Saylor URL: http://www.saylor.org/books Saylor.org 1

This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without

attribution as requested by the work’s original creator or licensee.

Saylor URL: http://www.saylor.org/books Saylor.org 2

Preface

Teaching strategic management classes can be a very difficult challenge for professors. In most

business schools, strategic management is a “capstone” course that requires students to draw on

insights from various functional courses they have completed (such as marketing, finance, and

accounting) to understand how top executives make the strategic decisions that drive whether

organizations succeed or fail. Many students have very little experience with major organizational

choices. This undermines many students’ engagement in the course.

Our book is designed to enhance student engagement. A good product in any industry matches what

customers want and need, and the textbook industry is no exception. It is well documented that

many of today’s students are visual learners. To meet students’ wants and needs (and thereby create

a much better teaching experience for professors), our book offers the following:

• Several graphic displays in each chapter that summarize key concepts in a visually

appealing format.Chapter 1 "Mastering Strategy: Art and Science", for example, offers graphic

displays on (1) the “5 Ps” of strategy; (2) intended, emergent, and realized strategies; (3) strategy in

ancient times; (4) military strategy; and (5) the evolution of strategic management as a field of study.

The idea for the graphic displays was inspired by the visually rich and popular series on business

published by DK Publishing.

• Rich, illustrative examples drawn from companies that are relevant to many

students. As part of our emphasis on examples, each chapter uses one company as an ongoing

example to bring various concepts to life. In Chapter 1 "Mastering Strategy: Art and Science", Apple is

used as the ongoing example.

• A “strategy at the movies” feature in each chapter that links course concepts with a

popular motion picture. In Chapter 1 "Mastering Strategy: Art and Science", for example, we

describe how The Social Network illustrates intended, emergent, and realized strategies.

Politicians in many states are paying more and more attention over time to the cost of a college

education, including the high prices of most textbooks. It is therefore reasonable to expect an ever-

increasing number of professors to seek modestly priced textbooks. Professors still want to be

Saylor URL: http://www.saylor.org/books Saylor.org 3

assured of quality, of course. Both of us are endowed chairs at Research I universities. We have long

track records of publishing our research in premier journals, and we have served in a variety of

editorial and review board roles for such journals. Finally, we recognize that professors want to

minimize their switching costs when adopting a new book. Although every textbook is a little unique,

our table of contents offers a structure and topic coverage that parallels what market leading books

provide.

Saylor URL: http://www.saylor.org/books Saylor.org 4

Chapter 1

Mastering Strategy: Art and Science

L E A R N I N G O B J E C T I V E S

After reading this chapter, you should be able to understand and articulate answers to the following

questions:

1. What are strategic management and strategy?

2. Why does strategic management matter?

3. What elements determine firm performance?

Strategic Management: A Core Concern for Apple

The Opening of the Apple Store

Image courtesy of Neil Bird, http://www.flickr.com/photos/nechbi/2058929337.

March 2, 2011, was a huge day for Apple. The firm released its much-anticipated iPad2, a thinner and

faster version of market-leading Apple’s iPad tablet device. Apple also announced that a leading publisher,

Random House, had made all seventeen thousand of its books available through Apple’s iBookstore.

Apple had enjoyed tremendous success for quite some time. Approximately fifteen million iPads were sold

in 2010, and the price of Apple’s stock had more than tripled from early 2009 to early 2011.

Saylor URL: http://www.saylor.org/books Saylor.org 5

But future success was far from guaranteed. The firm’s visionary founder Steve Jobs was battling serious

health problems. Apple’s performance had suffered when an earlier health crisis had forced Jobs to step

away from the company. This raised serious questions. Would Jobs have to step away again? If so, how

might Apple maintain its excellent performance without its leader?

Meanwhile, the iPad2 faced daunting competition. Samsung, LG, Research in Motion, Dell, and other

manufacturers were trying to create tablets that were cheaper, faster, and more versatile than the iPad2.

These firms were eager to steal market share by selling their tablets to current and potential Apple

customers. Could Apple maintain leadership of the tablet market, or would one or more of its rivals

dominate the market in the years ahead? Even worse, might a company create a new type of device that

would make Apple’s tablets obsolete?

Saylor URL: http://www.saylor.org/books Saylor.org 6

1.1 Defining Strategic Management and Strategy

L E A R N I N G O B J E C T I V E S

1. Learn what strategic management is.

2. Understand the key question addressed by strategic management.

3. Understand why it is valuable to consider different definitions of strategy.

4. Learn what is meant by each of the 5 Ps of strategy.

What Is Strategic Management?

Issues such as those currently faced by Apple are the focus of strategic management because they help

answer the key question examined by strategic management—“Why do some firms outperform other

firms?” More specifically, strategic management examines how actions and events involving top

executives (such as Steve Jobs), firms (Apple), and industries (the tablet market) influence a firm’s

success or failure. Formal tools exist for understanding these relationships, and many of these tools are

explained and applied in this book. But formal tools are not enough; creativity is just as important to

strategic management. Mastering strategy is therefore part art and part science.

This introductory chapter is intended to enable you to understand what strategic management is and why

it is important. Because strategy is a complex concept, we begin by explaining five different ways to think

about what strategy involves (Figure 1.1 "Defining Strategy: The Five Ps"). Next, we journey across many

centuries to examine the evolution of strategy from ancient times until today. We end this chapter by

presenting a conceptual model that maps out one way that executives can work toward mastering

strategy. The model also provides an overall portrait of this book’s contents by organizing the remaining

nine chapters into a coherent whole.

Defining Strategy: The Five Ps

Defining strategy is not simple. Strategy is a complex concept that involves many different processes and

activities within an organization. To capture this complexity, Professor Henry Mintzberg of McGill

University in Montreal, Canada, articulated what he labeled as “the 5 Ps of strategy.” According to

Mintzberg, understanding how strategy can be viewed as a plan, as a ploy, as a position, as a pattern, and

Saylor URL: http://www.saylor.org/books Saylor.org 7

as a perspective is important. Each of these five ways of thinking about strategy is necessary for

understanding what strategy is, but none of them alone is sufficient to master the concept. [1]

Figure 1.1 Defining Strategy: The Five Ps

Images courtesy of Thinkstock (first); Dave, K., Short, J., Combs, J., & Terrell, W. (2011). Tales of

Garcón: The Franchise Players. Irvington, Wikipedia (third); Old Navy (fourth); James Duncan

Davidson from Portland, USA (fifth).

Strategy as a Plan

Saylor URL: http://www.saylor.org/books Saylor.org 8

Strategic plans are the essence of strategy, according to one classic view of strategy. A strategic plan is a

carefully crafted set of steps that a firm intends to follow to be successful. Virtually every organization

creates a strategic plan to guide its future. In 1996, Apple’s performance was not strong, and Gilbert F.

Amelio was appointed as chief executive officer in the hope of reversing the company’s fortunes. In a

speech focused on strategy, Amelio described a plan that centered on leveraging the Internet (which at the

time was in its infancy) and developing multimedia products and services. Apple’s subsequent success

selling over the Internet via iTunes and with the iPad can be traced back to the plan articulated in 1996. [2]

A business model should be a central element of a firm’s strategic plan. Simply stated, a business model

describes the process through which a firm hopes to earn profits. It probably won’t surprise you to learn

that developing a viable business model requires that a firm sell goods or services for more than it costs

the firm to create and distribute those goods. A more subtle but equally important aspect of a business

model is providing customers with a good or service more cheaply than they can create it themselves.

Consider, for example, large chains of pizza restaurants such as Papa John’s and Domino’s.

Franchises such as Pizza Hut provide an example of a popular business model that has been successful worldwide.

Saylor URL: http://www.saylor.org/books Saylor.org 9

Image courtesy of Derek Jensen, http://wikimediafoundation.org/wiki/File:Bremen-indiana-pizza-hut.jpg.

Because these firms buy their ingredients in massive quantities, they pay far less for these items than any

family could (an advantage called economies of scale). Meanwhile, Papa John’s and Domino’s have

developed specialized kitchen equipment that allows them to produce better-tasting pizza than can be

created using the basic ovens that most families rely on for cooking. Pizza restaurants thus can make

better-tasting pizzas for far less cost than a family can make itself. This business model provides healthy

margins and has enabled Papa John’s and Domino’s to become massive firms.

Strategic plans are important to individuals too. Indeed, a well-known proverb states that “he who fails to

plan, plans to fail.” In other words, being successful requires a person to lay out a path for the future and

then follow that path. If you are reading this, earning a college degree is probably a key step in your

strategic plan for your career. Don’t be concerned if your plan is not fully developed, however. Life is full

of unexpected twists and turns, so maintaining flexibility is wise for individuals planning their career

strategies as well as for firms.

For firms, these unexpected twists and turns place limits on the value of strategic planning. Former

heavyweight boxing champion Mike Tyson captured the limitations of strategic plans when he noted,

“Everyone has a plan until I punch them in the face.” From that point forward, strategy is less about a

plan and more about adjusting to a shifting situation. For firms, changes in the behavior of competitors,

customers, suppliers, regulators, and other external groups can all be sources of a metaphorical punch in

the face. As events unfold around a firm, its strategic plan may reflect a competitive reality that no longer

exists. Because the landscape of business changes rapidly, other ways of thinking about strategy are

needed.

Strategy as a Ploy

A second way to view strategy is in terms of ploys. A strategic ploy is a specific move designed to outwit or

trick competitors. Ploys often involve using creativity to enhance success. One such case involves the

mighty Mississippi River, which is a main channel for shipping cargo to the central portion of the United

Saylor URL: http://www.saylor.org/books Saylor.org 10

States. Ships traveling the river enter it near New Orleans, Louisiana. The next major port upriver is

Louisiana’s capital, Baton Rouge. A variety of other important ports exist in states farther upriver.

Many decades ago, the governor of Louisiana was a clever and controversial man named Huey Long.

Legend has it that Long ordered that a bridge being constructed over the Mississippi River in Baton Rouge

be built intentionally low to the ground. This ploy created a captive market for cargo because very large

barges simply could not fit under the bridge. Large barges using the Mississippi River thus needed to

unload their cargo in either New Orleans or Baton Rouge. Either way, Louisiana would benefit. Of course,

owners of ports located farther up the river were not happy.

Ploys can be especially beneficial in the face of much stronger opponents. Military history offers quite a

few illustrative examples. Before the American Revolution, land battles were usually fought by two

opposing armies, each of which wore brightly colored clothing, marching toward each other across open

fields. George Washington and his officers knew that the United States could not possibly defeat better-

trained and better-equipped British forces in a traditional battle. To overcome its weaknesses, the

American military relied on ambushes, hit-and-run attacks, and other guerilla moves. It even broke an

unwritten rule of war by targeting British officers during skirmishes. This was an effort to reduce the

opponent’s effectiveness by removing its leadership.

Centuries earlier, the Carthaginian general Hannibal concocted perhaps the most famous ploy ever.

Saylor URL: http://www.saylor.org/books Saylor.org 11

Hannibal’s clever use of elephants to cross the Alps provides an example of a strategic ploy.

Image courtesy of Wikipedia, http://en.wikipedia.org/wiki/File:Hannibal3.jpg.

Carthage was at war with Rome, a scary circumstance for most Carthaginians given their far weaker

fighting force. The Alps had never been crossed by an army. In fact, the Alps were considered such a

treacherous mountain range that the Romans did not bother monitoring the part of their territory that

bordered the Alps. No horse was up to the challenge, but Hannibal cleverly put his soldiers on elephants,

and his army was able to make the mountain crossing. The Romans were caught completely unprepared

and most of them were frightened by the sight of charging elephants. By using the element of surprise,

Hannibal was able to lead his army to victory over a much more powerful enemy.

Saylor URL: http://www.saylor.org/books Saylor.org 12

Ploys continue to be important today. In 2011, a pizzeria owner in Pennsylvania was accused of making a

rather unique attempt to outmaneuver two rival pizza shops. According to police, the man tried to

sabotage his competitors by placing mice in their pizzerias. If the ploy had not been discovered, the two

shops could have suffered bad publicity or even been shut down by authorities because of health concerns.

Although most strategic ploys are legal, this one was not, and the perpetrator was arrested. [3]

Strategy as a Pattern

Strategy as pattern is a third way to view strategy. This view focuses on the extent to which a firm’s actions

over time are consistent. A lack of a strategic pattern helps explain why Kmart deteriorated into

bankruptcy in 2002. The company was started in the late nineteenth century as a discount department

store. By the middle of the twentieth century, consistently working to be good at discount retailing had led

Kmart to become a large and prominent chain.

By the 1980s, however, Kmart began straying from its established strategic pattern. Executives shifted the

firm’s focus away from discount retailing and toward diversification. Kmart acquired large stakes in

chains involved in sporting goods (Sports Authority), building supplies (Builders Square), office supplies

(OfficeMax), and books (Borders). In the 1990s, a new team of executives shifted Kmart’s strategy again.

Brands other than Kmart were sold off, and Kmart’s strategy was adjusted to emphasize information

technology and supply chain management. The next team of executives decided that Kmart’s strategy

would be to compete directly with its much-larger rival, Walmart. The resulting price war left Kmart

crippled. Indeed, this last shift in strategy was the fatal mistake that drove Kmart into bankruptcy. Today,

Kmart is part of Sears Holding Company, and its prospects remain uncertain.

In contrast, Apple is very consistent in its strategic pattern: It always responds to competitive challenges

by innovating. Some of these innovations are complete busts. Perhaps the best known was the Newton, a

tablet-like device that may have been ahead of its time. Another was the Pippin, a video game system

introduced in 1996 to near-universal derision. Apple TV, a 2007 offering intended to link televisions with

the Internet, also failed to attract customers. Such failures do not discourage Apple, however, and enough

of its innovations are successful that Apple’s overall performance is excellent. However, there are risks to

Saylor URL: http://www.saylor.org/books Saylor.org 13

following a pattern too closely. A consistent pattern can make a company predictable, a possibility that

Apple must guard against in the years ahead.

Strategy as a Position

Viewing strategy as a plan, a ploy, and a pattern involve only the actions of a single firm. In contrast, the

next P—strategy as position—considers a firm and its competitors. Specifically, strategy as position refers

to a firm’s place in the industry relative to its competitors. McDonald’s, for example, has long been and

remains the clear leader among fast-food chains. This position offers both good and bad aspects for

McDonald’s. One advantage of leading an industry is that many customers are familiar with and loyal to

leaders. Being the market leader, however, also makes McDonald’s a target for rivals such as Burger King

and Wendy’s. These firms create their strategies with McDonald’s as a primary concern. Old Navy offers

another example of strategy as position. Old Navy has been positioned to sell fashionable clothes at

competitive prices.

Old Navy occupies a unique position as the low-cost strategy within the Gap Inc.’s fleet of brands.

Image courtesy of Lindsey Turner, http://www.flickr.com/photos/theogeo/2148416495.

Saylor URL: http://www.saylor.org/books Saylor.org 14

Old Navy is owned by the same corporation (Gap Inc.) as the midlevel brand the Gap and upscale brand

Banana Republic. Each of these three brands is positioned at a different pricing level. The firm hopes that

as Old Navy’s customers grow older and more affluent, they will shop at the Gap and then eventually at

Banana Republic. A similar positioning of different brands is pursued by General Motors through its

Chevrolet (entry level), Buick (midlevel), and Cadillac (upscale) divisions.

Firms can carve out a position by performing certain activities in a different manner than their rivals. For

example, Southwest Airlines is able to position itself as a lower-cost and more efficient provider by not

offering meals that are common among other airlines. In addition, Southwest does not assign specific

seats. This allows for faster loading of passengers. Positioning a firm in this manner can only be

accomplished when managers make trade-offs that cut off certain possibilities (such as offering meals and

assigned seats) to place their firms in a unique strategic space. When firms position themselves through

unique goods and services customers value, business often thrives. But when firms try to please everyone,

they often find themselves without the competitive positioning needed for long-term success. Thus

deciding what a firm is not going to do is just as important to strategy as deciding what it is going to do. [4]

To gain competitive advantage and greater success, firms sometimes change positions. But this can be a

risky move. Winn-Dixie became a successful grocer by targeting moderate-income customers. When the

firm abandoned this established position to compete for wealthier customers and higher margins, the

results were disastrous. The firm was forced into bankruptcy and closed many stores. Winn-Dixie

eventually exited bankruptcy, but like Kmart, its future prospects are unclear. In contrast to firms such as

Winn-Dixie that change positions, Apple has long maintained a position as a leading innovator in various

industries. This positioning has served Apple well.

Strategy as a Perspective

The fifth and final P shifts the focus to inside the minds of the executives running a

firm. Strategy as perspective refers to how executives interpret the competitive landscape around them.

Because each person is unique, two different executives could look at the same event—such as a new

competitor emerging—and attach different meanings to it. One might just see a new threat to his or her

firm’s sales; the other might view the newcomer as a potential ally.

Saylor URL: http://www.saylor.org/books Saylor.org 15

An old cliché urges listeners to “make lemons into lemonade.” A good example of applying this idea

through strategy as perspective is provided by local government leaders in Sioux City, Iowa. Rather than

petition the federal government to change their airport’s unusual call sign—SUX—local leaders decided to

leverage the call sign to attract the attention of businesses and tourists to build their city’s economic base.

An array of clothing and other goods sporting the SUX name is available at http://www.flysux.com. Some

strategists such as these local leaders are willing to take a seemingly sour situation and see the potential

sweetness, while other executives remain fixated on the sourness.

Executives who adopt unique and positive perspectives can lead firms to find and exploit opportunities

that others simply miss. In the mid-1990s, the Internet was mainly a communication tool for academics

and government agencies. Jeff Bezos looked beyond these functions and viewed the Internet as a potential

sales channel. After examining a number of different markets that he might enter using the Internet,

Bezos saw strong profit potential in the bookselling business, and he began selling books online. Today,

the company he created—Amazon—has expanded far beyond its original focus on books to become a

dominant retailer in countless different markets. The late Steve Jobs at Apple appeared to take a similar

perspective; he saw opportunities where others could not, and his firm has reaped significant benefits as a

result.

K E Y T A K E A W A Y

• Strategic management focuses on firms and the different strategies that they use to become and remain

successful. Multiple views of strategy exist, and the 5 Ps described by Henry Mintzberg enhance

understanding of the various ways in which firms conceptualize strategy.

E X E R C I S E S

1. Have you developed a strategy to manage your career? Should you make it more detailed? Why or why

not?

2. Identify an example of each of the 5 Ps of strategy other than the examples offered in this section.

3. What business that you visit regularly seems to have the most successful business model? What makes

the business model work?

Saylor URL: http://www.saylor.org/books Saylor.org 16

[1] Mintzberg, H. 1987. The strategy concept I: Five Ps for strategy. California Management Review, 30(1), 11–24.

[2] Markoff, J. 1996, May 14. Apple unveils strategic plan of small steps. New York Times. Retrieved

from http://www.nytimes.com/1996/05/14/business/apple-unveils-strategic -plan-of-small-steps.html

[3] Reuters. 2011, March 1. Philadelphia area pizza owner used mice vs. competition—police. Retrieved from

news.yahoo.com/s/nm/20110301/od_uk_nm/oukoe_uk_crime_pizza

[4] Porter, M. E. 1996, November–December. What is strategy? Harvard Business Review, 61–79.