate activity systems that have provided them with sustained competitive advantages. A com­ pany with a good strategy must make clear choices about what it wants to accomplish. Trying to do everything that your rivals do eventually leads to mutually destructive price competition, not long-term advantage. The Four Key Attributes of Strategic Management Before discussing the strategic management process, let’s briefly talk about four attri­ butes of strategic management.H’ It should become clear how this course differs from other courses that you have had in functional areas, such as accounting, marketing, opera­ tions. and finance. Exhibit 1.1 provides a definition and the four attributes of strategic management. First, strategic management is directed toward overall organizational goals and objec­ tives. That is, effort must be directed at what is best for the total organization, not just a single functional area. Some authors have referred to this perspective as “organizational versus individual rationality.”1 That is, what might look “rational” or ideal for one func­ tional area, such as operations, may not be in the best interest of the overall firm. For example, operations may decide to schedule long production runs of similar products to lower unit costs. However, the standardized output may be counter to what the marketing department needs to appeal to a demanding target market. Similarly, research and develop­ ment may “overengineer” the product to develop a far superior offering, but the design may make the product so expensive that market demand is minimal. Therefore, in this course you will look at cases and strategic issues from the perspective of the organization rather than that of the functional area(s) in which you have the strongest background. Second, strategic management includes multiple stakeholders in decision making}* Stakeholders arc those individuals, groups, and organizations who have a “stake” in the success of the organization, including owners (shareholders in a publicly held corpora­ tion), employees, customers, suppliers, the community at large, and so on. (We’ll discuss this in more detail later in this chapter.) Managers will not be successful if they focus on a single stakeholder. For example, if the overwhelming emphasis is on generating prof­ its for the owners, employees may become alienated, customer service may suffer, and the suppliers may resent demands for pricing concessions. However, many organizations can satisfy multiple stakeholder needs simultaneously. For example, financial performance may increase because employees who are satisfied with their jobs work harder to enhance customer satisfaction—leading to higher profits. Third, strategic management requires incorporating both short-term and long-term perspectives.19 Peter Senge. a leading strategic management author, has referred to this need as a “creative tension.”20 That is, managers must maintain both a vision for the future of the organization as well as a focus on its present operating needs. However, financial stakeholders individuals, groups, and organizations who have a stake in the success of the organization, including owners (shareholders in a publicly held corporation), employees, customers, suppliers, and the community at large. Exhibit 1.1 Definition: Strategic management consists of the analyses, decisions, and actions an Strategic Management organization undertakes in order to create and sustain competitive advantages. Concepts Key Attributes of Strategic Management Directs the organization toward overall goals and objectives. Includes multiple stakeholders in decision making. Needs to incorporate short-term and long-term perspectives. Recognizes trade-offs between efficiency and effectiveness. Chapter 1:: Strategic Management: Creating Competitive Advantages 9 markets can exert significant pressures on executives to meet short-term performance tar­ gets. Studies have shown that corporate leaders often take a short-term approach to the detriment of creating long-term shareholder value. Consider the following: According to recent studies, only 59 percent of financial executives say they would pursue a positive net present value project if it meant missing the quarter’s consensus earnings per-share estimate. Worse, 78 percent say they would sacrifice value—often a great deal of value—to smooth earnings. Similarly, managers are more likely to cut R&D to reverse an earning slide if a significant amount of the company’s equity is owned by institutions with high portfolio turnover. Many companies have the same philosophy about long-term investments such as infrastructure and employee training.21 effectiveness tailoring actions to the needs of an organization rather than wasting effort, or “doing the right thing.” efficiency performing actions at a low cost relative to a benchmark, or “doing things right.” ambidexterity the challenge managers face of both aligning resources to take advantage of existing product markets as well as proactively exploring new opportunities. / strategic management process strategy analysis, strategy formulation, and strategy implementation Fourth, strategic management involves the recognition of trade-offs between effective­ ness and efficiency. Some authors have referred to this as the difference between “doing the right thing” (effectiveness) and “doing things right” (efficiency). 22 While managers must allocate and use resources wisely, they must still direct their efforts toward the attain­ ment of overall organizational objectives. Managers who only focus on meeting short-term budgets and targets may fail to attain the broader goals. Consider the following amus­ ing story told by Norman Augustine, former CEO of defense giant Martin Marietta (now Lockheed Martin): I am reminded of an article 1 once read in a British newspaper which described a problem with the local bus service between the towns of Bagnall and Greenfields. It seemed that, to the great annoyance of customers, drivers had been passing long queues of would-be pas­ sengers with a smile and a wave of the hand. This practice was, however, clarified by a bus company official who explained. “It is impossible for the drivers to keep their timetables if they must stop for passengers.”2. Clearly, the drivers who were trying to stay on schedule had ignored the overall mission. As Augustine noted, “Impeccable logic but something seems to be missing!” Successful managers must make many trade-offs. It is central to the practice of strate­ gic management. At times, managers must focus on the short term and efficiency; at other times the emphasis is on the long term and expanding a firm’s product-market scope in order to anticipate opportunities in the competitive environment. For example, consider Kevin Sharer’s perspective. I Ic is CEO of Amgen, the giant S15 billion biotechnology firm: A CEO must always be switching between what I call different altitudes—tasks of different levels of abstraction and specificity. At the highest altitude you’re asking the big ques­ tions: What are the company’s mission and strategy? Do people understand and believe in these aims? Are decisions consistent with them? At the lowest altitude, you’re looking at on-the-ground operations: Did we make that sale? What was the yield on that last lot in the factory? How many days of inventory do we have for a particular drug? And then there’s everything in between: How many chemists do we need to hire this quarter? What should we pay for a small biotech company that has a promising new drug? Is our production capacity adequate to roll out a product in a new market?24 Some authors have developed the concept of “ambidexterity” which refers to a man­ ager’s challenge to both align resources to take advantage of existing product markets as well as proactively explore new opportunities.2’’ Strategy Spotlight 1.2 discusses ambidex­ trous behaviors that are required for success in today’s challenging marketplace. >L01.2 The strategic management process and its three interrelated and principal activities. The Strategic Management Process We’ve identified three ongoing processes—analyses, decisions, and actions—that are central to strategic management. In practice, these three processes—often referred to as strategy analysis, strategy formulation, and strategy implementation—are highly interde­ pendent and do not take place one after the other in a sequential fashion in most companies. 1.2 strategy spotlight Ambidextrous Behaviors: Combining Alignment and Adaptability A recent study involving 41 business units in 10 multina­ tional companies identified four ambidextrous behaviors in individuals. Such behaviors are the essence of ambi­ dexterity, and they illustrate how a dual capacity for align­ ment and adaptability can be woven into the fabric of an organization at the individual level. They take time and are alert to opportunities beyond the confines of their own jobs. A large computer com­ pany’s sales manager became aware of a need for a new software module that nobody currently offered. Instead of selling the customer something else, he worked up a business case for the new module. With management’s approval, he began working full time on its development. They are cooperative and seek out opportunities to combine their efforts with others. A marketing manager for Italy was responsible for supporting a newly acquired subsidiary. When frustrated about the limited amount of contact she had with her peers in other countries, she began discussions with them. This led to the creation of a European marketing forum which meets quarterly to discuss issues, share best practices, and collaborate on marketing plans. They are brokers, always looking to build inter­ nal networks. When visiting the head office in St. Louis, a Canadian plant manager heard about plans for a $10 million investment for a new tape manufacturing plant. After inquiring further about the plans and returning to Source: Birkinshaw, J. & Gibson, C. 2004. Building ambidexterity into an organization. MIT Sloan Management Review. 45(4): 47-55; and. Bower, J. L. 2007. Solve the succession crisis by growing inside-out leaders. Harvard Business Review, 85(11): 90-99. Canada, he contacted a regional manager in Manitoba, who he knew was looking for ways to build his business. With some generous support from the Manitoba govern­ ment, the regional manager bid for, and ultimately won, the $10 million investment. They are multitaskers who are comfortable wearing more than one hat. Although an operations manager for a major coffee and tea distributor was charged with running his plant as efficiently as possible, he took it upon himself to identify value-added services for his clients. By developing a dual role, he was able to manage operations and develop a promising electronic module that automatically reported impending problems inside a coffee vending machine. With corporate funding, he found a subcontractor to develop the software, and he then piloted the module in his own operations. It was so successful that it was eventually adopted by operations managers in several other countries. A recent Harvard Business Review article provides some useful insights on how one can become a more ambidextrous leader. Consider the following questions: • Do you meet your numbers? • Do you help others? • What do you do for your peers? Are you just their inhouse competitor? • When you manage up, do you bring problems—or problems with possible solutions? • Are you transparent? Managers who get a reputa­ tion for spinning events gradually lose the trust of peers and superiors. • Are you developing a group of senior-managers who know you and are willing to back your original ideas with resources? Intended versus Realized Strategies Henry Mintzberg, a management scholar at McGill University, argues that viewing the strategic management process as one in which analysis is followed by optimal decisions and their subsequent meticulous implementation neither describes the strategic manage­ ment process accurately nor prescribes ideal practice.2il He sees the business environ­ ment as far from predictable, thus limiting our ability for analysis. Further, decisions are seldom based on optimal rationality alone, given the political processes that occur in all intended strategy strategy in which organizations.2′ Taking into consideration the limitations discussed above, Mintzberg proposed an organizational decisions are alternative model. As depicted in Exhibit 1.2, decisions following from analysis, in this determined only model, constitute the intended strategy of the firm. For a variety of reasons, the intended by analysis. V strategy rarely survives in its original form. Unforeseen environmental developments, Chapter 1:: Strategic Management: Creating Competitive Advantages 11 Deliberate Strategy Intended Strategy Realized Strategy Unrealized Strategy Emergent Strategy Exhibit 1.2 Realized Strategy and Intended Strategy: Usually Not the Same Source: From Mintzberg, H. & Waters, J. A., “Of Strategies: Deliberate and Emergent,” Strategic Management Journal, Vol. 6, 1985, pp. 257-272. Copyright © John Wiley & Sons Limited. Reproduced with permission. unanticipated resource constraints, or changes in managerial preferences may result in at least some parts of the intended strategy remaining unrealized. On the other hand, good managers will want to take advantage of a new opportunity presented by the environment, even if it was not part of the original set of intentions. For example, consider the wind energy industry. In October 2008, the United States Congress extended a key wind tax credit and many states have mandates requiring utilities to tap renewable energy. Such legislation, com­ bined with falling clean energy costs and wildly cyclical prices for coal, oil, and gas, has created a surge in demand for companies such as GE Wind Energy, which makes large tur­ bines and fan blades. Not surprisingly, such businesses have increased hiring and research and development, as well as profit and revenue forecasts.28 realized strategy Thus, the final realized strategy of any firm is a combination of deliberate and emergent strategy in which organizational decisions are determined by both analysis and unforeseen environmental developments, unanticipated resource constraints, and/or changes in managerial ^ preferences. strategies. Next, we will address each of the three key strategic management processes: strategy analysis, strategy formulation, and strategy implementation and provide a brief overview of the chapters. Exhibit 1.3 depicts the strategic management process and indicates how it ties into the chapters in the book. Consistent with our discussion above, we use two-way arrows to convey the interactive nature of the processes. Strategy Analysis Strategy analysis may be looked upon as the starting point of the strategic management process. It consists of the “advance work” that must be done in order to effectively for­ mulate and implement strategies. Many strategies fail because managers may want to for­ mulate and implement strategies without a careful analysis of the overarching goals of the strategy analysis study of firms’ external and internal environments, and their fit with organizational vision and goals. organization and without a thorough analysis of its external and internal environment. Analyzing Organizational Goals and Objectives (Chapter 1) A firm’s vision, mission, and strategic objectives form a hierarchy of goals that range from broad statements of intent and bases for competitive advantage to specific, measurable strategic objectives. Analyzing the External Environment of the Firm (Chapter 2) Managers must monitor and scan the environment as well as analyze competitors. Two frameworks of the external environment are provided: (1) the general environment consists of several ele­ ments, such as demographic, technological, and economic segments, and (2) the industry environment consists of competitors and other organizations that may threaten the success of a firm’s products and services. Strategic Analysis Chapter 1 Introduction and Analyzing Goals and Objectives Chapter 2 Chapter 3 Analyzing the External Environment Analyzing the Internal Environment Chapter 4 Assessing Intellectual Capital Strategic Implementation Strategic Formulation Chapter 5 Chapter 9 Formulating Business-Level Strategies Strategic Control and Corporate Governance Chapter 6 Chapter 7 Chapter 10 Chapter 11 Formulating CorporateLevel Strategies Formulating International Strategies Creating Effective Organizational Designs Strategic Lead­ ership Excel­ lence, Ethics and Change Chapter 8 Chapter 12 Entrepreneurial Strategy and Competitive Dynamics Fostering Corporate Entrepreneur­ ship Case Analysis Chapter 13 Case Analysis Exhibit 1.3 The Strategic Management Process Chapter 1:: Strategic Management: Creating Competitive Advantages 13 Assessing the Internal Environment of the Firm (Chapter 3) Analyzing the strengths and relationships among the activities that constitute a firm’s value chain (e.g.. operations, marketing and sales, and human resource management) can be a means of uncovering potential sources of competitive advantage for the firm.:g Assessing a Firm’s Intellectual Assets (Chapter 4) The knowledge worker and a firm’s other intellectual assets (e.g., patents, trademarks) are becoming increasingly important as the drivers of competitive advantages and wealth creation. We also assess how well the organization creates networks and relationships as well as how technology can enhance collaboration among employees and provide a means of accumulating and storing knowledge.3″ strategy formulation decisions made by firms regarding investments, commitments, and other aspects of operations that create and sustain competitive advantage. Strategy Formulation A firm’s strategy formulation is developed at several levels. First, business-level strategy addresses the issue of how to compete in a given business to attain competitive advan­ tage. Second, corporate-level strategy focuses on two issues: (a) what businesses to com­ pete in and (b) how businesses can be managed to achieve synergy; that is, they create more value by working together than if they operate as stand-alone businesses. Third, a firm must determine the best method to develop international strategies as it ventures beyond its national boundaries. Fourth, managers must formulate effective entrepreneur­ ial initiatives. Formulating Business-Level Strategy (Chapter 5) The question of how firms compete and outperform their rivals and how they achieve and sustain competitive advan­ tages goes to the heart of strategic management. Successful firms strive to develop bases for competitive advantage, which can be achieved through cost leadership and/or differen­ tiation as well as by focusing on a narrow or industrywide market segment. ‘1 Formulating Corporate-Level Strategy (Chapter 6) Corporate-level strategy addresses a firm’s portfolio (or group) of businesses. It asks (1) What business (or busi­ nesses) should we compete in? and (2) How can we manage this portfolio of businesses to create synergies among the businesses? Formulating International Strategy (Chapter 7) When firms enter foreign mar­ kets, they face both opportunities and pitfalls.Managers must decide not only on the most appropriate entry strategy but also how they will go about attaining competitive advantages in international markets.u Entrepreneurial Strategy and Competitive Dynamics (Chapter 8) Entrepre­ neurial activity aimed at new value creation is a major engine for economic growth. For entrepreneurial initiatives to succeed viable opportunities must be recognized and effective strategies must be formulated. strategy implementation actions made by firms that carry out the formulated strategy, including strategic controls, organizational design, and leadership. Strategy Implementation Clearly, sound strategies are of no value if they are not properly implemented. Strategy implementation involves ensuring proper strategic controls and organizational designs, which includes establishing effective means to coordinate and integrate activities within the firm as well as with its suppliers, customers, and alliance partners/0 Leadership plays a central role, including ensuring that the organization is committed to excellence and ethi­ cal behavior. It also promotes learning and continuous improvement and acts entrepreneurially in creating and taking advantage of new opportunities. Strategic Control and Corporate Governance (Chapter 9) Firms must exer­ cise two types of strategic control. First, informational control requires that organizations continually monitor and scan the environment and respond to threats and opportunities. Second, behavioral control involves the proper balance of rewards and incentives as well as cultures and boundaries (or constraints). Further, successful firms (those that are incorpo­ rated) practice effective corporate governance. Creating Effective Organizational Designs (Chapter 10) To succeed, firms must have organizational structures and designs that are consistent with their strategy. And. in today’s rapidly changing competitive environments, firms must ensure that their organiza­ tional boundaries—those internal to the firm and external—are more flexible and perme­ able.”6 Often, organizations develop strategic alliances to capitalize on the capabilities of other organizations. Creating a Learning Organization and an Ethical Organization (Chapter 11) Effective leaders set a direction, design the organization, and develop an organization that is committed to excellence and ethical behavior. In addition, given rapid and unpredictable change, leaders must create a “learning organization” to ensure that the entire organization can benefit from individual and collective talents. Fostering Corporate Entrepreneurship (Chapter 12) With rapid and unpredict­ able change in the global marketplace, firms must continually improve and grow as well as find new ways to renew their organizations. Corporate entrepreneurship and innovation provide firms with new opportunities, and strategies should be formulated that enhance a firm’s innovative capacity. Chapter 13. “Analyzing Strategic Management Cases,” provides guidelines and sug­ gestions on how to evaluate cases in this course. Thus, the concepts and techniques dis­ cussed in these 12 chapters can be applied to real-world organizations. Let’s now address two concepts—corporate governance and stakeholder management— that are critical to the strategic management process. The Role of Corporate Governance and Stakeholder Management Most business enterprises that employ more than a few dozen people are organized as corporations. As you recall from your finance classes, the overall purpose of a corporation is to maximize the long-term return to the owners (shareholders). Thus, we may ask: Who is really responsible for fulfilling this purpose? Robert Monks and Neil Minow provide a useful definition of corporate governance as “the relationship among various participants in determining the direction and performance of corporations. The primary participants are (I) the shareholders, (2) the management (led by the chief executive officer), and (3) the board of directors.’” This relationship is illustrated in Exhibit 1.4. The board of directors (BOD) are the elected representatives of the shareholders charged with ensuring that the interests and motives of management are aligned with those of the owners (i.e., shareholders). In many cases, the BOD is diligent in fulfilling its pur­ pose. For example, Intel Corporation, the giant $43 billion maker of microprocessor chips, is w idely recognized as an excellent example of sound governance practices. Its BOD fol­ lows guidelines to ensure that its members are independent (i.e., not members of the execu­ tive management team and do not have close personal ties to top executives) so that they can provide proper oversight, it has explicit guidelines on the selection of director candi­ dates (to avoid “cronyism”), and it provides detailed procedures for formal evaluations of directors and the firm’s top officers.™ Such guidelines serve to ensure that management is acting in the best interests of shareholders. ‘l> Recently, there has been much criticism as well as cynicism by both citizens and the business press about the poor job that management and the BODs of large corporations are doing. We only have to look at the scandals at firms such as Arthur Andersen, WorldCom. >L01.3 The vital role of corporate governance and stakeholder management as well as how “symbiosis” can be achieved among an organization’s stakeholders. corporate governance the relationship among various participants in determining the direction and performance of corporations.The primary participants are (1) the shareholders, (2) the management (led by the chief executive officer), and (3) the board of directors. Management (Headed by the chief executive officer) Shareholders (Owners) Board of Directors (Elected by the shareholders to represent their interests) Exhibit 1.4 The Key Elements of Corporate Governance Enron, Tyco, and ImClone Systems.40 Such malfeasance has led to an erosion of the public’s trust in the governance of corporations. For example, a recent Gallup poll found that 90 per­ cent of Americans felt that people leading corporations could not be trusted to look after the interests of their employees, and only 18 percent thought that corporations looked after their shareholders. Forty-three percent, in fact, believed that senior executives were in it only for themselves. In Britain, that figure, according to another poll, was an astonishing 95 percent.41 Perhaps worst of all, in another study, 60 percent of directors (the very people who decide how much executives should earn) felt that executives were “dramatically overpaid”!42 It is now clear that much of the bonus pay awarded to executives on Wall Street in the past few years was richly undeserved.4′ In the three years that led up to the recent collapse of seven big financial institutions, the chief executives of those firms collected a total of $80 million in performance bonuses and raked in S210 million in severance pay and earn­ ings from stock sales. Let’s take a closer look at a few of these payouts (the amounts below represent bonus pay, severance, and gains from stock sales from 2005 to late 2008): • • • Richard Fuld, Lehman Brothers ($172 million) Kerry Killinger, Washington Mutual ($37 million) Martin Sullivan. American International Group ($36 million) Michael Perry, Indymac, Federal Bank ($20 million) Kenneth Thompson. Wachovia Corporation (SI4 million) Clearly, there is a strong need for improved corporate governance, and we will address this topic in Chapter 9.44 We focus on three important mechanisms to ensureeffective cor­ porate governance: an effective and engaged board of directors, shareholder activism, and proper managerial rewards and incentives.4″ In addition to these internal controls, a key role is played by various external control mechanisms. These include the auditors, banks, analysts, an active financial press, and the threat of hostile takeovers. stakeholder management a Alternative Perspectives of Stakeholder Management firm’s strategy for recognizing and responding to the interests of all its salient stakeholders. Generating long-term returns for the shareholders is the primary goal of a publicly held corporation.47 As noted by former Chrysler vice chairman Robert Lutz, “We are here to serve the shareholder and create shareholder value. I insist that the only person who owns the company is the person who paid good money for it.”4s Despite the primacy of generating shareholder value, managers who focus solely on the interests of the owners of the business will often make poor decisions that lead to nega­ tive, unanticipated outcomes.44 For example, decisions such as mass layoffs to increase profits, ignoring issues related to conservation of the natural environment to save money, and exerting excessive pressure on suppliers to lower prices can certainly harm the firm in the long run. Such actions would likely lead to negative outcomes such as alienated employees, increased governmental oversight and fines, and disloyal suppliers. Clearly, in addition to shareholders, there are other stakeholders (e.g. suppliers, cus­ tomers) who must be explicitly taken into account in the strategic management process/” A stakeholder can be defined as an individual or group, inside or outside the company, that has a stake in and can influence an organization’s performance. Each stakeholder group makes various claims on the company/1 Exhibit 1.5 provides a list of major stakeholder groups and the nature of their claims on the company. Zero Sum or Symbiosis? There are two opposing ways of looking at the role of stakeholder management in the strategic management process.52 The first one can be termed “zero sum.” In this view, the role of management is to look upon the various stake­ holders as competing for the organization’s resources. In essence, the gain of one indi­ vidual or group is the loss of another individual or group. For example, employees want higher wages (which drive down profits), suppliers want higher prices for their inputs and slower, more flexible delivery times (which drive up costs), customers want fast deliveries and higher quality (which drive up costs), the community at large wants charitable con­ tributions (which take money from company goals), and so on. This zero-sum thinking is rooted, in part, in the traditional conflict between workers and management, leading to the formation of unions and sometimes ending in adversarial union-management negotiations and long, bitter strikes. Consider, for example, the many stakeholder challenges facing Walmart, the world’s largest retailer. Walmart strives to ramp up growth while many stakeholders are watching nervously: employees and trade unions; shareholders, investors, and creditors; suppliers and joint venture partners; the governments of the U.S. and other nations where the retailer oper­ ates; and customers. In addition many non-governmental organizations (NCiOs). particu­ larly in countries where the retailer buys its products, are closely monitoring Walmart. Walmart’s stakeholders have different interests, and not all of them share the firm’s goals. Each group has the ability, in various degrees, to influence the firm’s choices and results. Clearly, this wasn’t the case when Sam Walton built his first store in Rogers, Arkansas, in 1962!53 Exhibit 1.5 Stakeholder Group An Organization s Key Nature of Claim Stakeholders and the Stockholders Dividends, capital appreciation Employees Wages, benefits, safe working environment, job security Suppliers Payment on time, assurance of continued relationship Creditors Payment of interest, repayment of principal Customers Value, warranties Government Taxes, compliance with regulations Communities Good citizenship behavior such as charities, employment, Nature of Their Claims not polluting the environment Chapter 1:: Strategic Management: Creating Competitive Advantages 17 There will always be conflicting demands on organizations. How’ever, organizations can achieve mutual benefit through stakeholder symbiosis, which recognizes that stake­ holders are dependent upon each other for their success and well-being/4 Consider Procter & Gamble’s “laundry detergent compaction.” a technique for compressing even more cleaning power into ever smaller concentrations. In the early 2000s. P&G perfected a technique that could compact two or three times as much cleaning powder into a liquid concentration. This remarkable breakthrough has led to a change not only in consumer shopping habits, but also a revolution in industry supply-chain economics. Let’s look at how several key stakeholders are affected along the supply chain:5’ Consumers love concentrated liquids …


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