Home Uncategorized SIA Strategy Mod 6

Uncategorized

SIA Strategy Mod 6

Make sure your core concept is well defined in the first paragraph of the analysis. Don’t forget to incorporate a strong connection to Module specific information, your text should always be in your References. Minimum 5 References

Remember to formerly address the Board in your role as a consultant for this assignment.

please refrain from using Wikipedia as a source.

Strategy In Action 3

As an aside – My personal belief is that concepts and theories are of little value to each us if we do not learn to apply them to the real world. For this reason, we will have applied activities as often as possible. We are always learning together, myself included. Please feel free to call or email me if you want to discuss further.

This SIA assignment requires you apply a concept or theory we have learned to a subject that is current in the ‘real’ world. The assigned topic for Strategy In Action is: Any National Company (examples include Olive Garden, Sears, Carnival Cruise, Delta Airlines, Ford, etc) EXCEPT the FITNESS INDUSTRY (it is the example in the article below) that has been negatively impacted by COVID-19. Once you have selected a company, develop strategies for the organization to reinvent themselves to overcome due to setbacks and lost business from COVID-19.

Here is an example of an industry and several specific companies who are evolving:

https://www.cnn.com/2020/04/01/business/fitness-studios-coronavirus/index.html

In Chapter 11, we examine and explore strategic change.

Your Assignment:
Conduct research on organizations that have re-invented themselves (making strategic changes to remain competitive in a changing global business environment). There are MANY examples available for study. Remember, examples do not have to come from the same business or even the same industry. Using our textbook and your own research write at least two pages of analysis and discussion on key findings/elements of companies that have been successful in ‘reinventing’ themselves to remain competitive in a changing global market environment. You must incorporate at least 5 quality sources.

Next, based on your findings, prepare a minimum one-page recommendation for the board of directors of your selected company to address the challenge of reinventing itself. Include specific recommendations that that include the discussion and implementation plan for at least 3 new initiatives your selected company can pursue to reinvent themselves. Put these together in one document for a MINIMUM three total pages of content (not including reference and title pages). Please follow APA format guidelines.

In other words, after writing an analysis evaluating what companies have successfully done to reinvent themselves (3+pages), you should be in a position to make recommendations for the board of your select company (2+pages). Act as if you are a consultant, hired to help the company progress. What advice or guidance would you offer them based on the information you ascertained during your analysis? Include BOTH qualitative and quantitative support for your recommendations as you link your writing back to the course material as well as your own research.

*Remember, this is your ability to show off what you have learned as well as your ability to apply it to a real world situation.

**Do not confuse this assignment with the change discussed on page 4 of Chapter 11**

Turnitin Requirements:

· For each assignment, your similarity score must meet a threshold of no more than 5%.
· Assignments with greater than 5% similarity must be revised and resubmitted to Turnitin until the 5% threshold is achieved.
· For resubmissions, it may take up to 24 hours for a new similarity score.

Strategic Management: Theory and
Practice

Strategy Execution Strategic Change, Culture,
and Leadership

Contributors: By: John A. Parnell

Book Title: Strategic Management: Theory and Practice

Chapter Title: “Strategy Execution Strategic Change, Culture, and Leadership”

Pub. Date: 2014

Access Date: March 24, 2018

Publishing Company: SAGE Publications, Ltd

City: 55 City Road

Print ISBN: 9781452234984

Online ISBN: 9781506374598

DOI:

http://dx.doi.org/10.4135/9781506374598.n11

Print pages: 292-325

This PDF has been generated from SAGE Knowledge. Please note that the pagination of

the online version will vary from the pagination of the print book.

javascript:void(0);

http://dx.doi.org/10.4135/9781506374598.n11

Strategy Execution Strategic Change, Culture, and Leadership

Chapter Outline

Organizational Culture and Strategy

Cultural Strength and Diversity

Shaping the Culture

Global Concerns

Strategic Leadership

Leadership Style

Executing Strategic Change

Recognize the Need for Change

Create a Shared Vision

Institutionalize the Change

Summary

Key Terms

Review Questions and Exercises

Practice Quiz

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 2 of 41

http://www.sagepub.com

Student Study Site

Notes

When a new strategy is executed, an old one is discarded. Managing strategic change can be
a difficult task even when everyone in the organization agrees that it is needed and
understands what will occur as a result. Even so, techniques to institutionalize the change
must be developed. Barriers and resistance to change should be recognized so that
strategies can be developed to overcome them.

Executing a strategy can become quite challenging—especially when a strategic change of
great magnitude is involved. When the environment changes rapidly or abruptly, progressive
firms take steps to capitalize on new opportunities and/or minimize the negative effects of the

changes.1. Change can be brought about by factors such as the need to address increased
competition, improve quality or service, reduce costs, or align the firm with the practices and
expectation of its partners. Strategic change can be revolutionary, such as when a firm
changes its product lines, markets, or channels of distribution. Strategic change can also be
less radical, such as when a firm overhauls its production system to improve quality and lower
its costs of operations.

Because changing strategies is often a complex process, it may not be desirable even when
changes in the macroenvironment and/or industry suggest problems for the current strategy.
Shifting the strategic intent may confuse customers and employees, may require structural
changes in the organization, and can result in major capital investments. In short, the costs

associated with a major strategic change are not always justified by the benefits.

Evaluating the appropriateness of strategic change is a complex process. Consider several
examples. In 2003, McDonald’s faced its first quarterly loss as a public company. Rather than
increase its efforts to market inexpensive products to children, the burger giant responded
with higher priced items such as the $4.50 California Cobb salad and the $3.89 grilled chicken
c l u b s a n d w i c h , a l l t h e w h i l e r e t a i n i n g i t s d o l l a r m e n u w i t h i t e m s s u c h a s d o u b l e
cheeseburgers, chicken sandwiches, and side salads. As a result, revenue increased 33%
from 2002 to 2005, while profits more than doubled. McDonald’s also responded with a more
aggressive approach to new product development instead of relying on its franchises to
generate ideas, a slow process that led to the Big Mac in 1968, the Egg McMuffin in 1973,
and the Happy Meal in 1979. The firm hired chef Dan Coudreaut as director of culinary
innovation in 2004, a decision that led to the successful Asian salad and the value-priced

snack wrap in 2006.3. The fast-food giant added premium coffee and related offerings to its
product line in 2006. The results have been positive with McDonald’s experiencing strong

growth in profits, market share, and stock price through the early 2010s.4. Same store sales
declined in late 2012 for the first time since 2003, however, renewing the debate over how
McDonald’s can balance its premium and dollar menu items while its own food costs are on
the rise.

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 3 of 41

http://www.sagepub.com

McDonald’s also faced an intriguing challenge when it introduced drive-thru serve in its
Chinese restaurants in 2006. Customers there were not familiar with a drive-thru and could
not figure out how to use it. The company responded with flyers illustrating the process and

had employees stationed in the parking lots to direct customers to the drive-thru lane.

Strategic change is more common in some industries than in others. For example, a number
of strategic shifts have occurred in the airline industry since the early 2000s. Southwest
Airlines has reported profits every year since its inception, fueled by a consistent reliance on
low costs, no frills, and low fares. In the early 2000s, however, younger low-cost carriers such
as JetBlue, Frontier, and America West experienced more rapid growth thanks in part to a
greater emphasis on factors such as entertainment, food service, and first-class seating. In
late 2003, Southwest announced it would begin flying into Philadelphia—a hub for U.S.
Airways—in 2004, a move signaling a possible shift from the airline’s historical avoidance of
busy airports ruled by major carriers.

Southwest made another similar jump when it moved into Denver International Airport in
January 2006, where airport fees average around $9 per passenger as opposed to the
industry average of $5. Southwest had avoided such costly airports in the past and faced
intense price competition there with Denver-based low-cost carrier Frontier Airlines, and some

extent from United Airlines, which controls over half of the Denver market.6. Some analysts
believed that this strategic change marked the beginning of a departure from Southwest’s

strict low-cost position.7. Others believe that Southwest’s growth and success in the early
2000s, coupled with intense competition from low-price upstarts, has begun to erode
Southwest’s cost advantage. Southwest acquired low-cost rival AirTran in 2010, giving
Southwest a significant presence in the Hartfield-Jackson Atlanta International Airport.

Strategic change of a great magnitude can be difficult to implement (see Strategy at Work
11.1). Employees resist change for a variety of reasons, including personal factors, lack of
information about the change, and poor design of the support system. Simply stated,
strategic change is easier said than done.

Strategy at Work 11.1. Decades of Strategic Change at Sears

Until the mid-1970s, Sears was arguably the most successful U.S. retailer. However,
the retail industry began to undergo dramatic changes in the late 1970s. Sears’ private-
label business was eroded by the growing popularity of specialty retailers such as
Circuit City while its once low-cost structure was decimated by Wal-Mart.

Sears’ response to these changes has not always been consistent. Initially, the retailer
reacted by attempting to emphasize fashion with such labels as Cheryl Tiegs
sportswear. But high-fashion models were not consistent with the Sears middle-

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 4 of 41

http://www.sagepub.com

America image. Sears then attempted to convert its antiquated image into a financial
supermarket by purchasing Dean Witter Financial Services and Coldwell Banker Real
Estate. However, in-store kiosks never caught on with customers, and the expected
synergy between these two subsidiaries and Sears’ Allstate Insurance and Discover
Card business units failed to materialize.

Next, management modified the store’s image to one that sold nationally branded
merchandise along with private-label brands at “everyday low prices.” The idea was to
create individual “superstores” within each of the Sears outlets to compete more
effectively with powerful niche competitors. Sears departed from its traditional practice
of holding weekly sales to save on advertising expenses and inventory handling while
offering everyday low prices, which turned out to be, in some cases, higher than Sears’
old sale prices. By this time, customers were totally confused. In 1992 alone, Sears lost
almost $4 billion, its worst performance ever.

In 1993, Sears terminated its big catalog operations, began spinning off some of its
businesses unrelated to general merchandising, overhauled its clothing lines,
eliminated more than 93,000 jobs, and closed 113 stores. In 1995, Sears reentered the
catalog business. This time, instead of a big book Sears catalog, it set up joint
ventures to provide smaller catalogs. Sears provides its name and its 24 million credit
card customers. Its partners select the merchandise, mail catalogs, and fill orders.

By 1996, Sears had begun to benefit from its strategic shift to moderately priced
apparel and home furnishings. In 1999, Sears branched out further, developing “The
Great Indoors” to attract women to the traditionally male-dominated home improvement
market. This format was in response to the fragmented nature of the home remodeling
business, particularly on the higher end where services such as decorating and
installation are often involved. The format targeted as its primary customers women 30
to 50 years old earning in the $50,000 range.

In late 2001, Sears announced another strategic shift designed to position the firm as a
solid, even more discount-oriented retailer. The company announced the elimination of
a substantial number of cashiers and other employees, the integration of centralized
checkouts, and shifts in the product mix, all designed to improve efficiency in the
stores. In late 2002, Sears acquired Lands’ End, a leading marketer of traditionally
designed clothing and related products. By the mid-2000s, Sears had incorporated the
brand into its retail outlets, but performance continued to wane. The once prosperous
American icon had been unable to meet the challenges of a changing retail
environment.

Kmart acquired Sears in 2005 for $11 billion (see Strategy at Work 6.1 in Chapter 6),

but sales for the combined firm have declined every year since through 2011.

The decision to institute a strategic change or not can be a difficult one. This chapter
discusses two key areas associated with executing strategic change: (1) organizational
culture and (2) leadership. Both dimensions must be aligned with the strategy and managed
properly if a strategy is to be implemented effectively.

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 5 of 41

http://sk.sagepub.com/books/strategic-management-theory-and-practice-fourth-edition/i2345.xml

http://www.sagepub.com

Organizational Culture and Strategy

Organizational culture refers to the shared values and patterns of belief and behavior that are

accepted and practiced by the members of a particular organization.10. It includes work
practices, traditions, and accepted work practices and also defines how managers and
workers treat each other and can expect to be treated. It fosters peer pressure that
encourages members of the organization to behave in certain ways. Ideally, the strategic
decisions rendered by top management should be consistent with the culture of the
organization. Strategies that contradict cultural norms are more difficult to execute. An
emphasis on cost leadership, for example, is not easy to implement when members of an
organization are conditioned to spend company time and resources on new products and
ideas.

Because each organization develops its own unique culture, even organizations within the
same industry and city will exhibit distinctly different ways of functioning. The organizational
culture enables a firm to adapt to environmental changes and to coordinate and integrate its

internal operations.11. Ideally, the values that define a firm’s culture should be clear, easy to
understand by all employees, embodied at the top of the organization, and reinforced over
time.

Cultures not only form at the organizational level but within the organizational culture as well.
These organizational subcultures can develop around such factors as location, functional
responsibility, or managerial level. Cultural similarities among sales representatives at an
organization may differ from those among production workers.

The first and most important influence on an organization’s culture is its founder(s). Some
founders have strong beliefs about business practice or have strict procedures for transacting
affairs. Their assumptions about success—as well as those of other early top managers—

form the foundation of the firm’s culture.12. For instance, the primary influence on
McDonald’s culture was the fast-food company’s founder, Ray Kroc. Although he passed
away in 1984, his philosophy of fast service, assembly line food preparation, wholesome
image, cleanliness, and devotion to quality are still central facets of the organization’s

culture.13. Likewise, Steve Job’s influence on Apple will remain long past his untimely death
in 201

Views and assumptions concerning an organization’s distinctive competence comprise one of
the most important elements of culture, particularly in new organizations. For example,
historically innovative firms are likely to respond to a sales decline with new product
introductions whereas companies whose success is based on low prices may respond with

attempts to lower costs even further.14. However, it is possible to modify the culture over time
as the environment changes, rendering some of the firm’s culture obsolete and even
dysfunctional. New elements of the culture must be added as the old elements are discarded.

Stories are also an important component of culture. Whether true or fabricated, accounts and
legends of organizational members can have a great influence on present-day actions of
managers and workers alike. UPS employees tell stories of drivers who go the extra mile
through adverse weather to deliver packages on time. Microsoft employees retell stories of
programmers who work long hours to meet demanding production schedules. These stories
create expectations and can inspire workers to perform similar feats in their daily jobs.

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 6 of 41

http://www.sagepub.com

Organizational culture can facilitate or hinder the firm’s strategic actions. Studies have shown
that firms with “strategically appropriate cultures”— such as PepsiCo, Apple, and Google—
tend to outperform other corporations whose cultures do not fit as well with their strategies. A
strategy-culture fit can support strategy execution because the activities required from middle
managers and others in the organization are consistent with what is already taking place.
When the strategy does not fit with the culture, it is necessary to change one or both. For
example, a firm caught in a changing environment may craft a new strategy that makes sense
from financial, product, and marketing points of view. Yet the strategy may not be
implemented because it requires significant changes in assumptions, values, and ways of

working.15. All things considered, changing a strategy is easier than changing culture, and

both are often required for organizations to be successful.1

For many firms, achieving a strategy-culture fit means an adaptive culture whereby members

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 7 of 41

http://www.sagepub.com

of an organization are willing and eager to embrace any change that is consistent with the

core values.17. Such a culture values taking initiative and risk, exhibiting creativity, trust and
employee involvement, and a desire for continuous, positive organizational change. Adaptive
cultures are especially important for firms that emphasize high growth or innovation (e.g.,
prospectors), as well as those operating in turbulent environments. Adaptive cultures
emphasize innovation—developing something new—and encourage initiative whereas inert
cultures are conservative and encourage maintenance of existing resources. For companies
like Google and eBay, an adaptive culture is an essential part of their success.

Cultural Strength and Diversity

Some cultures influence firm activities more than others. A strong culture is characterized by
deeply rooted values and ways of thinking that regulate firm behavior. Top managers model
that behavior and create peer pressure that reinforces the notion that others in the
organization should behave likewise. Strong cultures develop over an extended period of time
—generally a decade or longer.

When a strong culture embodies appropriate values, it can be a valuable resource for a firm
when it reinforces values inherent in the organization’s strategies. Effective strategy execution
occurs when all facets of the organization—including the culture—are “on the same page.”
When this occurs, effectiveness is likely to increase when a firm’s strategy and culture

reinforce each other.18. J. C. Penney’s strong culture grounded in its key principles on ethics
and customer orientation has contributed to its success and survival as a leading U.S. retailer

for over 100 years.19.

When a strong culture is unhealthy and embodies destructive characteristics, it can strain firm
performance. For example, such characteristics include a strong emphasis on politics to get
things done, a disregard for ethical standards, territorialism among departments, and strong
resistance to change. Of course, strong dysfunctional cultures can hinder organizational

performance.20.

Unlike a strong culture, a weak culture lacks values and ways of thinking that are widely
accepted by members of the organization. There is no clear, widely accepted business
philosophy, and managers approach their responsibilities in different ways. In general, this
lack of cultural consensus does not support strategy execution. There are exceptions,
however, such as colleges and universities where disparate perspectives may be deliberately
fostered across campus to expose students to different view and ideas during their
educational experience. Such institutions emphasize diversity, the extent to which individuals
across the organization are different.

It is common today to speak of the need to pursue diversity as a means of competitive
advantage. The term can be defined in a number of ways, however. Some use it to reference
differences over which individuals clearly have no choice, such as age, race, ethnicity, gender,
and physical disability. Others extend this definition to include behaviors over which

individuals exert control, such as marital status, religion, and sexual preference.21. Still others
use the term simply to reference differences in ways of thinking.

Research linking diversity and firm performance is largely inconclusive, however, in part
because of competing conceptualizations of what it means for an organization’s membership

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 8 of 41

http://www.sagepub.com

to be diverse.22. Diversity’s link to cultural strength is an interesting one. The latter, simpler
notion of diversity—differences in ways of thinking—is strikingly similar to the concept of a
weak culture. In this respect, greater diversity can hinder firm performance. A number of
research studies focusing on diverse top management teams, however, have found that
diverse ways of thinking among top managers lead to more creative, comprehensive, and

effective strategies.2

The value of diverse ways of thinking appears to be most critical when a strategy is being
formulated. A diverse top management team can pool its vast backgrounds and perspectives
to create innovative strategies without blind spots. For those responsible for executing a
strategy, typically middle- and lower-level managers, less diversity is required. In this stage,
processes for implementation may be clearly defined, and managers are simply charged with
following them. Hence, a strong culture—one with less diversity of thought—is likely
preferable in this regard.

Shaping the Culture

Cultural change is a complex process. Just as cultures do not develop overnight, they are
rarely changed in a short period of time. Culture change is possible, but efforts often fail due
primarily to a lack of understanding about how a culture can be changed and how long it is

likely to take.2

Top executives can influence and shape the organization’s culture in at least five ways25.—
the first of which is to systematically pay attention to areas of the business believed to be of
key importance to the strategy’s success. The top executive may take steps to accomplish this
goal formally by measuring and controlling the activities of those areas or less formally by
making specific comments or questions at meetings. These specific areas should be ones
identified as critical to the firm’s long-term performance and survival, and may include such
areas as customer service, new product development, or quality control.

The second means involves the leader’s reactions to critical incidents and organizational
crises. The way a chief executive officer (CEO) deals with a crisis, such as declining sales or
technological obsolescence, can emphasize norms, values, and working procedures or even
create new ones. Organizational members often take their behavioral cues from their leaders.

The third means is to serve as a deliberate role model, teacher, or coach. When a CEO
models certain behavior, others in the organization are likely to adopt it as well. For example,
CEOs who give up their reserved parking places and park among the line workers send a
message about the importance of status in the organization.

The fourth means is the process through which top management allocates rewards and
status. Leaders communicate their priorities by consistently linking pay raises and promotions,
or the lack thereof, to particular behaviors. Simply stated, rewarded behavior tends to
continue and become ingrained in the fabric of the organization. This not only applies to
middle and lower-level managers but can apply at top levels of the organization as well.

The fifth means of shaping the culture is to modify the procedures through which an
organization recruits, selects, promotes, and terminates employees. An organization’s culture
can be perpetuated by hiring and promoting individuals whose values are similar to those of
the firm and whose beliefs and behaviors more closely fit the organization’s changing value

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 9 of 41

http://www.sagepub.com

1.
2.

system. Firms should spend the time necessary to properly screen candidates and evaluate
them on their fit with the desired organizational culture. The easiest way to affect culture over
the long term is to hire individuals who possess the desired cultural attributes.

Global Concerns

A number of global concerns can also complicate the role of organizational culture. In many
respects, an organization’s culture can be viewed as a subset of the national culture in which
the firm operates. As such, operating outside one’s own country can create special challenges
in areas such as leadership and maintaining a strong organizational culture. For example,
leaders of some nations resist innovation and radical new approaches to conducting business
whereas others welcome such change. Such national tendencies often become a part of the
culture of the organization in those countries.

The self-reference criterion—the unconscious reference to one’s own cultural values as a
standard of judgment—also presents a potential problem. Managers often believe that the
leadership styles and organizational culture that work in their home country should work
elsewhere. However, each nation—like each organization—has its own unique culture,
traditions, values, and beliefs. Hence, organizational values and norms must be tailored to fit
the unique culture of each country in which the organization operates—at least to some
extent. The need to customize values and norms can create special challenges when firms
from different countries become partners or even merge their organizations.

Strategic Leadership

Announcing a strategic change usually does little to inspire those responsible for
implementing the change. The top management team has several means at its disposal to
encourage managers and other employees to implement the strategy, one of which is
leadership. The CEO is recognized as the organization’s principal leader, one who sets the
tone for its activities. A manager exhibits (managerial) leadership when he or she secures the
cooperation of others in accomplishing a goal (see Strategy at Work 11.2).

Strategy at Work 11.2. Planning for CEO Succession26.

CEO succession is an important consideration, especially when an executive departs a
large, successful firm. Wal-Mart’s legendary CEO Sam Walton handed over the reigns
of power to David Glass in early 1998, followed by Lee Scott and Mike Duke in 2009.
Following Steve Job’s illness and subsequent death in 2011, the reigns at Apple were
passed to Tim Cook. How do icons like Wal-Mart and Apple execute these changes in
leadership-and leadership styles—without negative consequences? Five lessons for a
successful CEO transition have been suggested from the Wal-Mart experience:

Firms should cross-train high-level executives to broaden their exposure as
much as possible. Doing so prevents the learning curve for the new CEO from
being too steep.

Firms should expose the heir apparent and other top executives to board

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 10 of 41

http://www.sagepub.com

3.
4.
5.

members so they know what the board expects from top management.

Firms should discuss potential conflicts associated with the new roles for both
the incoming and the outgoing CEOs. Plan to address any potential problems.
Like Walton, Glass stayed on in an advisory capacity after he stepped down as
CEO.

The new CEO should conduct meetings in conference rooms to facilitate open
participation, not from the executive desk.

Everyone involved should stay humble and not overestimate the new CEO’s
ability to institute rapid change.

Strategic leaders articulate the firm’s vision. Whereas the mission describes what you
strive to do best every day, the vision is a view of the future when your mission is
achieved in the present. For example, a relatively small car producer’s mission may be
to produce reliable, economical vehicles for value-conscious consumers. Its CEO might
articulate a vision of the firm as a leader in providing reliable transportation throughout
the world. Such a vision stretches the firm’s ability to grow and develop but looks to the
future and is realistic because it is attainable if the company continues to fulfill its
mission.

Broadly speaking, the vision sets the stage for the firm’s strategy by focusing members
of the organization on key capabilities, offering a sense of direction, and even providing
a mental picture of what the firm should look like in the future. Of course, vision
statements have little impact on organizations if they are not sufficiently focused and
articulated clearly. In this respect, the notion of a vision is the linchpin between the
CEO and the components of the strategy. Diffusing the vision—and ultimately the

strategy—throughout the organization is a key top executive function.2

Strategic leadership is more than managerial leadership. In addition to creating the
vision and mission for the firm, it also includes developing strategies and empowering
individuals throughout the organization to put those strategies into action. It includes
determining the firm’s strategic direction, aligning the firm’s strategy with its culture,
modeling and communicating high ethical standards, and initiating changes in the
firm’s strategy when necessary. Strategic leadership establishes the firm’s direction by
developing and communicating a vision of the future and inspires organization

members to move in that direction.28. Unlike strategic leadership, managerial

leadership is generally concerned with the short-term, day-to-day activities.29.

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 11 of 41

http://www.sagepub.com

Effective strategic leadership is the link between strategy formulation and strategy
execution. Without it, otherwise effective strategies will not likely be implemented as
planned. Developing a firm’s mission, vision, and strategies is not sufficient. Effective
strategic leaders inspire managers and even non-managers to take the necessary
steps to realize them. They build and promote an organizational culture that supports
firm strategies, and they set the tone for ethical behavior.

Exerting effective strategic leadership is not always easy. Indeed, the leadership
component of strategic management is often characterized by the same lack of
decisiveness inherent in one of its forerunners, the field of economics. Former U.S.
president Harry Truman became so frustrated with economists that he once lamented,
“I want a one-armed economist so that the guy could never make a statement and then
say ‘but on the other hand.’” One could argue that one-armed strategists are also in
short supply. There are at least two sides to most strategic issues from downsizing and
outsourcing to takeovers and corporate restructuring. Sage strategists are well versed

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 12 of 41

http://www.sagepub.com

in multiple perspectives on issues before committing to a course of action.

Leadership Style

Every leader has a distinctive leadership style—a consistent pattern of behavior that a leader
exhibits in the process of governing and making decisions. Some leaders are flamboyant
whereas others are reserved and contemplative. Some seek broad-based participation when
making decisions whereas others arrive at decisions primarily on their own with little input
from others. Regardless of style, participation can help build employee commitment to the
firm’s goals and strategies and is generally seen as a positive approach to decision

making.30.

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 13 of 41

http://www.sagepub.com

1.
2.
3.

There is little agreement on what might constitute a single best leadership style. Moreover,
research has identified a wide variety of leadership styles, a complete analysis of which is
beyond the scope of this chapter. To demonstrate the link between leadership and strategy,

two basic approaches are presented herein.31. L e a d e r s e m p l o y i n g a transactional
leadership style use the authority of their office to exchange rewards such as pay and status
for employees’ work efforts and generally seek to enhance an organization’s performance
steadily, but not dramatically. By contrast, leaders employing a transformational leadership
style inspire involvement in a mission, giving followers a vision or higher calling, thereby
seeking more dramatic changes in organizational performance. In effect, transformational
leaders like Sam Walton and Steve Jobs motivated followers to do more than they originally
expected to do by stretching their abilities and increasing their self-confidence (see Strategy

at Work 11.3)32.

Strategy at Work 11.3. Johnson & Johnson Leadership Emphasizes Innovation33.

To say the least, Johnson & Johnson (J&J) chairman Robert Wood Johnson was
ahead of his time when he wrote the Company Credo in the 1940s. The Credo took the
unusual step of declaring that the organization’s primary responsibility was to “the
doctors, nurses, and patients… mothers and fathers and all others who use our
products and services.” This customer-driven focus had been the basis of J&J’s
success to that point, and it continues to pervade the company today, serving as
common ground for the organization’s 170 operating companies. J&J’s business today
is driven by three basic commitments:

Commitment to the Credo

Commitment to decentralized management

Commitment to the long term

Within the Credo’s framework-and in some ways because of it—J&J constantly
emphasizes innovation, often measuring its success by the percentage of sales from
products introduced in the past 5 years. In the 1980s, this percentage was around
30%. Today, it is close to 35%. As a result of this high level of innovation, the
organization has increased its sales by more than $3 billion and added more than
8,000 new employees over the past decade, growing to more than 116,000 employees
in more than 60 countries by 20

11.

Transformational leadership is typically associated with strategies that emphasize innovation,
a frequently referenced but elusive concept. Austrian economist Joseph Schumpeter
identified five types of innovation: (1) new products, (2) new materials or resources, (3) new

markets, (4) new production processes, and (5) new forms of organization.34. It often occurs
through a process Schumpeter called creative destruction, whereby managers consciously
and constantly destroy old ways of doing things by recombining their elements into new

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 14 of 41

http://www.sagepub.com

forms.

A leader is typically categorized as transactional or transformational based on his or her
overall pattern of behavior. Contrary to popular opinion, the transformational leader is not

always a dynamic, vibrant, charismatic personality type.35. A n u m b e r o f C E O s h a v e
transformed their organizations during times of turbulence without being charismatic figures.
Indeed, a charismatic personality can be an asset to a transformational leader (and to a
transaction leader, to a lesser extent), but it is not a prerequisite for success (see Strategy at
Work 11.4).

Strategy at Work 11.4. Strategic Leadership at Southwest Airlines36.

Herb Kelleher built Southwest Airlines into one of the most profitable and fastest-
growing airlines in the country through an emphasis on low-cost operations. In doing
so, he also managed to win the trust and respect of his employees through his
leadership style.

Texas businessman Rollin King and attorney Herb Kelleher founded Air Southwest in
1967 as a regional airline linking Dallas, Houston, and San Antonio. Southwest made
its first scheduled flight in 1971 and passed the billion-dollar revenue mark in 1989.
Today, Southwest Airlines remains a predominantly short-haul, high-frequency, low-fare
airline providing service within the United States. The Dallas-based carrier offers
approximately 2,700 daily flights throughout much but not all of the country.

Southwest is a classic no-frills airline, although service is generally perceived to be
excellent, and on-time performance rivals or exceeds its larger peers. Meals are not
served, although passengers are encouraged to bring their own food on the plane. In
addition, there are no reserved seats. The first 30 passengers to check in at the gate
are allowed to board first (and select seats), followed by the next 30, and so on.
Southwest minimizes costs by operating out of smaller, less costly airports whenever
possible.

Southwest has enjoyed 29 consecutive years of profits, including 2001 when the 9/11
terrorist attacks riveted other American carriers into deep losses. High productivity,
combined with the airline’s lack of frills, gives Southwest a 43% cost advantage over its
large Dallas-based rival, American Airlines. In fact, the airline has been the only major
U.S. carrier to avoid layoffs and maintain a full flight schedule since that time. The
company even began hiring additional employees in early 2002.

Southwest is known for its fun-loving, service-oriented culture. Flight attendants seem
to be amateur comedians, a practice that subsided after the events of 9/11 but had
reemerged by 2003.

Chairman Herb Kelleher, who stepped down as CEO in 2001, helped establish a
reputation for the company as one of the top employers in the United States. Fortune
typically recognizes Southwest as one of the most admired companies in its annual
surveys.

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 15 of 41

http://www.sagepub.com

Kelleher was (and still is) genuinely respected by Southwest employees. He
established excellent rapport with personnel and avoided the bitter negotiations that
have characterized labor contracts at several other airlines. Through profit-sharing
plans, cross-utilization of workers, and Kelleher’s concern for employees, the company
developed a culture of trust and loyalty.

As CEO, Kelleher was highly visible. He would often take Southwest flights and
frequently visited the aircraft maintenance areas. The visits were invariably upbeat and
optimistic, with Kelleher dressing in a casual fashion (often in a Southwest Airlines
shirt) and joking with the crew. He knew individuals’ names and even sent birthday and
Valentine’s Day cards to each employee.

Kelleher handed over the CEO reins to James Parker (VP) in 2001 although Kelleher
retained his position as chairman of the board until 2008.

Most leaders exhibit both transactional and transformational styles, to varying degrees (see
Figure 11.1). Consider General Electric’s (GE) Jack Welch, who retired after two decades as
GE CEO in 2001. Welch was known for his impatient, aggressive, and alternatively charming
and overbearing image, and he pushed workers in GE plants and offices to constantly
improve efficiency. However, Welch also demonstrated an uncanny charisma and strong drive
as top executive. Widely known as one of America’s most effective CEOs, Welch integrated

components of both transactional and transformational styles.37.

Firms often seek leaders with certain styles that complement the organization. Three months
after an ice storm stranded passengers and created chaos at JetBlue Airways in 2007—
costing the airline an estimated $30 million—founder and charismatic leader David Neeleman
was removed as CEO. Neeleman was replaced by then president Dave Barger, a leader with

an operations perspective and a more transactional style.38.

Figure 11.1 Leadership Style Continuum

Regardless of leadership style, a leader’s likelihood of success has also been tied to
emotional intelligence, one’s collection of psychological attributes, such as motivation,
empathy, self-awareness, and social skills. Executives who possess a passion for their work,
are socially oriented, and understand their own needs as well as those of their subordinates
a r e m o r e l i k e l y t o g a i n t h e t r u s t , c o n f i d e n c e , a n d s u p p o r t n e c e s s a r y t o l e a d t h e i r

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 16 of 41

http://www.sagepub.com

organizations.39.

Other facets of leadership are also important. DaVita, Inc., is one of the largest dialysis-
treatment operators in the United States. CEO Kent Thiry created an immersion program for
his senior managers, requiring them to spend several days each year alongside technicians or
other practitioners. Loews Hotels executives are required to spend a day each year in an
entry-level job at one of the hotels. This type of ground-level perspective earns trust and favor

with the rank and file in an organization, as well as valuable strategic insight.40.

Although transformational leadership styles have gained increased popularity in recent years,
transactional styles may be most appropriate in relatively predictable environments. Because
predictability has become less common in recent years, however, many scholars and
practitioners see a movement toward a transformational style as attractive for many
organizations. Changing the predominant style in an organization—especially from
transactional to transformational—can be a difficult process.

Executing Strategic Change

This chapter has outlined the benefits, costs, and considerations for implementing a strategic
change. The process can be complex, however, especially in global markets. When German
retailer Metro AG entered India, for example, it had to teach farmers how to pick, store, and
transport vegetables. Workers used to piling produce on the ground were required to place

them in crates to minimize the infiltration of bacteria that can reduce shelf life.41.

Not only is strategic change a complex process but clear, detailed steps for instituting a
change are difficult to develop because organizations differ markedly in terms of industry,
external environment, strategy, structure, culture, leadership, and other factors. For this
reason, a simple three-step process for executing an effective strategic change is

presented.42. This model can be applied regardless of the type of strategic change under
consideration. In this context, the notion of “strategic change” is broadly defined and includes
both changes in a strategy and changes in related factors (e.g., structure, leadership, and
culture) that support the success of a strategy.

Recognize the Need for Change

First, the need for change must be recognized, and key managers in the organization must
be made aware of that need. Although this step may appear simple at first, some individuals
inevitably perceive the need for change before others. In addition, this task may be difficult if
the organization currently seems to be going well. From an implementation standpoint,
however, the best time to initiate change is when the organization is functionally well, not
when it is in crisis. From a practical standpoint, it is difficult to execute a strategic change
when only a visionary top executive sees the need to change in the first place.

Firms that are performing poorly are usually first to recognize the need for change and often
replace their CEOs with outsiders. These new leaders can sometimes make the decisions that
an insider might be reluctant to make while bringing a fresh perspective to the firm and its
problems. On the other hand, outsiders may have to spend months learning the intricacies of

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 17 of 41

http://www.sagepub.com

the business and developing a network of contacts before they can make decisions of any
magnitude. However, hiring an outsider can send a message that current executives are not
worthy of promotion.

An organization tends to allocate resources to the factors that led to current success, not
necessarily the factors that are associated with future success. To overcome this tendency,
leaders should broaden their measurement of performance to include comparisons to their
competitors and to industry norms, not just last year’s performance. In addition to the typical
economic indicators, such as profitability, earnings per share, and market share, performance
measures should also include factors such as customer satisfaction and product quality.

Create a Shared Vision

Once the need for change is established, leaders must inspire organizational members with a
vision of what the organization can become if its members are willing to change. The vision
might be one of excellent customer service, industry leadership, or a leaner firm following a
restructuring. The change effort is not as likely to be successful when members of the firm do
not share the same vision for the company’s future organization.

The CEO should lead the effort and should identify and model high performance standards.
Transformational leaders seek to stretch their followers’ abilities, and high-performing
organizations rarely pursue moderate goals or performance standards. Their public behavior

should reflect their own excitement and energy at all levels of the organization.43.

Transformational leaders must also effectively communicate their vision to all members of the
organization. A lack of vision can cloud organizational efforts whereas clear communication of
a vision creates a focus for the employees’ efforts.

Institutionalize the Change

Finally, the firm’s leadership must institutionalize the desired strategic changes. The adage
“change starts at the top” is true in this regard. Without a strong commitment from the top
executive and his or her top management team, the proposed strategic change is less likely to
succeed.

The top executive must also realize that building a lasting change takes time. For example,
encouraging organizational members to work and interact in different ways may require a new
reward system, and changes may be necessary in systems for pay increases and promotions.
Without adequate rewards, employees are unlikely to see involvement in initiating change as

worthy of their efforts.44. Minor changes in the system will likely produce minor changes in
behavior.

The need for concise, accurate, and timely information is critical at all three stages of the

change process.45. A leader should not rely exclusively on his or her associates for
information but should be accessible to all the members of the organization and to its
customers. CEOs should also actively encourage others on their top management teams to
act as devil’s advocates so that group members seek agreement even in the face of conflict.

Top-down change efforts are not always successful. Top managers may attempt to
institutionalize an ambitious change without pretesting, education, or employee participation,
or they may follow a rigid change procedure that appeared to work elsewhere without

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 18 of 41

http://www.sagepub.com

1.
2.
3.
4.
5.
6.
7.

considering unique characteristics of the organization.46. For this reason, a number of
bottom-up approaches have been suggested whereby managers and line workers recognize
the need for change and develop new strategies jointly. Regardless of approach, the
importance of employee participation in the process at all levels cannot be easily

understated47. (see Case Analysis 11.1).

Case Analysis 11.1 Step 23: How Should the Alternative(s) be Implemented?

After alternatives have been evaluated and one or more have been selected, a plan for
their execution must be developed. Some of the key considerations-structure, culture,
and leadership-have been outlined in this and the previous chapter. Concepts
concerning the processes of external and internal analysis discussed in previous
chapters are relevant as well.

There are no simple outlines for effective implementation, however; each plan is unique
to the organization and the alternatives recommended in the previous step.
Nonetheless, it must clearly detail precisely how the organization should implement the
selected alternative(s). In doing so, potential problems may arise-many of which are an
extension of some of the pros and cons aforementioned-and must be addressed. For
example, if raising product quality and prices is proposed, the problems associated
with present customers who may not perceive the increase in quality or who may not
be willing to pay a higher price should be considered. “Hiring a consultant” is not an
acceptable recommendation!

Consider the following restaurant example. Suppose, based on the analysis, that it is
recommended that Pizza Hut introduce a low-fat pizza. Stating that the organization
should “just do it” would not be sufficient. Key questions that would be considered in
the plan for implementation include the following:

What are the characteristics of the new product (i.e., low-fat cheese, “lite” crust;
actual fat and calorie levels should have been discussed in the pros and cons
earlier)?

Should this product be implemented at all locations simultaneously? What are
the pros and cons of doing so?

How should this new product be marketed?

How will this new product affect sales of existing pizzas? Compared to the low-
fat option, some customers may view the regular pizzas as being high in fat.

What problems have other fast-food restaurants had in delivering high-quality,
low-fat products to their customers?

Specifically, what should Pizza Hut do to avoid the pitfalls and/or capitalize on
the successes?

How much will this new product introduction cost?

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 19 of 41

http://www.sagepub.com

8. How much time is necessary for training employees in the preparation of the
new product? Do the current structure and culture facilitate effective training?

Notice in this example that some of these issues may have been introduced in the
alternative evaluation phase, and others extend beyond implementation into the control
function. It is acceptable to make references to earlier statements and arguments.

One final note: The execution phase of the case analysis is required even if no major
strategic changes are adopted. It is still necessary to explain in detail how the firm will
execute the current strategy effectively in the coming years. It is not sufficient to
suggest that the firm simply “stay the course.” Arguments such as “if it ain’t broke,
don’t fix it” are weak as firms often fail because they resist change during profitable
periods.

Summary

Executing a strategy can be challenging, especially when a significant strategic change is
involved. Hence, the decision to institute such a change is not easy. Two key areas associated
with executing strategic change—(1) organizational culture and (2) leadership—must be
considered. Organizational culture can facilitate or hinder the firm’s strategic actions.
Successful strategy execution requires a strategically appropriate culture—one that is
appropriate to, and supportive of, the firm’s strategy. Modifying the culture is sometimes
necessary, but doing so is usually difficult.

The leadership style of the top executive, and the top management team is also closely linked
to a firm’s ability to implement a given strategy. Each leader may adopt a transactional or a
transformational style, although most effective leaders utilize both styles to some extent.
Effective leadership is critical when a firm seeks to implement a major strategic change.

Key Terms

Adaptive Culture: A culture whereby members of an organization are willing and eager to
embrace any change that is consistent with the core values.
Creative Destruction: A process whereby managers consciously and constantly destroy
the old by recombining its elements into new forms.
Diversity: The extent to which individuals within an organization are different; what
constitutes “different” is often debated, however.
Emotional Intelligence: One’s collection of psychological attributes, such as motivation,
empathy, self-awareness, and social skills.
Inert cultures: Conservative cultures that encourage maintenance of existing resources.
Innovation: Developing something new.
Leadership: The capacity to secure the cooperation of others in accomplishing
organizational goals.
Leadership Style: The consistent pattern of behavior that a leader exhibits in the process
of governing and making decisions.
Organizational Culture: The shared values and patterns of belief and behavior that are
accepted and practiced by the members of a particular organization.
Self-Reference Criterion: The unconscious reference to one’s own cultural values as a

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 20 of 41

http://www.sagepub.com

1.
2.
3.
4.

standard of judgment.
Strategic Leadership: Creating the vision and mission for the firm, developing strategies,
and empowering individuals throughout the organization to put those strategies into
action.
Strong Culture: A culture characterized by deeply rooted values and ways of thinking that
regulate firm behavior.
Subcultures: Culture within broader cultures.
Transactional Leadership: The capacity to motivate followers by exchanging rewards for
performance.
Transformational Leadership: T h e c a p a c i t y t o m o t i v a t e f o l l o w e r s b y i n s p i r i n g
involvement and participation in a mission.
Vision: A view of the future when the mission is achieved in the present.
Weak Culture: A culture that lacks values and ways of thinking that are widely accepted
by members of the organization.

Review Questions and Exercises

Give an example of an organization whose culture is appropriate for its strategy.
Explain.
Strategies involving mergers and acquisitions are particularly vulnerable to cultural
problems. Mergers between two organizations often are easier to accomplish on paper
than in reality. Reality may reveal that the cultures of the organization fail to mesh as
easily as corporate assets. Research on the Internet the history of the DaimlerChrysler
merger. Learn as much as you can about each original company’s organizational
culture. What problems have the companies experienced in combining their cultures?
Explain transformational and transactional leadership styles, and give examples of
each. Identify the conditions under which each is likely to be effective.
To what extent can leaders institute change in their organizations? Practically speaking,
how is this accomplished?

Practice Quiz

True or False?

1. Organizational culture can facilitate or hinder the firm’s strategic actions.
2. Because each organization develops its own unique culture, even organizations within
the same industry and city will exhibit distinctly different ways of functioning.
3. Transactional leaders inspire involvement in a mission, giving followers a “dream” or
“vision” of a higher calling.
4. Most effective leaders exhibit traits associated with both transformational and
transactional leadership styles.
5. B e c a u s e e n v i r o n m e n t s h a v e b e c o m e l e s s p r e d i c t a b l e i n r e c e n t y e a r s , a
transformational leadership style may be most appropriate for the majority of firms.
6. The first step in initiating strategic change is to create a shared vision.

Multiple Choice

7.
SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 21 of 41

http://www.sagepub.com

A.
B.
C.
D.

A.
B.
C.
D.
A.
B.
C.
D.
A.
B.
C.
D.
A.
B.
C.
D.
A.
B.
C.
D.

D e e p l y r o o t e d v a l u e s a n d w a y s o f t h i n k i n g t h a t r e g u l a t e f i r m b e h a v i o r
characterize_______.

a strong culture
a weak culture
the organizational culture
none of the above

A lack of values and ways of thinking in a firm characterize_______.

strong culture
weak culture
organizational culture
none of the above

In general, an organizational culture_______.

cannot be changed
can only be changed by a transformational leader
can be changed easily if proper procedures are followed
none of the above

10.

The unconscious reference to one’s own cultural values as a standard of judgment is
known as_______.

emotional intelligence
the self-reference criterion
global awareness
none of the above

11.

One’s collection of psychological attributes, such as motivation, empathy, self-awareness,
and social skills is known as_______.

emotional intelligence
leadership traits
leadership style
none of the above

12.

Top-down change efforts_______.

are not always successful
can be augmented through employee participation
are not necessarily more effective than bottom-up efforts
all of the above

Student Study Site
SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 22 of 41

http://www.sagepub.com/parnell4e

http://www.sagepub.com

Visit the student study site at www.sagepub.com/parnell4e to access these additional
materials:

Answers to Chapter 11 practice quiz questions
Web quizzes
SAGE journal articles
Web resources
eFlashcards

Notes

1. R. D’Aveni, “The Empire Strikes Back: Counterrevolutinoary Strategies for Industry
Leaders,” Harvard Business Review 80, no. 11 (2002): 66-74.

2. J. A. Parnell, “Strategic Change Versus Flexibility: Does Strategic Change Really Enhance
Performance?” American Business Review 12, no. 2 (1994), 22-30; D. D. Bergh and J. F.
Fairbank, “Measuring and Testing Change in Strategic Management Research,” Strategic
Management Journal 23 (2002): 359-366.

3. S. Gray, “McDonald’s Menu Upgrade Boosts Meal Prices and Results,” Wall Street Journal,
February 18-19, 2006, A1, A7; J. Adamy, “For McDonald’s, It’s a Wrap,” Wall Street Journal,
January 30, 2007, B1, B2.

4. M . M a r c u s , “ G o t t a L o v e M c D o n a l d ‘ s P r o f i t s , ” Forbes, J a n u a r y 2 2 , 2 0 1 0 ,
www.forbes.com/2010/01/22/mcdonalds-burger-starbucks-markets-equities-earnings-
dollar.html (accessed October 28, 2011).

5. G. Fairclough and G. A. Fowler, “Drive-Through Tips for China,” Wall Street Journal, June
20, 2006.

6. S. Warren, “Move to Denver Signals Threat to Southwest’s Low-Cost Model,” Wall Street
Journal, November 29, 2005, A1, A6.

7. M. Trottman, “Southwest Air Considers Shift in its Approach,” Wall Street Journal,
December 23, 2003, B1, B5.

8. E. Scardino, “Sears Looking for the Best Fit,” DSN Retailing Today, February 23, 2004;
“Sears Retrenches for the Future: Retailer’s Makeover Includes Layoffs and a Discount
Image,” National Home Center News, November 19, 2001; “Home Goods Concept Anchors
Multi-Format Strategy,” DSN Retailing Today, December 11, 2000, 49; K. Hutchison, “Sears to
Announce Long-Term Plans, Creating Buzz Among Many Analysts,” DSN Retailing Today,
October 22, 2001, 2-3; A. Ward, “Sears ‘On Course’ Despite Hard Retail Conditions, CEO
Says,” Wall Street Journal Interactive Edition, May 9, 1996; K. Fitzgerald, “Sears, Ward’s Take
Different Paths,” Advertising Age, July 31, 1995, 27

9. J. Wohl, “Lampert Offers ‘No Excuses’ for Sears Poor Performance,” Reuters, May 3, 2011,
www.reuters.com/ article/201 l/05/03/us-sears-idUSTRE7423OJ20110503 (accessed October
28, 2011).

10. W. J. Duncan, “Organizational Culture: ‘Getting a Fix’ on an Elusive Concept,” Academy of
Management Executive 3 (1989): 229-236.

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 23 of 41

http://www.sagepub.com/parnell4e

http://www.forbes.com/2010/01/22/mcdonalds-burger-starbucks-markets-equities-earnings-dollar.html

http://www.reuters.com/%20article/201%20l/05/03/us-sears-idUSTRE7423OJ20110503

http://www.sagepub.com

11. M. J. Rouse and U. S. Daellenbach, “Rethinking Research Methods for the Resource-
Based Perspective: Isolating Sources of Sustainable Competitive Advantage,” Strategic
Management Journal 20 (1999): 487-494.

12. E . H . S c h e i n , “ T h e R o l e o f t h e F o u n d e r i n C r e a t i n g O r g a n i z a t i o n a l C u l t u r e , ”
Organizational Dynamics 12 (Summer 1983): 14.

13. J. F. Love, McDonald’s: Behind the Golden Arches (New York Bantam Press, 1995).

14. G. A. Yukl, Leadership in Organizations (Upper Saddle River, NJ: Prentice Hall, 2002).

15. E. H. Schein, Organizational Culture and Leadership (San Francisco: Jossey-Bass, 1985),
30.

16. D. Tosti and S. Jackson, “Alignment: How It Works and Why It Matters,” Training 31 (April
1994): 58-64; T. Brown, “The Rise and Fall of the Intelligent Organization,” Industry Week,
March 7, 1994, 16-21; D. Lawrence Jr., “The New Social Contract Between Employers and
Employees,” Employee Benefits Journal 19, no. 1 (1994): 21-24.

17. M. Driver, “Learning and Leadership in Organizations: Toward Complementary
Communities of Practice,” Management Learning 33 (2002): 96-126.

18. J. W. Barnes, D. W. Jackson Jr., M. D. Hutt, and A. Kumar, “The Role of Culture Strength
in Shaping Sales Force Outcomes,” Journal of Personal Selling & Sales Management 26
(2006): 255-270.

19. G. L. Davis, “Business Ethics: It’s All Inside—JCPenney Grounded in Golden Rules of
Business Conduct,” Mid-American Journal of Business 19, no. 1 (2004): 7-10.

20. H. M. Sabri, “Socio-Cultural Values and Organizational Culture,” Journal of Transnational
Management Development 9, no. 2, (2004): 123-145; D. W. Pitts, “Diversity, Representation,
and Performance: Evidence about Race and Ethnicity in Public Organizations,” Journal of
Public Administration Research and Theory 15 (2005): 615-631.

21. The extent to which individuals can control some of these factors is widely debated but is
beyond the scope of this text.

22. O. R. Richard, D. Ford, and K. Ismail, “Exploring the Performance Effects of Visible
Attribute Diversity: The Moderating Role of Span of Control and Organizational Life Cycle,”
International Journal of Human Resource Management 17 (2006): 2091-2109; A. Alesina and
E. LaFerrara, “Ethnic Diversity and Economic Performance,” Journal of Economic Literature 43
(2005): 762-800; S. K. Horwitz, “The Compositional Impact of Team Diversity on Performance:
Theoretical Considerations,” Human Resource Development Review 42 (2005): 219-245.

23. S. Auh and B. Menguc, “Diversity at the Executive Suite: A Resource-Based Approach to
the Customer Orientation-Organizational Performance Relationship,” Journal of Business
Research 59 (2006): 564-572.

24. A. R. Jassawalla and H. C. Sashittal, “Cultures That Support Product-Innovation
Processes,” Academy of Management Executive 16, no. 3 (2002): 42-54.

25. Schein, Organizational Culture and Leadership.

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 24 of 41

http://www.sagepub.com

26. A. Zimmerman, “Defending Wal-Mart,” Wall Street Journal, October 6, 2004, B1, B10; A.
Zimmerman, “How Wal-Mart Transfers Power,” Wall Street Journal, March 27, 2001, B1, B4;
B. Ortega, In Sam We Trust: The Untold Story of Sam Walton and Wal-Mart, the World’s Most
Powerful Retailer (New York Times Books, 2000); P. Pitcher, S. Chreim, and V Kisfalvi, “CEO
Succession Research: Methodological Bridges Over Troubled Waters,” Strategic Management
Journal 21 (2000): 625-648.

27. M. A. Köseoglu, J. A. Parnell, and S. Ocak, “Strategic Diffusion and Job Satisfaction
Among Physicians: Evidence From Turkish Private Hospitals,” International Journal of
Strategic Change Management 3, no. 3 (2011): 169-187.

28. J. R. Darling and T. M. Box, “Keys for Success in the Leadership of Multinational
Corporations, 1990 Through 1997,” SAM Advanced Management Journal 64, no. 4 (1999): 16-
20; M. Driver, “Learning and Leadership in Organizations.”

29. W. G. Rowe, “Creating Wealth in Organizations: The Role of Strategic Leadership,”
Academy of Management Executive 15, no. 1 (2001): 81-94.

30. G. Trumfio, “Managing from the Trenches,” Sales & Marketing Management 146 (February
1994): 39; J. A. Parnell and E. D. Bell, “A Measure of Managerial Propensity for Participative
Management,” Administration and Society 25 (1994): 518-530.

31. D.J. Brown and R. G. Lord, “The Utility of Experimental Research in the Study of
Transformational/Charismatic Leadership,” Leadership Quarterly 10 (1999): 531-539.

32. J. M. Beyer, “Two Approaches to Studying Charismatic Leadership: Competing or
Complementary?” Leadership Quarterly 10 (1999): 575-588.

33. R. M. Fulmer, “Frameworks for Leadership,” Organizational Dynamics (March 2001): 211-
220; and R. M. Fulmer, P. A. Gibbs, M. Goldsmith, “Developing Leaders: How Winning
Companies Keep on Winning,” Sloan Management Review (Fall 2000): 49-59.

34. J. Schumpeter, The Theory of Economic Development (Cambridge: Harvard University
Press, 1934).

35. J. M. Crant and T. S. Bateman, “Charismatic Leadership Viewed from Above: The Impact
of Proactive Personality,” Journal of Organizational Behavior 21 (2000): 63-75.

36. J. Barlow, “Legendary Herb Has Done It His Way,” Houston Chronicle, March 22, 2001,
online edition; P. Adams, “Southwest Air Founder, Kelleher, Yielding Reins,” Baltimore Sun,
March 20, 2001, 1C; K. Labich, “Is Herb Kelleher America’s Best CEO?” Fortune, May 2, 1994,
44-52; P. O’Brian, “Southwest Airlines Is a Rare Air Carrier: It Still Makes Money,” Wall Street
Journal, October 26, 1992, A1.

37. M. Murray, “Why Jack Welch’s Brand of Leadership Matters,” Wall Street Journal,
September 5, 2001, B1, B10.

38. S. Carey and P. Prada, “Course Change: Why JetBlue Shuffled Top Rank,” Wall Street
Journal, May 11, 2007, B1.

39. D. Goleman, “What Makes a Leader?” Harvard Business Review 76, no. 5 (1998): 92-105.

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 25 of 41

http://www.sagepub.com

40. J. S. Lublin, “Top Brass Try Life in the Trenches,” Wall Street Journal, June 25, 2007, B1.

41. E. Bellman and C. Rohwedder, “Western Grocer Modernizes Passage to India’s Markets,”
Wall Street Journal, November 28, 2007, B1.

42. N. M. Tichy and M. A. Devanna, The Transformational Leader (New York: Wiley, 1986).

43. A. M. Mohrman Jr. et al., Large-Scale Organizational Change (San Francisco: Jossey-
Bass, 1989), 106.

44. A. J. Nurick, “The Paradox of Participation: Lessons from the Tennessee Valley Authority,”
Human Resource Management 24 (Fall 1985): 354-355.

45. W. Bennis, “The End of Leadership: Exemplary Leadership Is Impossible Without Full
Inclusion, Initiatives, and Cooperation of Followers,” Organizational Dynamics 28, no. 1 (1999):
71-80.

46. N. P. Archer, “Methodologies and Tools for E-Business Change Management,” presented
at the 24th Annual McMaster World Congress, Hamilton, Ontario, Canada (January 15-17,
2003).

47. M. Beer, R. A. Eisenstat, and B. Spector, “Why Change Programs Don’t Produce
Change,” Harvard Business Review 68, no. 5 (1990): 158-166.

Strategy + Business Reading: CEO Succession 2010: The Four Types of CEOs

Booz & Company’s annual study of turnover among chief executives —
now increasingly diverse, as the world’s largest companies migrate to
emerging economies — suggests that the nature of the job varies with
the role of the corporate core.

by Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson

Every year, Booz & Company takes a long and penetrating look at CEO succession
among the world’s top 2,500 public companies. Our research now goes back
consecutively to 2000, giving us 11 years of perspective on the tenure and position of
these global business leaders. Each year we consider a new dimension in our study of
CEO succession. This year, we looked at the role of the CEO and its effect on tenure
and turnover. How hands-on are the CEO and his or her senior team? How do they
engage themselves with the businesses they lead? We found that these factors have a
noticeable effect. The more involved headquarters is in operational decision making in
any given company, the more tenuous the CEO’s tenure is likely to be.

Exhibit 1 Global CEO Turnover, 2000-10

Source: Booz & Company analysis

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 26 of 41

http://www.sagepub.com

We also found several noteworthy trends this year. There is a steep decline in CEO
turnover worldwide: A higher proportion of chief executives are staying in office than we
saw in 2009. (See Exhibit 1.) That doesn’t mean that governance is growing more
relaxed; the rates of CEO turnover are still much higher in general than they were in
the 1990s, and the pressure on performance remains as great as ever. But it does
suggest that some basic trends in CEO hiring and oversight have solidified as standard
practice. Last year, we referred to the 2000s as a “decade of convergence and
compression,” and this pattern continued in 2010. Around the world, for example, fewer
CEOs are also board chairmen this year than was the case the year before, and more
CEOs are being appointed from inside companies, rather than from outside.

In one respect, however, the largest public companies are becoming more diverse:
They are increasingly based in emerging economies, rather than in the mature
economies of the United States, Canada, western Europe, and Japan. For years, in
compiling our list of the 2,500 largest publicly held companies in the world (as ranked
by their market capitalization), we have observed this gradual migration. (See Exhibit
2.) To explore the implications more closely this year, we divided our study sample over
the past 11 years into mature and emerging economies (based on the United Nations’
Human Development Index for 2010), and then further broke out the BRIC countries
(Brazil, Russia, India, and China). We found that the share of companies from
emerging markets in our sample has grown at a compound annual growth rate of 14
percent over the past 11 years; BRIC representation has shot up 24 percent annually.
China, in particular, shows staggering growth, accounting for one in five new entries in
our sample this year (83 of the 415 new members of the world’s 2,500 largest
companies).

Exhibit 2 The World’s Largest Public Companies by Region

Source: Booz & Company analysis

Note:See “Methodology,” for an explanation of how countries were classified.

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 27 of 41

http://sk.sagepub.com/books/strategic-management-theory-and-practice-fourth-edition/i776.xml#i965

http://sk.sagepub.com/books/strategic-management-theory-and-practice-fourth-edition/i776.xml#i969

http://www.sagepub.com

For those who see North America and western Europe as the commercial centers of
the world, the news is even more striking; for the first time, almost half the companies
on the list are located outside those two regions. In fact, the number of the top 2,500
companies based in the U.S., Canada, and western Europe has fallen some 28
percent altogether since 2000.

Finally, a significant milestone was reached in 2010: More than one-quarter of the top
2,500 public companies now have their headquarters in emerging economies. Could
this suggest that global enterprise is nearing a geographic tipping point? Within a few
years, if this pattern continues, the companies in the world’s mature Western
economies could represent a minority of our sample. Already, the Asian economies
(China, Japan, rest of Asia) are the new center of gravity in terms of global market heft,
with 895 companies in this year’s sample versus North America’s 772 companies and
Europe’s 619 companies.

Global Turnover in 2010

This shift in the mix of companies in our global sample is already influencing CEO
succession trends, as companies with new governance structures and different growth
arcs come to the fore. (See “A Tipping Point for the Global Economy,” by Ivan de Souza
and Edward Tse, below.)

For example, one can surmise that the growing presence of Chinese companies in our
sample helped bring down the global rate of CEO turnover this year. Because of their
high degree of government ownership, China’s biggest companies manifest extremely
low CEO turnover—half the global average. In 2010, CEO succession worldwide hit a
six-year low of 11.6 percent; Chinese companies’ turnover was only 5.2 percent.

However, the overall drop in turnover in 2010 is not solely China’s doing; in general,

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 28 of 41

http://www.sagepub.com

there was a sharp reduction in both forced and planned turnover at the top. There are
several possible reasons for this. First, the global recession’s lingering effects
influenced companies to keep a steady, seasoned hand at the helm. Second, boards
have gotten better at selecting CEOs and ensuring their smooth succession. Finally,
given the historically high rates of forced turnover in the last few years, there were
fewer companies that hadn’t made a recent change in chief executives.

Global Governance Trends

We broke down the data to assess what it means for today’s boards as well as for
sitting and aspiring CEOs. Many long-term trends in governance still hold. Boards
around the world increasingly separate the roles of chairman and CEO, especially in
North America, where only 14 percent of incoming CEOs were assigned both titles in
2010 (versus 52 percent in 2001). Related to this trend is the practice of appointing an
outgoing CEO as board chairman, to apprentice the incoming CEO. We continue to
see this model growing in prevalence—except in Japan, where it has long been the
norm (it accounts for more than two-thirds of successions there).

Another Japanese tradition, appointing insiders, is also becoming a worldwide
phenomenon. Among the 291 succession events we assessed in 2010, insiders
ascended to the CEO spot 81 percent of the time. Insiders also last longer — in 2010,
those insiders leaving office had lasted on average 7.1 years, versus 4.3 years for
outsiders. This is not surprising; insiders have historically produced superior returns for
their shareholders. Last year was no exception. Insider CEOs leaving office generated
total shareholder returns on a regionally adjusted basis of 4.6 percent as compared
with 0.1 percent among outsiders.

On average, compared with 10 years ago, CEOs are being appointed at a later age.
The average appointment age among outgoing CEOs in 2010 was 52.2, versus 50.2 in
2000. This suggests that boards continue to value experience in selecting a CEO. In
tracking outgoing CEOs, we found that the percentage of chief executives who had
previously served as CEOs of a public company has risen markedly over the past 11
years, from 4.3 percent in 2000 to 15.2 percent in 2010. And in 2010’s incoming class,
more than half (51 percent) of new outsider CEOs came from within the same industry
—suggesting that boards are getting more particular about the type of candidates they
are seeking.

A Tipping Point for the Global Economy

by Ivan de Souza and Edward Tse

The changing composition of this year’s sample of the world’s top 2,500 public
companies by market capitalization is, in and of itself, a significant portent of a
profound shift about to occur in the global economy. The center of gravity
among global corporations is moving from mature Western economies to
emerging markets. (See Exhibit 3.) The details vary by country and industry, but
some general truths broadly apply.

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 29 of 41

http://www.sagepub.com

Exhibit 3 The Growth of Public Companies in Emerging Economies

Source: Booz & Company analysis

Companies in emerging economies-not only in Brazil, Russia, India, and China
(the BRIC countries), but also in the “next 11” countries named by Goldman
Sachs: Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the
Philippines, South Korea, Turkey, and Vietnam-are in hyper-growth mode. They
are on the early and steep side of what we at Booz & Company call the arc of
growth: the natural evolutionary cycle of any country or region as it enters the
industrialized economy. Meanwhile, the mature economies of North America and
western Europe are confronting challenges in generating further growth-
challenges that have only been exacerbated by the economic turmoil of the past
few years. The global recession has exaggerated the dichotomy between rapidly
growing BRIC and the next 11 countries on the one hand, and those in the
Organisation for Economic Co-operation and Development on the other.

Furthermore, companies based in these emerging economies have far greater
access to capital markets than they did even five years ago. Investors now
perceive these economies more favorably, and the senior management of these
companies have become more worldly in their outlook. Companies can now
capitalize through IPOs, finance additional activity, and fund acquisitions in their
own geographies as well as abroad (including in North America and western
Europe).

Finally, companies in the world’s emerging economies enjoy significant resource
advantages. It’s little wonder that demographically advantaged countries, such
as India and China, and countries endowed with natural resources, such as
Russia and Brazil, have seized the lion’s share of the growth in global GDP over
the past several years.

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 30 of 41

http://www.sagepub.com

Although these general truths apply to all emerging economies, China’s story
has some unique elements. First, despite being publicly listed, the largest
Chinese companies in our sample are still controlled by the state, which retains
a substantial ownership stake. (Of the 232 Chinese companies on our global list
of 2,500, the state owns all of the top 10.) The Communist Party appoints the
chairman and the CEO of these enterprises from a roster it maintains of industry
experts. (That said, the Chinese government has installed Western-style boards
of directors in the top government-owned enterprises in China, and these
boards exercise a good deal of authority.) Finally, given the high degree of
government oversight, companies in China often enjoy distinct positional
advantages, at least domestically, and M&A activity is rare. These factors all
help explain why China’s CEO turnover is so low compared with that of other
countries. (See Exhibit 4.)

Exhibit 4 CEO Turnover Rate by Region in 2010

Source: Booz & Company analysis

In the coming years, we should see Chinese companies and their emerging-
market peers open up more and more to the rest of the world, in terms of both
mind-set and footprint. Chinese business leaders, by necessity, will maintain a
more international outlook; this will undoubtedly have an impact on CEO
succession in years to come.

Methodology

The 2010 CEO Succession study identified the world’s 2,500 largest public companies
as measured by their market capitalization (per Bloomberg) on January 1, 2010. Booz
& Company research team members based in India, China, Romania, Chile, the United

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 31 of 41

http://www.sagepub.com

Arab Emirates, Italy, France, and the United States then identified the companies
among the top 2,500 that had experienced a chief executive succession event and
cross-checked data using a wide variety of printed and Electronic sources in multiple
languages. For a listing of companies that had been acquired or merged in 2010, we
again used Bloomberg. In considering relative market capitalization, we did not adjust
for currency exchange rate fluctuations, which have an insignificant effect over time
because they quickly adjust to market reality. (We also note that China’s currency is
pegged to the U.S. dollar.)

We investigated each company that appeared to have changed its CEO to confirm that
a succession event occurred in 2010, and for the 291 confirmed companies, we
compiled demographic, career, and governance structure details on both outgoing and
incoming CEOs (as well as any interim chief executives), including age, tenure, title,
career path, prior experience, education, and chairmanship, among others. In the
analysis of CEO succession by tenure of outgoing CEO (Exhibit 6), insider/outsider
status (Exhibit 7), and CEO background (Exhibit 9), we excluded turnover events
involving interim-appointed CEOs, and those resulting from mergers and acquisitions.

We accepted company-provided information for all data elements except for the reason
for the succession. For that, we consulted outside press reports and other independent
sources.

Total shareholder return data for a CEO’s tenure was sourced from Bloomberg and
includes reinvestment of dividends, if any. Company return data was then regionally
market-adjusted (against the return of the local regional index over the same time
period) and annualized.

Corporate core classification of each of the 291 companies experiencing a succession
event in 2010 was based on multiple factors (e.g., number and diversity of business
units, degree of shared activities, number and percentage of top-line versus functional
managers), as well as Booz & Company expertise on industry and geographic
operating models.

To distinguish between mature and emerging economies, we followed the United
Nations’ Human Development Index 2010 ranking, which classifies countries with a
score above 0.788 as “very high.” Mature economies include South Korea, Australia,
the Czech Republic, Poland, and Hong Kong; emerging economies include Turkey,
Saudi Arabia, Mexico, and South Africa. For the purposes of this study, Hong Kong
and Macau are classified as separate from China.

CEOs are also staying in office for less time, compared with 11 years ago. For outgoing
CEOs, the mean tenure was 18 months shorter: 6.6 years in 2010 versus 8.1 in 2000.
In particular, the length of planned tenures—in which the CEO departs on a date that
has been prearranged with the board—has dropped by 30 percent over the last 11
years, from 10 to seven years. These findings suggest that CEOs are finding the
demands of the job more pressing than their predecessors did.

Four Models of Management

This year we applied an additional lens to our study of CEO succession events at the world’s

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 32 of 41

http://www.sagepub.com

largest companies by examining the impact of the corporate core. The corporate core is made
up of the CEO, his or her senior team, and a defined set of support functions necessary for
the entire corporation. Back when the senior management team of a typical large company
could all have offices in one location, this was known as headquarters. All corporate cores
provide leadership, create the context for growth, represent the corporation to the public and
investment community, and provide essential services to the business units, which are
consigned maximum responsibility for money-making activities. That’s where the similarities
among companies end. As any CEO can tell you, each corporate core is a unique blend of
skills, responsibilities, and personal management styles tailored to the nature of the
businesses it oversees and the competitive environment in which it operates. On the basis of
our in-depth experience with hundreds of corporations at Booz & Company, we have found
that they fall along a spectrum of four different corporate models — defined by the way senior
management and the corporate core engage with the rest of the business. (See Exhibit 5.)

The first model, at one extreme, is the highly diversified holding company—distinguished by
its arm’s-length approach to managing its subsidiary operations. Holding companies add
value through strong portfolio management. The second model is the strategic management
company, which offers guidance and leadership on strategic direction and provides
expectations of performance for its group of related businesses. The third model involves
more active management. These corporate cores oversee more tightly linked businesses and
advise on operational issues. The fourth corporate model is the highly operationally involved
company, in which senior management plays an active role in day-to-day business decision
making.

Exhibit 5 Models of Corporate Management

To briefly sum up each model from the point of view of a business unit leader: Holding
companies want your results. Strategic management headquarters want to know what you will
do. Active management corporate cores want to know how you will do it. And operationally
involved executive teams want to work closely with you in running the business.

As part of our research on CEO succession and related issues, we have interviewed chief
executives working within these models. Their experience sheds light on the operation of
these models, the patterns of CEO succession that seem to follow the models, and the
implications for business leaders.

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 33 of 41

http://sk.sagepub.com/books/strategic-management-theory-and-practice-fourth-edition/i5143.xml#i5378

http://www.sagepub.com

Holding companies (Model 1) manage their businesses much as a financial fund manager
oversees a portfolio of investments. The CEOs of this first group of companies have a minimal
degree of involvement in operational decisions. They are primarily interested in results, not in
how the results are generated. The corporate core establishes and ensures managerial and
financial discipline. Holding company chief executives are a level removed—they focus on
portfolio management while the second-tier executives run the businesses. If there is a
problem, more often than not, its fallout is felt at that second management tier.

Warren Buffett, CEO of Berkshire Hathaway Inc., typifies this type of management. As he
noted in his letter to shareholders in the 2010 annual report, “At Berkshire, managers can
focus on running their businesses: They are not subjected to meetings at headquarters nor
financing worries nor Wall Street harassment. They simply get a letter from me every two
years…and call me when they wish. And their wishes do differ. There are managers to whom I
have not talked in the last year, while there is one with whom I talk almost daily. Our trust is in
people rather than process. A ‘hire well, manage little’ code suits both them and me.”

Strategic management companies (Model 2) exercise a bit more oversight in managing their
operations. The corporate core offers strategic guidance to its local businesses, but not the
supervision of operational decision making. A good example is the Korea-based LG
Corporation, a US$104 billion company originally known for its brand name Goldstar. (LG
once stood for Lucky Goldstar.) At first glance, because of its global operations spanning
consumer electronics, mobile communications, home appliances, chemicals, and more, LG
might seem to fit the definition of a diversified holding company such as Berkshire Hathaway.
But Juno Cho, president and CEO of LG Corporation, notes that the company’s corporate
core has always operated more in a strategic management model.

Cho describes his role, and that of other senior management, as closely engaged in strategic
goal development with executives of subsidiaries such as LG Chemical and LG Electronics,
where central core team members often sit on the boards. “We effectively agree on strategic
goals and targets with the businesses and give them accountability,” says Cho. Once each
year the group chairman of LG Corporation conducts a consensus meeting with the
presidents of all the business units to discuss, understand, and agree on their annual
business plan. “This is the backbone of our communication,” says Cho. “Corporate executives
chair the board of each business unit, so we have a real-time understanding of performance,
but it would be impractical to get deeply involved in operational matters. Since LG is such a
big organization, the corporate core limits its voice to brand-building, R&D expenditures, high-
level human resources decisions, and capital investment.”

Active management companies (Model 3) have a corporate core that starts to share
accountability with the business units for major operational decisions and adds value through
close guidance and expertise. John H. Hammergren, chairman, president, and CEO of the
McKesson Corporation, a leading pharmaceutical distributor and healthcare IT company
based in North America, describes his corporate core as moving back and forth between the
strategic and active management models.

“We want our businesses to drive the McKesson culture,” says Hammergren, “but the
corporate executive team also wants to guide the businesses on how they do it. We follow a
similar approach when it comes to leadership development—whereas with sales training, we
expect the businesses to take the lead, because sales training is more specific to their
business.”

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 34 of 41

http://www.sagepub.com

Hammergren says that the corporate officer group at McKesson performs several key roles.
“First, it sets the culture: the tone at the top—for example, what standards we are going to
hold for ourselves, both at the executive committee level and in our interactions with the
leaders of the business units. Second, corporate upholds a set of principles that ensure all of
our business units put the customer at the center of everything we do. Third, we manage the
cadence of the management team: in other words, how we plan our strategy; how we conduct
our operating reviews; what we expect of the business units; and what processes, like Six
Sigma and the corporate calendar, we use to drive results.” The top group also establishes
the rules of engagement between the corporate core and the business units, determining
when businesses should expect that headquarters will be involved, and when they can
assume the authority and decision-making power to move forward on their own.

“We manage the corporation through two key management teams,” says Hammergren. “The
first is the executive committee, comprising my direct reports; the second is an operating team
that consists of the presidents of the major businesses. I inspect each major business at least
quarterly, and I’m actively involved in the budget-setting process and leadership decisions at
the business unit level. The executive committee meets every other week to take up
performance within the various businesses, large M&A transactions, Wall Street expectations,
deployment of capital, leadership development, succession planning, balance sheet
management, board reporting, overall corporate strategy, and those kinds of issues.”

Hammergren notes that it would be extremely difficult to move McKesson to a model of full
operational involvement. “Given the complexity of our company, it would be impossible for the
CEO to call the orders every day on the execution side. I wouldn’t be close enough to the
fight to know which way to send the troops; and the people who run these businesses would
get disenchanted and disheartened, because I would probably not do their jobs as well as
they do them.”

Operationally involved companies (Model 4) are enterprises in which the corporate core is
involved in management more directly. This does not mean that the CEO and top team are
involved in every aspect of day-today management; execution remains the business units’
domain. Rather, the corporate core adds value through the development of cross-company
capabilities and functional expertise, and gets involved in strategic decision making for most
or all business units. Because of the highly engaged nature of the corporate core in
managing the business, these companies are typically focused within a single industry.

Ford Motor Company under CEO Alan Mulally is a good example of an operationally involved
corporate core. According to an Economist article published December 9, 2010, Mulally began
to convene weekly meetings of his senior team soon after he arrived in September 2006. He
pushed the attendees to bring up operational problems and collaborate in solving them.
When the head of Ford’s operations in the Americas admitted that his group had a serious
problem with defective parts, instead of falling from grace, he was applauded by Mulally, who
exclaimed, “Great visibility.”

To maintain a tighter rein on the carmaker’s fundamental business, Mulally and his key
lieutenants decided to concentrate on the Ford brand and divest the Premier Automotive
Group—a collection of high-end brands that had been acquired under previous regimes. The
company quickly sold Aston Martin, Jaguar, Land Rover, and Volvo. Ford also decided to
produce a much narrower range of cars built on a few core platforms, focusing on quality and
flexibility. At one point, Ford produced nearly 100 different models around the world; now it is
down to a third of that number and may go lower. For clarifying and simplifying the

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 35 of 41

http://www.sagepub.com

management challenges at Ford, “you cannot believe the difference this makes,” noted
Mulally.

The Most Challenging Corporate Model

As part of this year’s study, we identified which of the four corporate core models applied most
closely to each of the 291 companies that experienced a succession event in 2010. We based
our analysis on such factors as the number and diversity of business units, the degree of
activity sharing among those units, and the number and proportion of senior line and staff
managers. We also called on our own firm’s industry expertise and our direct experience with
many of these companies. The breakdown that emerged from this sample was broadly
consistent with what we have observed in the general population of global corporations—10
percent were holding companies, 20 percent were strategic management companies, 30
percent were active management companies, and the most numerous, at about 40 percent,
were operationally involved companies.

The corporate core model clearly seems to influence the CEO’s experience in office. For the
291 succession events that occurred worldwide in 2010, the tenure of the CEO in the
operationally involved companies was unquestionably shorter and riskier. In fact, the tenure of
a holding company CEO is a third longer, on average, than that of an operationally involved
CEO. (The median tenure of a holding company CEO departing office in 2010 was 6.5 years,
whereas the median tenure of an operationally involved CEO was only 4.9 years.) Moreover,
CEOs in Model 4 companies are much more likely to depart during their first four years than
CEOs in the other three models. (See Exhibit 6.)

This departure rate at operationally involved companies was particularly high for outsider
CEOs—those who were hired from another company. Outsiders are generally more
pressured; in all categories except holding companies (in which only one outsider CEO left in
2010, a chief executive who had lasted for a statistically anomalous 17 years), they stayed in
office for less time on average than their insider counterparts. Outsiders at Model 4
companies had the shortest tenure of all: on average, only 3.3 years in office. (See Exhibit 7.)

Exhibit 6 Tenures of Outgoing CEOs

Source: Booz & Compay analysis

Note: Excludes interim-appointed CEOs and turnover resulting from M &B. Sums may not
total 100 due to rounding.

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 36 of 41

http://www.sagepub.com

Why was CEO turnover higher in Model 4 companies? It wasn’t because of inexperience: The
proportion of Model 4 outgoing CEOs who had prior CEO experience was higher than in any
other model group. Nor was it a matter of a lack of coaching or support. The apprentice CEO
model is more prevalent at operationally involved companies than at holding companies (38
percent as compared with 32 percent), and Model 4 headquarters organizations are much
larger, as a rule. However, CEOs in Model 4 companies face some particular challenges:

Exhibit 7 Tenure for Insider and Outsider CEOs

Note: Excludes interim appointed CEOs, turnover resulting from M&A, and outsiders in
holding companies.

Source: Booz & Company analysis
SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 37 of 41

http://www.sagepub.com

1.
2.

Operationally involved companies are more likely to be acquired. M&A successions
are most common among Model 4 firms (in 2010, they represented 52 percent of non-
planned turnover, versus 40 percent at Model 1 companies and 26 percent at Model 2
companies). Because Model 4 companies typically focus on a single industry or
business, they are often attractive targets for acquisition. And although Model 1 and 2
companies may engage in M&A activity more frequently, they typically buy and sell
subsidiary units, not whole companies, so the CEO position is usually not affected.

Operationally involved CEOs more often succumb to board and power struggles.
These struggles accounted for 57 percent of the forced (non-planned and non-M&A)
turnover at Model 4 companies in 2010. By contrast, in Model 2 companies, poor
financial or managerial performance was the main driver of forced succession. (See
Exhibit 8.) In a single-line or closely related set of businesses, it is easier for the board
t o a p p l y s t r i c t s c r u t i n y t o a C E O ‘ s s t r a t e g y , a n d p o w e r s t r u g g l e s w i t h o t h e r
knowledgeable insiders are more likely.

Exhibit 8 Caused of Non-Planned Turnover

Sums may not total 100 due to rounding

Source: Booz & Company analysis

Note: Forced Turnover Cases—all those except M&A in this exhibit—are categorized on
the basis of official company statements, multiple press releases, or other verified

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 38 of 41

http://www.sagepub.com

sources. “Job demands” are cases in which the CEO position was deemed to have
been too demanding or not a good fit for the outgoing CEO’s capabilities.

Operationally involved and active management CEOs are more likely to also hold
the chairman title. This is twice as likely, on average, as it is in the other two models.
Overall, only one in 10 CEOs has this dual role, but the more involved the corporate
core is in the business operations, the more likely the double role is to appear. (See
Exhibit 9.) The correlation between actively engaged corporate cores and “double-
hatted” CEO/ chairmen is particularly strong in Europe.

Exhibit 9 Some CEO Characteristics among Corporate Models

Note:Excludes interim-appointed CEOs and turnover resulting from M&A.

Source: Booz & Company

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 39 of 41

http://www.sagepub.com

At first glance, this correlation seems puzzling. Double-hatted CEOs are subject to immense
job demands in any company; they run both the board—which is charged with scrutinizing
their strategy—and the business. In Model 3 and Model 4 companies, their roles would be
even more demanding. One may surmise that this trend is either an anomaly (in which case
we will probably see it diminish in future years) or a sign that some boards still believe that a
single leader accountable for the entire company provides the most effective form of
governance.

Advice for the New CEO

Few CEOs would interpret these findings as a suggestion to adopt the holding company
model. After all, most companies have developed their corporate core structure over time, to
match their unique portfolio of businesses and their competitive strategy. No one model is
inherently better than another, and it is neither practical nor desirable to move your corporate
model away from what the business requires.

However, if you are the CEO in a Model 4 company, you should recognize the especially
demanding nature of this job. It requires hands-on management and greater accountability,
and your exposure to disruption is therefore higher. More than one-third of operationally
involved CEOs are replaced within four years; indeed, your role may involve quietly building
value to become an acquisition target. Model 4 boards tend to be more informed and engaged
in monitoring strategy, and the competition for the chief executive position can be more
intense — there are often several candidates well versed in the business vying for the
position. These challenges will be all the more formidable if you are hired from outside.

Of course, CEOs at companies with other core models also face great pressures. As we noted
earlier, planned-succession tenures, overall, have dropped from 10 years to seven since 2000.
In a large company, seven years can be a very short time to set an agenda and execute it.
Nonetheless, as an incoming CEO, you should adjust your expectations accordingly, and be
prepared to demonstrate early wins in the first few years to solidify your position.

If you are a board member or senior executive in search of a long-term CEO, you face a
different, but equally immense, challenge. As they develop through their careers, very few
candidates will automatically receive the breadth of general management experience and

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 40 of 41

http://www.sagepub.com

functional expertise needed to oversee a large global enterprise. In a Model 1 company, up-
and-coming executives have the early opportunity to run a P&L, but they may not get a
broader sense of the whole portfolio or develop strong functional skills. By contrast, in a
typical Model 4 company, there will be a cadre of executives with high levels of functional
expertise and strong industry knowledge, but their general management experience may be
less robust.

It is the responsibility of sitting CEOs and boards to plan for succession by building a bench
of well-rounded candidates that transcends any management development limits in their
corporate core model. Model 1 and 2 companies need to help their general managers
cultivate functional and portfolio management skills. Model 3 and 4 companies need to give
their functional specialists general management experience. Thoughtful executives planning
their own careers would do well to take on roles that help fill the gaps.

If you are a new CEO, awareness of your corporate core model can help you establish a
better position. For example, a new CEO coming from the outside into a company with an
active management model can lay the groundwork for success early by appointing well-
regarded insiders to one or two top jobs, to engage the organization more effectively.
Similarly, in last year’s study, we highlighted the growing importance of regarding the board of
directors as a strategic partner. This advice is crucial if you are the CEO of an operationally
involved company, especially given the fact that skirmishes with the board account for most
CEO dismissals in those companies. The more effective your engagement is with the board,
the more likely your succession is to be a planned one.

In general, chief executives need to adapt their personal management style to the company’s
corporate core model. This may be particularly challenging if you are a new CEO in a Model 1
or Model 2 company. More likely than not, you were an operationally involved business unit
head before taking the top job. Now, you will have to deliberately learn to delegate
accountability for running the businesses so you can focus on adding value to the larger
organization.

No matter where you sit on the corporate core spectrum, the challenges of being the CEO of
a major corporation are considerable and growing, while the window you have to address and
overcome those challenges continues to narrow. Never has the job been more exciting … or
more daunting.

Reprint No. 11207

Author Profiles:

Ken Favaro is a senior partner with Booz & Company based in New York. He leads the
firm’s work in enterprise strategy and finance.
Per-Ola Karlsson is a senior partner with Booz & Company based in Stockholm. He is
managing director of the firm’s European business.
Gary L. Neilson is a senior partner with Booz & Company based in Chicago. He focuses
on operating models and organizational transformation and is a leader of the firm’s work
on organizational DNA.
Also contributing to this article were Booz & Company senior associates Alexis Bour and
Kenji Chikada and s+b contributing writer Tara A. Owen.

http://dx.doi.org/10.4135/9781506374598.n11
SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.
SAGE Books – Strategy Execution Strategic Change, Culture, and
Leadership

Page 41 of 41

http://dx.doi.org/10.4135/9781506374598.n11

http://www.sagepub.com

Strategic Management: Theory and
Practice

Strategic Control and

Crisis Management

Contributors: By: John A. Parnell

Book Title: Strategic Management: Theory and Practice

Chapter Title: “Strategic Control and Crisis Management”

Pub. Date: 2014

Access Date: March 24, 2018

Publishing Company: SAGE Publications, Ltd

City: 55 City Road

Print ISBN: 9781452234984

Online ISBN: 9781506374598

DOI:

http://dx.doi.org/10.4135/9781506374598.n12

Print pages: 326-352

This PDF has been generated from SAGE Knowledge. Please note that the pagination of

the online version will vary from the pagination of the print book.

javascript:void(0);

http://dx.doi.org/10.4135/9781506374598.n12

Strategic Control and Crisis Management

Chapter Outline

Step 1: The Focus of Strategic Control

Step 2: Strategic Control Standards (Benchmarks)

Published Information for Strategic Control

Product/Service Quality

Innovation

Market Share and Relative Market Share

Steps 3 Through 5: Exerting Strategic Control
Control Through the Formal and Informal Organizations

Crisis Management

Prominent Crises in Recent History

Crisis Planning

Trends in Strategic Management

Summary

Key Terms

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 2 of 33

http://www.sagepub.com

Review Questions and Exercises

Practice Quiz

Student Study Site

Notes

The strategic management process is not complete when a strategy has been executed. It is
also necessary to evaluate its success—or failure—and take steps to address any problems
that may have arisen along the way. Strategic control consists of determining the extent to
which the organization’s strategies are successful in attaining its goals and objectives. The

execution process is tracked, and adjustments to the strategy are made as necessary.1. It is
during the strategic control process that gaps between the intended and realized strategies
(i.e., what was planned and what really happened) are identified and addressed. For
example, Wal-Mart instituted strategic control when it cut back its plan for U.S. supercenter

expansion in the late 2000s following lower-than-expected global revenues.

The process of strategic control can be likened to that of steering a vehicle. After the strategy
accelerator is pressed, the control function ensures that everything is moving in the right
direction. When a simple steering adjustment is not sufficient to modify the course of the
vehicle, the driver can resort to other means, such as applying the break or shifting gears. In
a similar manner, strategic managers can steer the organization by instituting minor
modifications or resort to more drastic changes, such as altering the strategic direction
altogether.

The imperative for strategic control is brought about by two key factors, the first of which is the
need to know how well the firm is performing. Without strategic control, there are no clear
benchmarks and ultimately no reliable measurements of how the company is doing. A second
key factor supporting the need for strategic control is organizational and environmental
uncertainty. Because strategic managers are not always able to accurately forecast the future,
strategic control serves as a means of accounting for last-minute changes during the
implementation process. In addition, rivals may respond immediately to a change in strategy,
requiring that managers consider additional modifications.

The focus of strategic control is both internal and external because it is top management’s
role to align the internal operations of the enterprise with its external environment. Relying on
quantitative and qualitative performance measures, strategic control helps maintain proper
alignment between the firm and its environment.

Although individual firms usually exert little or no influence over the external environment,
macroenvironmental and industry forces must be continuously monitored because shifts can

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 3 of 33

http://www.sagepub.com

greatly influence the firm. The purpose of monitoring the external environment is to determine
whether the assumptions on which the strategy is based remain valid. In this context, strategic
control consists of modifying the company’s operations to more effectively defend itself
against external threats that may arise or become known.

The notion of strategic control has recently gained a “continuous improvement” dimension,
whereby strategic managers seek to improve the efficiency and effectiveness of all factors
related to the strategy. In other words, control should not be seen as an action necessary only
when performance declines. Rather, managers should think critically when considering
strategic control and look for opportunities to enhance performance even with things seem to
be going well.

Ultimately, strategic control can be exerted by the chief executive officer (CEO), the board of
directors, or even individuals outside the top management team. The roles played by boards
of directors, institutional investors, and shareholders who monitor firm strategies and often
instigate control vary across firms. The influence of the board and others notwithstanding,
ongoing strategic control is largely a function performed by the top management team. A five-
step strategic control process can be employed to facilitate this process, as depicted in Figure
12.1:

Top management determines the focus of control by identifying internal factors that can
serve as effective measures for the success or failure of a strategy, as well as outside
factors that could trigger responses from the organization.
Standards (i.e., benchmarks) are established for internal factors with which the actual
performance of the organization can be compared after the strategy is implemented.
Management measures, or evaluates, the company’s actual performance both
quantitatively and qualitatively.
Performance evaluations are compared with the previously established standards.
If performance meets or exceeds the standards, corrective action is usually not
necessary. If performance falls below the standard, then management usually takes
remedial action.

Step 1: The Focus of Strategic Control

The first step of the strategic control process is to determine the focus of the control. It is
important to align the focus with the ongoing strategy to be assessed so that its success or
failure can be evaluated accordingly. For example, executives in a firm emphasizing
innovation may wish to focus on factors associated with research and development (R & D)
and new product development. In contrast, strategic managers in a firm emphasizing cost
containment might focus on factors associated with efficiency and production processes.
Specifically, if the firm seeks to be the industry’s low-cost producer, for example, its managers
must compare its production efficiency with those of competitors and determine the extent to
which the firm is attaining its goal.

This step creates the context for strategic control by concentrating management effort on
areas directly linked to strategic success.

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 4 of 33

http://www.sagepub.com

Figure 12.1 Five-Step Strategic Control Process

Step 2: Strategic Control Standards (Benchmarks)

The second step of the strategic control process is to identify specific strategic control
standards directly linked to the strategy. Here, executives are clarifying the specific
performance measures that will be employed to evaluate strategic success or failure. Firm
performance may be evaluated in a number of ways. Management can compare current
operating results with those from the preceding quarter or year. Profitability is the most
commonly utilized performance measure and is therefore a popular means of gauging
performance and exerting strategic control. A number of additional financial measures may
also be helpful, including return on investment (ROI), return on assets (ROA), return on sales
(ROS), and return on equity (ROE), and growth in revenues. A qualitative judgment may be
made about factors such as changes in product or service quality.

A key problem with measuring performance is that one measure can be pursued to the
detriment of another. The common goals of growth and profitability represent an example of
this phenomenon. Many firms pursue growth by investing in R & D or new product
development or by slashing prices to gain customers. Either approach tends to reduce profits

—at least in the short term.3.

While control standards should be established for the internal factors identified in the
previous step, the focus should not consider past performance. Doing so can be myopic
because it ignores important external variables. For example, a rise in ROA from 8% to 10%
may appear to be a significant improvement, but this measure must be evaluated in the
context of industry trends. In a depressed industry, a 10% ROA may be considered
outstanding, but that same return in a growth industry may be disappointing if the leading

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 5 of 33

http://www.sagepub.com

firms earn 20%. In addition, an increase in a company’s ROA is less encouraging if
performance continues to lag behind industry standards.

Often, strategic control standards are based on competitive benchmarking—the process of
measuring a firm’s performance against that of the top performers, usually in the same
industry. After determining the appropriate benchmarks, a firm’s managers set goals to meet
or exceed them. Best practices—processes or activities that have been successful in other
firms— may be adopted as a means of improving performance.

Strategic control should occur constantly at various organizational levels and within various
functions of the organization. Realistic performance targets, or benchmarks, should be
established for managers throughout the organization, and they should also be specific. For
example, if market share is identified as a key indicator of the success or failure of a growth
strategy, a specific market share should be identified, based on past performance and/or
industry norms. Without specificity, it is difficult to assess the effectiveness of a strategy after
it is implemented if clear targets are not identified in advance.

Control at the functional level may include factors such as the number of defects in
production or composite scores on customer satisfaction surveys. Like organization-wide
benchmarks, functional targets should also be specific, such as “3 defective products per
1,000 produced” or “97% customer satisfaction based on an existing survey instrument.”

Published Information for Strategic Control

Key information required to exert strategic control is not always readily available, but access
has improved significantly in the past several decades. One of the first and best-known efforts
to amass relevant data was known as the PIMS (profit impact of market strategy) program.
PIMS is a database that contains quantitative and qualitative information on the performance
of thousands of firms and more than 5,000 business units. The original PIMS survey involved
about 3,000 business units in 200 firms between 1970 and 1983. Data collection continued
after 1983, however, with about 4,000 businesses currently included. While PIMS continues to
be recognized as a pioneering effort in strategic control, a variety of elaborate and targeted

databases have since emerged.4.

Fortune magazine annually publishes the most- and least-admired U.S. corporations with
a n n u a l s a l e s o f a t l e a s t $ 5 0 0 m i l l i o n i n s u c h d i v e r s e i n d u s t r i e s a s e l e c t r o n i c s ,
pharmaceuticals, retailing, transportation, banking, insurance, metals, food, motor vehicles,
and utilities. Corporate dimensions are evaluated along factors such as quality of products
and services, innovation, quality of management, market share, financial returns and stability,
social responsibility, and human resource management effectiveness. Publications such as
Forbes, Industry Week, Business Week, and the Industry Standard also provide performance
scorecards based on similar criteria. Although such lists generally include only large, publicly
traded companies, they can offer high-quality strategic information at minimal cost to the
strategic managers of all firms, regardless of size. Published information on three measures—
(1) quality, (2) innovation, and (3) market share—can be particularly useful measures, and are
discussed later in the chapter.

Product/Service Quality

Over the years, there has been a positive relationship between product/service quality—

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 6 of 33

http://www.sagepub.com

including both the conformance of a product or service to internal standards and the ultimate
consumer’s perception of quality—and the financial performance of those firms. Conforming to
internal quality standards alone is not sufficient. Products and services must also meet the

expectations of users, including both objective and subjective measures.5.

Fortune assesses quality by asking executives, outside directors, and financial analysts to

judge outputs of the largest firms in the United States.6. Its studies consistently demonstrate
a significant relationship between product/service quality and firm performance. Although the
PIMS program assesses quality through judgments made by both managers and customers
instead of asking executives and analysts, its findings also support a strong positive

correlation between product quality and business performance.

Consumer Reports is also an excellent source of product quality data, evaluating hundreds of
products from cars to medications each year. Because Consumer Reports accepts no
advertising, its evaluations are relatively bias free, rendering it an excellent source of product
quality information for competing businesses. Even if the products of a particular business are
not evaluated by this publication, that company can still gain insight on the quality of products
and services produced by its competitors, suppliers, and buyers.

Specific published information may also exist for select industries. One of the best known is
the “Customer Satisfaction Index” released annually by J. D. Power for the automobile
industry. A survey of new car owners each year examines such variables as satisfaction with
various aspects of vehicle performance; problems reported during the first 90 days of
ownership; ratings of dealer service quality; and ratings of the sales, delivery, and condition of

new vehicles.8. Numerous Internet sites offer quality ratings associated with a number of
industries for everything from computers to university professors.

Business publications often provide detailed assessments of firms in travel-related industries.
For example, in early 2011, the Financial Times conducted an in-depth analysis of air travel
worldwide, including information on fatal accidents in the 25 largest airlines, fatalities in

various parts of the world, and airlines banned for safety concerns.9. Reports such as these
are not only valuable to business travelers, but executives in the industry can often use them
as a means of evaluating firm performance.

Broadly speaking, the Internet serves as an excellent resource for strategic managers seeking
quality assessments for its industry. For example, a number of sites (e.g., www.dealtime.com)
provide consumer ratings of vendors. Although such information is not always reliable,
feedback forums can provide strategic managers with valuable insight into the quality
perceptions of their customers. Even Amazon.com ranks all books on sales volume and
provides opportunities for readers to post comments to prospective buyers.

Innovation

Innovation is a complex process and is conceptualized, measured, and controlled through a
variety of means. Some researchers use expenditures for product research and development

and process R & D as a surrogate measure.10. Expenditures on developing new or improved
products and processes also tend to increase the level of innovation, a finding also supported

by PIMS data.11. However, it should not be assumed that all innovation-related expenditures
yield the same payback.

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 7 of 33

http://www.dealtime.com

http://amazon.com

http://www.sagepub.com

Some firms plan and control their programs for innovation very carefully. 3M, for instance, has
established a standard that 25% of each business unit’s sales should come from products
introduced to the market within the past 5 years. Not surprisingly, 3M invests about twice as

much of its sales revenue in R & D as its competitors.12. This approach is consistent with
3M’s differentiation and prospector orientation at the business level.

Market Share and Relative Market Share

Market share is a common measure of performance for a firm. As market share increases,
control over the external environment, economies of scale, and profitability are all likely to be
enhanced. In large firms, market share often plays an important role in managerial
performance evaluations at all levels in the organization. Because market share gains
ultimately depend on other strategic variables, such as consumer tastes, product quality,
innovation, and pricing strategies, changes in relative market share may serve as a strategic
control gauge for both internal and external factors. As discussed in Chapter 2, a firm’s
relative market share is its proportion of total revenues when only a select group of rivals are
considered.

For successful smaller businesses, market share may serve as a strategic control barometer
because some businesses may strategically plan to maintain a low market share. In this
event, the strategic control of market share emphasizes variables that are not targeted at
growth and includes tactics that encourage high prices and discourage price discounts.
Limiting the number of product/markets in which the company competes also serves to limit
small market share. A small market share combined with operations in limited product/markets
may allow a company to compete in domains where its larger rivals cannot. Hence, for some
companies, emphasizing increases in relative market share can trigger increases in cost or

declines in quality and can actually be counterproductive.13.

Steps 3 through 5: Exerting Strategic Control

Exerting strategic control requires that performance be measured (Step 3), compared with
previously established standards (Step 4), and followed by corrective action (Step 5), if
necessary. Corrective action should be taken at all levels if actual performance is less than
the standard that has been established unless extraordinary causes of the discrepancy can
be identified, such as a halt in production when a fire shuts down a critical supplier. It is most
desirable for strategic managers to consider and anticipate possible corrective measures
before a strategy is implemented whenever possible.

Top managers should monitor the price of the company’s stock as relative price fluctuations
suggest how investors value the performance of the firm. A sudden drop in price makes the
firm a more attractive takeover target whereas sharp increases may mean that an investor or
group of investors is accumulating large blocks of stock to engineer a takeover or a change in
top management.

Organizational comparisons with rivals are a key basis for exerting strategic control. For
example, the collective market share for cable television providers consistently declined
throughout the 1990s. A number of cable customers switched to less expensive satellite
providers such as DIRECTV and Dish Network. By the early 2000s, cable’s competitive
advantage of simplicity and complete local network programming had eroded as Dish Network

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 8 of 33

http://sk.sagepub.com/books/strategic-management-theory-and-practice-fourth-edition/i974.xml

http://www.sagepub.com

and DIRECTV began to offer small, easy-to-install, discreet satellite dishes, including local
networks as part of the service plan. As a result, a number of cable companies began cutting

rates in the early 2000s in an effort to regain lost market share.14. Today, competition between
satellite television providers and cable firms remains intense.

Because individual measures of performance can provide a limited snapshot of the firm, a
number of companies have begun using a balanced scorecard approach to measuring
performance. When a balanced scorecard is used, performance measurement is not based
on a single quantitative factor but on an array of quantitative and qualitative factors, such as

ROA, market share, customer loyalty and satisfaction, speed, and innovation.15. The key to
employing a balanced scorecard is to identify a combination of performance measures tailored
specifically to the firm and its strategic objectives (see Table 12.1).

Implementing a balanced scorecard approach can be challenging, however. Although the
measures are surrogates of performance, some managers might focus on individual measures
at the expense of overall performance. For example, if a firm emphasizes market share as a
key individual measure on the scorecard, its managers might attempt to meet this objective by
rushing products to market or cutting prices excessively, activities that can undermine the
long-term health and profitability of the firm. Nonetheless, this approach has helped a large

number of firms better understand performance issues.16.

Table 12.1 Balanced Scorecard Strategic Objectives and Measures

Strategic
Objective

Examples of Strategic Measures

Cost Leadership Annual reductions in production costs

Innovation
Percentage of revenues derived from products developed during the
previous 5 years

Customer
Service

Percentage of customers reporting satisfaction with a product or service

Firm Growth Market share in select industries

Product Quality
Percentage of products returned by retailers or by consumers for warranty
service

Financial
Strength

Net income, profit margin, or return on assets (ROA)

Control through the Formal and Informal Organizations

Strategic control can occur directly through the formal organization or indirectly through the
informal organization. The formal organization—the official structure of relationships and
procedures used to manage organizational activity—can facilitate or impede a firm’s success.
When an organization’s structure is no longer appropriate for its mission, strategic control can
initiate a change. Top managers can exert formal control through such actions as modifying
the structure or changing the reward system.

Popularity has increased for a means of exerting control through the formal organization
called business process reengineering—the application of technology and creativity in an
effort to eliminate unnecessary operations or drastically improve those that are not performing

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 9 of 33

http://www.sagepub.com

well. As such, companies sought to “eliminate any process that did not add value” to the
organization’s goods and services. For example, many consumer goods manufacturers during
this period began to rethink their packaging operations, and many of them eliminated large,
cumbersome boxes in favor of less costly shrink-wrapping. Some analysts have noted a

reemer-gence of this trend in the early 2000s.17.

In the 2000s, a number of organizations shifted from functional or product divisional structures
to matrix structures and experienced considerable unanticipated difficulty. Substantial
structural changes cannot be easily implemented and typically require a large amount of
training and development. Strategic managers at many of these firms underestimated the
complications associated with transforming their organizational structures into a more complex
matrix structure.

Whereas the formal organization concerns the official structure, the informal organization
refers to the norms, behaviors, and expectations that evolve when individuals and groups

come into contact with one another.18. The informal organization is dynamic and flexible and
does not require managerial decree to change. Simply stated, informal relationships can
promote or impede strategy implementation and can play a greater role than the formal
organization. Strategic control through the informal organization often involves attempts to
modify the organization’s culture.

When top executives use the formal organization effectively, the informal organization tends to
reinforce the formal organization and promote the same values. However, when the
organization’s value system is unclear or even contradictory, the informal organization will
ultimately develop its own, more consistent set of values and rewards. For example, every
organization claims to reward high job performance. However, when promotions and pay
increases go to individuals who have the greatest seniority (regardless of their level of
performance), employees will lose motivation and develop their own set of informal rules
concerning what will and will not be rewarded.

Management must recognize its limitations concerning the informal organization. As stressed
in Chapter 11, management can influence but cannot control the informal organization. An
effective means of influencing the informal organization is to develop and promote a formal
organization that is consistent with the core values of the firm. The informal organization
becomes dysfunctional when it develops means to address inconsistencies in the formal
organization.

T h e r e l a t i o n s h i p b e t w e e n t h e f o r m a l a n d i n f o r m a l o r g a n i z a t i o n s s h o u l d n o t b e
underestimated. In general, any change in structure may also necessitate an appropriate
modification in the organization’s reward system so that the new forms of desired behavior will
be properly rewarded. When management fails to align the formal organization’s reward
systems with new expectations, the informal organization typically changes to counterbalance

the inconsistencies19. (see Case Analysis 12.1).

Case Analysis 12.1 Step 24: How Should the Selected Alternative(s) be Controlled?

How can one know in 1, 3, 5, or 10 years if an alternative has been successfully
implemented? What should be done if sales or profits do not increase as planned? To

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 10 of 33

http://sk.sagepub.com/books/strategic-management-theory-and-practice-fourth-edition/i3556.xml

http://www.sagepub.com

answer these questions, one needs to apply the five-step control process with as much
specificity as possible.

First, identify what will be measured (i.e., how one will determine the extent to which
the company is successful). Second, set the standards. For example, if ROA and
“number of new profitable stores” are selected in Step 1, then one might identify 15%
ROA and 22 stores per year as standards or targets.

Explain how the standards were developed. Consider the industry and past
performance. If the industry mean for ROA is 15%, then 15% might be an appropriate
target of performance for the company. The selected strategy can also be considered.
If 110 additional retail locations are planned over the next 5 years, then 22 stores per
year might be an appropriate target. It is important to clearly state how the standards
were derived. Identifying numbers without a clear basis is not sufficient.

After performance is measured (Step 3) and compared to the standards (Step 4),
corrective action may be taken (Step 5). In the context of a case analysis, it is not
p o s s i b l e t o m e a s u r e p e r f o r m a n c e a f t e r t h e s t r a t e g i c r e c o m m e n d a t i o n s a r e
implemented. Therefore, one should suggest alternative courses of action that might
be taken if the standards are not reached. Considering the preceding example, what
changes (if any) should be made if only 15 profitable stores are opened in the first 2
years or if ROA is only 8%? What changes (if any) should be made if the company
reaches its target of 22 profitable stores but ROA falls to 2%? At what point (if any)
should the company consider retreating from the recommended alternative(s)? It is
critical to provide considerable detail to demonstrate that all prospective future
outcomes have been considered when outlining the present course of action. Of
course, it is important to exert strategic control and take corrective action whenever
necessary, not just at the end of a specified term.

Crisis Management

On April 20, 2010, British Petroleum’s (BP) offshore drilling rig known as the Deepwater
Horizon exploded in the Gulf of Mexico, triggering the largest accidental marine oil spill in
history. Eleven workers were killed, and 17 others were injured in the accident. The discharge
of oil that stemmed from the sea floor gusher flowed for 3 months as politicians, local
communities, and the general public chastised the firm for the mistakes that led to the
catastrophe. From a strategic control perspective, one must consider the appropriate steps
that BP could have taken to avoid such a crisis when possible and minimize the effects

should it occur.20.

Disasters such as these are not limited to large firms. Any organization can be faced with a
crisis—any substantial disruption in operations that physically affects an organization, its

basic assumptions, or its core activities.21. Such crises can include any low-probability, high-
impact event that threatens the livelihood of the organization. Crises are typically
characterized by ambiguity of cause, effect, and means of resolution and a belief that the

organization must respond quickly.22.Crisis management refers to the process of planning
for and implementing the response to a wide range of negative events that could severely
affect an organization.

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 11 of 33

http://www.sagepub.com

One of the most prominent examples of a crisis in recent history is the terrorist attacks on 9/11

to New York City’s World Trade Center and the U.S. Pentagon in Washington, D.C.23. For
some organizations, the attack resulted not only in the tragic loss of a large number of

employees but also a loss of key facilities and data.24. Terrorism, however, represents only
one form of crisis events.

A number of other potential organizational crises also warrant consideration, such as fires and
other natural disasters, economic crises (e.g., extortion, boycotts, bribery), and political unrest

such as urban riots.25. Even bioterrorism—the use of biological agents for terrorist purposes
—has become a major concern. One recent survey reported that approximately two-thirds of
executives are not confident that their organizations would be safe in the event of a biological
or chemical attack, even though 80% of the organizations in question have crisis management

plans in place.26.

Some potential crisis events are more likely than others in certain types of firms. Airlines, for
example, may focus crisis preparations on prospective events such as spikes in fuel prices,
crashes, and hijackings whereas a small hardware store may plan for events such as the
abrupt loss of a key employee or a natural disaster. Simply stated, firms can and should
prepare for the ones they are most likely to face.

For one smartphone producer, crisis preparation means reducing the likelihood of a service
outage and minimizing the extent of an outage should one occur. In October 2011, Research
in Motion (RIM), Ltd., experienced a crisis when BlackBerry users around the world
experienced the worst outage in the company’s history. Disruptions in e-mail, instant
messaging, and web access affected a large percentage of the company’s 70 million users.
An RIM spokesperson reported that a technical glitch choked off data flow and that both
active and backup hardware had failed. The problem lasted several days and occurred at a
time when increased competition from Apple’s iPhone and Google’s Android was steadily

chipping away at BlackBerry’s market share.27.

Crisis preparation is especially critical when a crisis can be avoided. For example, in
September 2006, the Guangdong (China) Entry-Exit Inspection and Quarantine Bureau found
one type of Procter & Gamble’s (P&G) SK-II line of cosmetics tainted with low levels of
chromium and neodymium. These metals can cause skin diseases and have been banned
from cosmetics in a number of countries, including China. This situation presented a business
problem—a potential crisis—for P&G. However, the company did not address the situation
effectively. P&G initially refused to suspend sales of the SK-II line and hesitated to offer
refunds to customers, doing so only after metals were discovered in more SK-II products.
Angry consumers broke into a P&G office in Shanghai, and negative publicity in China was

widespread.28. The progression of these events caused this business problem to escalate
into a crisis for the firm.

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 12 of 33

http://www.sagepub.com

Mock disaster training is common preparation in the airline industry as flight attendants train
to evacuate passengers in the event of a fire or other emergency. Research suggests that
prompt, clear, and accurate responses are critical. A 2008 analysis of 283 accidents worldwide
with fatalities found that only 31% of passengers survived. On the US Airways Hudson River
landing in 2009, only about 10 of the 150 passengers grabbed a life jacket before deplaning,
and only about half took a seat cushion for flotation. Experts aim to improve the survival
percentage by focusing on speed. Panicking, pushing, and even fighting often occur when
lives are threatened. A study of 46 evacuations found that 29% of passengers involved
reported seeing others being pushed or experiencing it themselves during the crisis. A
passenger who hesitates to jump down a three-story evacuation slide often gets a push from

another passenger that can easily lead to broken ankles and other injuries.2

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 13 of 33

http://www.sagepub.com

A more recent area of crises relates to “information age” activities, including computer system
sabotage, copyright infringement, and counterfeiting. Criminals throughout the world can
extort thousands of dollars from organizations fearful of a web crash. So-called cyber-
blackmailers may have the ability to disrupt or even halt Internet activity associated with

certain sites.30. The effects of crises on an organization can vary widely around the world and
can be especially traumatic in emerging nations where recovery can be more difficult and

costly.31.

Prominent Crises in Recent History

A number of large firms faced major crises during the past few decades. One of the most
famous cases is the Johnson & Johnson (J&J) Tylenol crisis of 1982. A number of Tylenol
Extra Strength capsules were laced with deadly cyanide in West Chicago, resulting in seven
deaths. Rather than blaming retailers or other factors out of the firm’s control, J&J CEO
James Burke accepted full responsibility for the crisis. J&J launched an immediate campaign
to retrieve all of its Tylenol capsules by offering unconditional refunds to consumers. Toll-free
hotlines were established, and the company worked closely with public safety officials to
investigate the cause of the problem. Although the capsules were not contaminated in J&J
facilities, the firm suffered a drastic loss in consumer confidence and market share, with many
analysts predicting the end of the Tylenol brand. Buoyed by its forthright and assertive
response, however, J&J weathered the storm and returned to the market with caplets instead
of capsules. Consumers were receptive to the firm’s proactive approach and Tylenol soon
regained its prominence. Even today, this case represents one of the best examples of what
firms should do in the event of a crisis.

Shortly after the Tylenol crisis, Union Carbide suffered a setback of its own but did not
manage it properly. In 1984, gas leaked from a methyl isocyanate tank at a Union Carbide
plant in Bhopal, India, killing approximately 3,800 persons and totally or partially disabling
about 2,700 more. It was later learned that the leak occurred when a disgruntled employee

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 14 of 33

http://www.sagepub.com

sought to spoil a batch of the chemical by adding water to the storage tank. The incident was
reported to officials at company headquarters in the United States after a 12-hour delay, an
event that sparked a widespread view that the firm was negligent and “covering up” details.
India’s Supreme Court later provided a $470 million settlement for victims and their

families.32.

In 1989, the Exxon Valdez tanker hit a reef in Prince William Sound, Alaska, spilling
approximately 250,000 barrels of oil. Although there was no loss of human life, the loss of
animal and bird life was extensive, and negative press was daunting. The company’s untested
crisis management plan said such a spill could be contained in 5 hours, but the plan was not
implemented for 2 days. Exxon eventually spent about $2 billion to clean up the spill and

another $1 billion to settle claims associated with the disaster.33.

In 2003, The New Delhi Center for Science and Environment published a report asserting that
local samples of Pepsi and Coke products contained pesticide residues at 30 times the
acceptable limits in Europe. India’s Parliament stopped serving the beverages, and Indian
nationalist activists in Allahabad smashed bottles and vandalized the property of a Coke
distributor. Daily sales dropped by about one-third in less than 2 weeks, further curtailing
efforts by the soft drink giants to spawn consumption of a product in a country where the
average resident consumes less than one soft drink per month. The soft drink giants

responded by questioning the methodology and credentials of the group’s laboratory.34.

In 2004, McDonald’s CEO Jim Cantalupo died suddenly from a heart attack. Less than 6
hours later, McDonald’s board named president and chief operating officer (COO) Charlie Bell
as his successor. The board had already intended for Bell to succeed Cantalupo at some
point, but its quick, decisive action quelled many fears about the future of this leading fast-
food chain. This response highlights the importance not only of planning for CEO succession
but also of preparing for unexpected medical emergencies. Many experts suggest that boards

should always be prepared for an unexpected loss of the top two executives in their firms.35.

MSNBC and CBS faced a publicity crisis in 2007 when radio talk show host Don Imus made
disparaging and racially insensitive comments about members of the Rutgers University
women’s basketball team. CBS initially suspended Imus from its radio program for 2 weeks,
but MSNBC followed shortly thereafter by canceling its television simulcast of the program
after firms began to pull their advertisements from the show and consumers threatened
boycotts of other firms and the networks. CBS Radio fired Imus from the radio show several
days later. The Imus incident could be seen as an extension of an ongoing broadcasting crisis
for CBS, however. With Howard Stern’s departure for Sirius Satellite Radio in 2005 and the
growing popularity of SiriusXM talk show personalities like Andrew Wilkow and Mike Church,

CBS is struggling to retain market share in a fiercely competitive industry.36.

Matrixx Initiatives faced a serious crisis on June 16, 2009, when U.S. Food and Drug
Administration (FDA) regulators recommended that consumers stop buying the company’s
homeopathic cold remedy Zicam because the product can cause a permanent loss of smell.
Matrixx’s acting president and COO William Hemelt defended Zicam’s record and called the
FDA’s move unwarranted. Matrixx halted Zicam shipments immediately and provided refunds
to any customers seeking one. Matrixx’s stock declined 70% in value the day of the

announcement.37. Matrix introduced a reformulated Zicam remedy in 20

10.

On March 11, 2011, an 8.9 magnitude earthquake and ensuing tsunami struck Japan. The

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 15 of 33

http://www.sagepub.com

island nation endured a death toll in the thousands and a grave threat from damage to its
nuclear power facilities. In addition to the national crisis, organizations there faced their own
calamities. Wal-Mart shifted into crisis mode when 24 of its 414 stores close to the epicenter
were trashed as goods fell off the shelves during the temblor. Two locations of Seiyu stores
suffered extensive damage, and about 2,000 employees were immediately unaccounted for.
Consumers stripped shelves bare in Tokyo’s undamaged stores. Seiyu’s supply chain was

severely interrupted across the island.3

Japanese automakers were also affected by the earthquake. Production facilities there hold
little or no inventory because of the popular “just in time” philosophy in Japan. As a result,
Toyota, Honda, and Nissan experienced immediate shortages of critical parts and
implemented immediate shutdowns. Automakers based in other nations including General
Motors (GM), Ford, and Volkswagen (VW) also experienced difficulties because of their

reliance on parts from throughout the world.39.

On May 20, 2011, an explosion at Hon Hai Precision Industry in Chengdu, China, killed 3
workers and injured 15 others. A metal polishing shop was improperly cleaned or ventilated:
dust collected and ignited. The human toll of this crisis is tragic enough, but there is also a
corporate side. The shop in China produces a number of high-tech products, including iPads.
Apple offshores production to China in part because of lower wages and less restrictive
government regulations. Critics charge that shop conditions were overcrowded and that
workers travail long hours for marginal pay. Hon Hai leaders had increased worker wages and
taken public steps to improve safety shortly before the accident, arguing that its production

facility is safe and working conditions are reasonable.40.

Crises in China have not been limited to Chinese firms. Wal-Mart was fined by Chinese
regulators on four different occasions in 2011, including $78,000 for deceptive pricing; $53,000
for selling expired smoked duck; and $573,000 and temporary store closures for allegedly
mislabeling ordinary pork as organic. Wal-Mart and French retailer Carrefour were fined a
combined $1.5 million for deceptive pricing as well. In 2011, Wal-Mart operated about 350
stores in over 120 Chinese cities, accounting for about $8 billion in annual revenue, making it
the second largest big-box retailer in the country. This string of political, regulatory, and public
relations missteps has challenged the firm’s ability to gain a stronghold in the country,

something foreign firms typically find difficult in China.41.

Netflix faced a crisis after a substantial price jolt resulted in a stronger and more negative
consumer backlash than originally anticipated. During the summer of 2011, Netflix unbundled
its popular $9.99-per-month unlimited plan that allowed customers to get DVDs through the
mail and stream video over the Internet. Under the new plan launched in September 2011,
customers were required to purchase the unlimited mail and Internet stream options
individually at $7.99 per month, constituting a 60% price increase to those who opted for both
services. By mid-September, the company had suffered a significant stock price decline and a
loss of 19% of its customers, more than 16,000 of which had posted negative comments on
the Netflix blog. Netflix had expected to retain 3 million DVD-only customers and 9.8 million

streaming-only customers but ended up with about 2.2 million and 9.6 million respectively.42.

Netflix CEO Reed Hastings defended the move, arguing that the company had to transition
away from mail to Internet streaming, the latter offering greater efficiency and flexibility. Netflix
expects its DVD business to remain viable only through the mid-2020s. Hastings apologized
to his customers not for raising the price but for failing to explain the need to unbundle the

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 16 of 33

http://www.sagepub.com

services. Unfortunately his apology came 2 months after announcing the move and only after
a large number of customer defections. Although Netflix recovered much of the lost revenue
by early 2012—amassing 24.4 million subscribers compared to 24.6 million before the crisis—

the growth rate in subscriptions was much lower than the firm previously experienced.43.

The Netflix crisis was about more than price. By decoupling the mail and Internet stream
options, customers of both were inconvenienced by being forced to access different websites.
Netflix eventually dropped its plan to separate the mail and streaming video businesses but
did not rescind the pricing decision. At the time of the price hike, Netflix offered about 20,000
titles in streaming format compared to about 100,000 in DVD. Moreover, many of the
streaming titles are available elsewhere. Dish Network had acquired Blockbuster earlier in the

year and was close to introducing its streaming service.44. Hence, the pricing move will
inevitably have a long-term influence on the organization. Whether this influence will have an
eventual positive effect—as Hastings believes—remains to be seen.

How a firm responds to a crisis can ultimately determine its survival and long-term success.
Following the devastation of New Orleans from Hurricane Katrina in 2005, for example, grocer
Winn-Dixie contemplated closing shop in the area where it operates about 125 stores.
Because Winn-Dixie was in Chapter 11 b a n k r u p t c y , t h e f i r m c o u l d e x i t w i t h f e w e r
repercussions than other grocers would face because bankruptcy protection makes it easier
to cancel costly store leases. CEO Peter Lynch saw it as an opportunity, however, choosing
instead to use the millions of dollars the company would receive in insurance payments to
rebuild the stores to be brighter and better stocked. Instead of departing the ravaged region,

Winn-Dixie is banking on New Orleans’ strong rebound.45.

Strategy at Work 12.1. Procter & Gamble’s SK-II Crisis in China46.

Although successful in the West, P&G has been experiencing a number of problems in
China. In May 2005, P&G negotiated a $24,000 settlement after a consumer spent 840
Yuan ($100) on De-Wrinkle Essence, a member of its SK-II product line. The product
advertisement claimed the treatment would help eliminate 47% of the deep lines and
wrinkles in the first month of usage. Lu Ping, the victim in this suit, claimed the product
only caused a painful allergic reaction. P&G’s claims were based on a study involving
200 Japanese women, a study challenged by the Nanchang Commercial and Industrial
Bureau in Jiangxi.

In June 2005, the Zhejiang Provincial Industrial and Commercial Administration
(ZPICA)-a local advertising standards agency in China-ordered P&G to remove an
advertisement for its Pantene V shampoo. The ZPICA challenged the ad’s claim that
Pantene made hair 10 times more resilient than normal. ZPICA also challenged
advertisements for three other P&G products-(l) Safeguard soap, (2) Crest toothpaste,
and (3) Head & Shoulders shampoo-although formal action was only taken in the case
of Pantene V.

For a year, the stormy relationship between P&G and Chinese regulators seemed to
subside until an incident involving the SK-II product line of cosmetics. The SK-II line is
made in Japan and sold to stores in China, the United States, and several other

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 17 of 33

http://sk.sagepub.com/books/strategic-management-theory-and-practice-fourth-edition/i3556.xml

http://www.sagepub.com

nations. In the United States, the product line is available through the high-end retailer
Saks Fifth Avenue. On September 14, 2006, quality authorities in South China’s
Guangdong Province detected chromium and neodymium in an SK-II product. These
metals can cause skin irritation and disease and subsequently are banned in all
cosmetics in China and many other parts of the world. P&G initially denied the
charges, stating that it was working with the local Chinese authorities to verify the
validity of the findings. After nine (allegedly) contaminated SK-II products were
identified, the company reluctantly agreed to offer refunds to consumers. To be
eligible, consumers were required to return the product to the store of purchase with
no less than one-third of the product remaining. They also had to sign a form
acknowledging that the product was of good quality and wait several weeks for
processing

Hundreds of Shanghai women sought refunds at various P&G locations on September
21. Tempers flared, however, when they were told that their refunds would take 3
weeks to process. Citing security concerns, P&G suspended its refund operations the
following day. The company also announced its intentions to discontinue sales of the
SK-II line in China-at least temporarily. An angry group of consumers kicked down the
front door of P&G’s Shanghai office that same day, and the company’s China website
was hacked that weekend. Dismayed by the P&G response to the crisis, some retailers
even started offering immediate cash refunds on their own.

Crisis Planning

Managing a crisis can be a complex process. Hence, it is helpful to view crisis management
as a three-stage process. Before the crisis, organizations should develop a crisis
management team— a cross-functional group of individuals within the organization who have
been designated to develop and plan for worst-case scenarios and define standard operating
procedures that should be implemented prior to any crisis event. Ideally, the team should
represent all functional areas of the organization and should facilitate action necessary to
prevent or minimize the effect of potential crisis events. For example, top managers
anticipating labor unrest at a company facility may hire additional security guards or contract
with a private agency to provide additional security. In 2008, global rice shortages prompted

Sam’s Club and Costco to ration the project to prevent potential hoarding.47.

Proactive organizations that continually assess their vulnerabilities and threats and develop
crisis management plans tend to be adequately equipped when a crisis occurs. Proper
preparation requires research of the literature, of the industrial sector, and of the company
itself. Information is needed to properly prepare for the crisis events. When managers
understand which crisis events are more likely to occur, they can plan for the event more
effectively and foster a business culture that is ready to meet the challenge if and when a

crisis occurs.48. Organizational crises cannot always be avoided—even with the best of
planning. Nassim Taleb used the term black swan to describe a broad array of low-probability,
high-impact events, including organizational crises. Taleb points out we rarely predict black
swans accurately, so CEOs often spend their time, energy, and resources preparing for crises
that may never occur. Because executives tend to base their predictions of the future on past
events, they inevitably miss unprecedented crises such as the 9/11 attack on the World Trade

Center or the financial crisis of 2008.49. This is not to suggest that precrisis planning is not a
worthwhile exercise but rather that executives need to recognize their limitations in terms of

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 18 of 33

http://www.sagepub.com

anticipating and preparing for the wide range of crisis events their organizations can face.

During the crisis, an organizational spokesperson should communicate effectively with the
public to minimize the effect of the crisis. For example, after being unprepared when Tylenol
capsules were laced with cyanide in 1982, J&J improved its preparation, responding to a 1986
lacing incident by acknowledging the crisis with the public and instructing all consumers to

return products for a refund.50. Presentations to the public should be prompt, honest,
professional, and streamlined through a single person or office.

Over 14,000 infants were hospitalized and countless others treated in China after ingesting
baby formula tainted with the industry chemical melamine in 2008. The formula had been
manufactured by a Chinese firm, Shijiazhuang Sanlu Group. Government officials initially
downplayed the crisis but became more forthcoming as time passed, seeking to provide more

accurate details and announcing plans to prevent such a crisis from recurring.51.

After the crisis, communication with the public should continue as needed, and the cause of
the crisis should be uncovered. Understanding the cause can help executives minimize the

likelihood that the crisis will occur again and improve preparation for the crisis if it does.52.

Throughout these stages, three key points should be highlighted. First, organizational leaders
should take crisis management seriously. Sooner or later, every organization will face a crisis,
and survival may hinge on the organization’s ability to manage the situation properly. Second,
steps should be taken to prevent or reduce the likelihood of crisis events whenever such
action is practicable. Finally, even when a crisis cannot be avoided, it should be handled
appropriately. Managing a crisis requires an investment of time attending to specific activities
before, during, and after a crisis. How a crisis is managed can have a tremendous effect on
the organization in both the short and long term.

Unfortunately, while few executives would reject these points, many acknowledge that their
firms are not as prepared as they should be. This inconsistency occurs for three reasons.
First, some executives view crisis events as largely unpredictable or unavoidable and
therefore not worthy of precious managerial time and resources. Second, many managers feel
that they lack the time to adequately prepare for potential crises. Third, some leaders
recognize the need for crisis planning and are willing to commit the time but simply lack the
expertise necessary to make the appropriate preparations.

Crisis management is a key component of strategic control—and arguably the entire strategic
management process. Investing sufficient time, energy, and resources into preventing crises
when possible and managing them when necessary can pay dividends (see Case Analysis
12.2).

Case Analysis 12.2 Step 25: What Crisis Events Should the Firm Anticipate? What Are the Future
Prospects for the Company?

Given the nature of the firm, its industry, and the recommended strategies, what crisis
events are most realistic? This type of analysis varies considerably by firm and
industry. Although it is impossible to anticipate and prepare for every conceivable crisis
that a firm may face, attention should be placed on those that are most likely to occur,

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 19 of 33

http://www.sagepub.com

can be avoided or palliated, and are likely to result in substantial losses.

How do the strategic recommendations differ from the current strategy? Will the
outlook for the company change as a result of these recommendations? Will the
organization be successful in the coming decade? What strategic issues were not
addressed in the recommendations that may become more important in the next few
years? Why were they not addressed in the present analysis?

Trends in Strategic Management

Change is eminent in the business world. Indeed, several key trends in the strategic
management field can be identified. First, the strategic environment has and will continue to
become more global. With the “flattening” of the world and the emergence of BRIC (Brazil,
Russia, India, and China) and other nations, global partnerships are becoming more common
and vital to strategic success. Firms must be willing and able to work with counterparts
anywhere in the world to produce higher-quality products at lower costs.

Second, the Internet’s influence on business organizations has not yet been fully realized.
With the continued development of social media, a growing preference for “real time” and
digital over archived and print, and Internet portability through smartphones and iPads,
organizations will be challenged to respond to consumer demands with greater precision and
speed. Consumers expect organizations to stay abreast of this technology and will reward
those that do with their business.

Third, the notion of sustainability is here to stay. Debates about social responsibility and
anthropogenic climate change aside, firms must meet consumer expectations for cleaner,
more efficient production processes. Organizations seen as wasteful or ignorant of their
interconnect-edness with the environment are likely to suffer greatly in the marketplace.

Fourth, the low cost-differentiation dichotomy is becoming less valid as businesses seek to
transcend the traditional trade-offs and sail into “blue oceans.” While preferences for either
cost leadership or differentiation will continue, few firms will be able to survive by emphasizing
only one dimension. Rivals competing “in the middle” are less likely to be stuck—as Porter
noted—but are more likely to exert pressure on businesses at either end of the continuum.
More carmakers like Hyundai, hotel chains like Hampton Inn, and fast casual restaurants like
Quiznos and Panera Bread are occupying middle-ground value-oriented positions by
delivering reasonable quality at low costs and affordable prices.

Finally, the growing importance of crisis management is likely to continue. Increases in
globalization, technology, and speed suggest a greater incidence of organizational crises in
coming years. Whether initiated internally or externally, crises no longer represent the rare
events that only affect “other companies.” Firms that prepare effectively for them are more
likely to thrive, while those that do not risk catastrophic downturns and even dissolution.

Summary

The strategic control process consists of determining the extent to which the company’s
strategies are successful in attaining its goals. This process is accomplished through five
steps. First, top management must determine what serves as a measure of a strategy’s
success and, therefore, needs to be controlled. Next, standards of performance should be

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 20 of 33

http://www.sagepub.com

1.
2.
3.

4.
5.

developed. Management then measures performance along these lines both quantitatively
and qualitatively and compares the actual performance to the standards. Reasons for
discrepancies between actual measures and standards are analyzed, and corrective action is
taken to resolve any areas where performance needs to be enhanced.

Crisis management refers to the process of planning for and implementing the response to a
wide range of negative events that could severely affect an organization. Like strategic control,
crisis management is an ongoing process.

Key Terms

Balanced Scorecard: An approach to measuring performance based on an array of
quantitative and qualitative factors, such as ROA, market share, customer loyalty and
satisfaction, speed, and innovation.
Best Practices: Processes or activities that have been successful in other firms.
Business Process Reengineering: The application of technology and creativity in an
effort to eliminate unnecessary operations or drastically improve those that are not
performing well.
Competitive Benchmarking: The process of measuring a firm’s performance against that
of the top performers— usually in the same industry.
Crisis: Any substantial disruption in operations that physically affects an organization, its
basic assumptions, or its core activities.
Crisis Management: The process of planning for and implementing the response to a
wide range of negative events that could severely affect an organization.
Crisis Management Team: A cross-functional group of individuals within the organization
who have been designated to develop and plan for worst-case scenarios and define
standard operating procedures that should be implemented prior to any crisis event.
Formal Organization: The official structure of relationships and procedures used to
manage organizational activity.
Informal Organization: Interpersonal norms, behaviors, and expectations that evolve
when individuals and groups come into contact with one another.
PIMS (Profit Impact of Market Strategy) Program: A database that contains quantitative
and qualitative information on the performance of more than 5,000 business units.
Strategic Control: The process of determining the extent to which an organization’s
strategies are successful in attaining its goals and objectives.

Review Questions and Exercises

What are the five steps in the strategic control process?
Why is it critical to identify the appropriate strategic control standards for a firm?
Should corrective action always be taken when performance falls below the
predetermined standard? Likewise, should corrective action never be taken when
performance meets or exceeds the predetermined standard? Explain.
Explain how competitive benchmarking is used in strategic control. What are some
commonly used competitive benchmarks?
What is crisis management, and why is it important?

Practice Quiz
SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 21 of 33

http://www.sagepub.com

A.
B.
C.

A.
B.
C.
D.

A.
B.
C.
D.
A.
B.
C.
D.

True or False?

1. Strategic control should be ongoing and occur throughout the strategic management
process.
2. The PIMS program is a government-sponsored effort to improve strategic planning
effectiveness in the United States.
3. Corrective action should usually, but not always, be taken at all levels if actual
performance is less than the standard that has been established.
4. Strategic control can be exerted through either the formal or informal organization.
5. Crisis management refers to efforts made to eliminate the possibility that the
organization can be affected negatively by unforeseen events.
6. Crisis management involves a series of steps that can be taken before a crisis occurs,
while it is occurring, and after it has passed.

Multiple Choice

Strategic control is important because_______.

it is difficult to know how well the firm is performing without it
the organization’s environment is uncertain and always changing
lower-level managers need an effective means of providing feedback to top

management
A & B only

The strategic control process begins by_______.

identifying appropriate performance measures
establishing benchmarks
measuring performance
taking corrective action as needed

The process of measuring a firm’s performance against that of the top performers, usually
in the same industry, is known as_______.

competitive positioning
performance measurement
benchmarking
PIMS analysis

10.

Sources of published information for strategic control available to the public include all of
the following except_______.

the Wall Street Journal
Consumer Reports
PIMS data
many trade journals

11.

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 22 of 33

http://www.sagepub.com

A.
B.
C.
D.
A.
B.
C.
D.

Benchmarks should be_______.

broad, not specific
associated with the strategy’s success
outside the firm’s control
all of the above

12.

Which of the following approaches bases the measurement of performance on an array of
quantitative and qualitative factors instead of a single quantitative measure in the
organization, such as profitability?

balanced scorecard
PIMS analysis
competitive benchmarking
none of the above

Student Study Site

Visit the student study site at www.sagepub.com/parnell4e to access these additional
materials:

Answers to Chapter 12 practice quiz questions
Web quizzes
SAGE journal articles
Web resources
eFlashcards

Notes

1. J. C. Picken and G. G. Dess, “Out of (Strategic) Control,” Organizational Dynamics 26, no.
1 (1997): 35-48.

2. G. McWilliams and J. Covert, “Wal-Mart’s Strategy Spurs a Selloff,” Wall Street Journal,
October 24, 2009.

3. J. B. White and N. Shirouzu, “At Ford Motor, High Volume Takes Backseat to Profits,” Wall
Street Journal, May 7, 2004, A1, A12.

4. C. H. Springer, “Strategic Management in General Electric,” Operations Research 2 14. C. H. Springer, “Strategic Management in General Electric,” Operations Research 2 1
(1973): 1177-1182.

5. L. Dube, L. M. Renaghan, and J. M. Miller, “Measuring Customer Satisfaction for Strategic
Management,” Cornell Hotel and Restaurant Administration Quarterly (February 1994): 39-47;
J. M. Groocock, The Chain of Quality (New York: Wiley, 1986).

6. P. Wright, D. Hotard, J. Tanner, and M. Kroll, “Relationships of Select Variables with
Business Performance of Diversified Corporations,” American Business Review 6 , n o . 1
(January 1988): 71-77.

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 23 of 33

http://www.sagepub.com/parnell4e

http://www.sagepub.com

7. R. D. Buzzell and B. T. Gale, The PIMS Principles: Linking Strategy to Performance (New
York: Free Press, 1987).

8. A. Taylor III, “More Power to J. D. Power,” Fortune, May 18, 1992, 103-106.

9.Financial Times, “The Final Approach,” February 8, 2011, 9.

10. R. D. Buzzell and B. T. Gale, The PIMS Principles; P. Wright, M. Kroll, C. Pringle, and J.
Johnson, “Organization Types, Conduct, Profitability, and Risk in the Semiconductor Industry,”
Journal of Management Systems 2, no. 2 (1990): 33-48.

11. P. Fuhrman, “No Need for Valium,” Forbes, January 31, 1994, 84-85.

12. K. Kelly, “3M Run Scared? Forget About It,” Business Week, September 16, 1991, 59.

13. W. E. Fruhan Jr., “Pyrrhic Victories in Fights for Market Share” and R. G. Hamermesh, M.
J. Anderson, and J. E. Harris, “Strategies for Low Market-Share Businesses” in R. G.
Hamermesh (Ed.), Strategic Management (New York: Wiley, 1983), 112-125; 126-138.

14. P. Grant, “The Cable Guy Cuts His Rates,” Wall Street Journal, September 25, 2002, D1,
D2.

15. R. Kaplan and D. Norton, The Balanced Scorecard: Translating Strategy Into Action
(Boston: Harvard Business School Press, 1996); R. Kaplan and D. Norton, The Strategy
Focused Organization (Boston: Harvard Business School Press, 2001).

16. M. L. Frigo, “Strategy and the Balanced Scorecard,” Strategic Finance 84, no. 5 (2002): 6-
8; E. M. Olson and S. F. Slater, “The Balanced Scorecard, Competitive Strategy, and
Performance,” Business Horizons 45, no. 3 (2002): 11-16.

17. N. P. Archer, “Methodologies and Tools for E-Business Change Management,” presented
at the 24th Annual McMaster World Congress, Hamilton, Ontario, Canada, January 15-17,
2003; E. Abrahamson and G. Fairchild, “Management Fashion: Lifecycles, Triggers, and
Collective Learning Processes,” Administrative Science Quarterly 44 (1999): 708-728.

18. D. Krackhardt and J. R. Hanson, “Informal Networks: The Company Behind the Chart,”
Harvard Business Review 71, no. 4 (July-August 1993): 104-111.

19. G. A. Miller, “Culture and Organizational Structure in the Middle East: A Comparative
Analysis of Iran, Jordan and the USA,” International Review of Sociology 11 (2001): 309-324;
H. Kahalas, “How Competitiveness Affects Individuals and Groups Within Organizations,”
Journal of Organizational Behavior 22, no. 1 (2001): 83-85.

20. P. Hart and D. McGinn, “Advice for BP’s Reputation Crisis,” Wall Street Journal, May 27,
2010, A19.

21. J. Burnett, Managing Business Crises: From Anticipation to Implementation (Westport, CT:
Quorum, 2002).

22. C. Pearson and J. Clair, “Reframing Crisis Management,” Academy of Management
Review 23, 59-76.

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 24 of 33

http://www.sagepub.com

23. D. N. Greenberg, J. A. Clair, and T. L. Maclean, “Teaching Through Traumatic Events:
Uncovering the Choices of Management Educators as They Respond to September 11th,”
Academy of Management learning & Education Journal 1, no. 1 (2002): 38-54.

24. J. W. Greenberg, “September 11, 2001: A CEO’s Story,” Harvard Business Review 80, no.
10 (2002): 58-64; P. ‘t Hart, L. Heyse, and A. Boin, “New Trends in Crisis Management
Practice and Crisis Management Research: Setting the Agenda,” Journal of Contingencies &
Crisis Management 9, no. 4 (2001): 181-188.

25. A. H. Miller, “The Los Angeles Riots: A Study in Crisis Paralysis,” Journal of Contingencies
and Crisis Management 9, no. 4 (2001): 189-199; C. Pearson and I. Mitroff, “From Crisis Prone
to Crisis Prepared: A Framework for Crisis Management,” Academy of Management Executive
7, no. 1 (1993): 48-59.

26.Business Wire, “BioTerrorism Response Plans Doubted; Organizations Feel Vulnerable
Despite Contingency Planning, According to Survey at International Biosecurity Summit,”
November 26, 2002.

27. W. Connors, B. Dummett, and C. Lawson, “For BlackBerry Maker, Crisis Mounts,” Wall
Street Journal, October 13, 2011, A1, A2.

28. M. Fong and L. Chao, “P&G Stumbles in China,” Wall Street Journal Interactive Edition,
September 25, 2006.

29. S. McCartney, “Training for a Plane Crash,” Wall Street Journal, September 29, 2011, D1,
D2.

30. C. Bryan-Low, “Tech-Savvy Blackmailers Hone a New Form of Extortion,” Wall Street
Journal, May 5, 2005, B1, B3.

31. A. H. Miller, “The Los Angeles Riots: A Study in Crisis Paralysis”; C. Pearson and I. Mitroff,
“From Crisis Prone to Crisis Prepared.”

32.Bhopal.com Information Center, www.bhpopal.com (accessed November 26, 2002)

33. A. Tanneson and L. Weisth, “FT Report: Mastering Leadership,” Financial Times,
November 22, 2002.

34. J. Slater, “Coke, Pepsi Fight Product-Contamination Charges in India,” Wall Street
Journal, August 15, 2003, B1, B4.

35. C. Hymowitz and J. S. Lublin, “McDonald’s CEO Tragedy Holds Lessons,” Wall Street
Journal, April 20, 2004, B1, B8; R. Gibson and S. Gray, “Death of Chief Leaves McDonald’s
Facing Challenges,” Wall Street Journal, April 20, 2004, A1, A16.

36. B. Steinberg, B. Barnes, and E. Steel, “Facing Ad Defection, NBC Takes Don Imus Show
Off TV,” Wall Street Journal, April 12, 2007, B1.

37. J. Corbett-Dooren, “FDA Warns Against Use of Zicam,” Wall Street Journal, June 17,
2009, B1.

38. M. Sanchanta, “Wal-Mart’s Local Team Shifts into Crisis Mode,” Wall Street Journal, March

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 25 of 33

http://bhopal.com

http://www.bhpopal.com

http://www.sagepub.com

25, 2011, B1, B5.

39. M. Ramsey and S. Moffett, “Japan Parts Shortage Hits Auto Makers,” Wall Street Journal,
March 24, 2011, B1, B2.

40. J. Bussey, “Measuring the Huma Cost of an iPad Made in China,” Wall Street Journal,
June 3, 2011, B1-B2.

41. M. Bustillo and L. Burkett, “Wal-Mart’s Chinese Puzzle,” Wall Street Journal, October 12,
2011, B1, B11.

42. I. Sherr, “New Netflix Pricing Gets Thumbs Down,” Wall Street Journal, September 16,
2011, B1, B2.

43. R. E. Silverman and D. Mattioli, “Netflix CEO Says He’s Sorry, Sort of,” Wall Street
Journal, September 20, 2011, B1; S. Woo and I. Sherr, “Netflix’s Growth Disappoints,” Wall
Street Journal, April 24, 2012, B1, B4.

44. E. Smith, “Netflix CEO Unbowed,” Wall Street Journal, September 20, 2011, B1, B7; S.
Woo, “Under Fire, Netflix Rewinds DVD Plan,” Wall Street Journal, October 11, 2011, A, C10.

45. J. Adamy, “The Aisles of Optimism,” Wall Street Journal, October 3, 2005, B1, B6.

46. W. R. Crandall, J. A. Parnell, P. Xihui, and Z. Long, “When Crisis Management Goes
Abroad: The Demise of SK-II in China,” Journal of International Business Research and
Practice 1, no. 1 (2007): 38-49; China Daily, “P&G Accepts Fine for ‘Bogus’ Advertising,” April
11, 2005, www.chinadaily.com.cn/english/doc/2005-04/11/content_432925.htm (accessed May
11, 2009); W. Liu, “P&G Again Faces False Ad Claims,” China Daily, June 29, 2005,
www.chinadaily.com.cn/english/doc/2005-04/11/content_432925.htm (accessed May 11, 2009);
Xinhua News Agency, “Japanese Cosmetics Cause Concern in China,” September 21, 2006,
www1.china.org.cn/english/2006/Sep/181859.htm ( a c c e s s e d M a y 1 1 , 2 0 0 9 ) ; G u a n , X . ,
“ R e f u n d s O f f e r e d o n H a r m f u l C o s m e t i c s , ” China Daily, S e p t e m b e r 1 8 , 2 0 0 6 ,
www.chinadaily.com.cn/china/2006-09/18/content_691155.htm (accessed May 11, 2009).

47. G. McWilliams and L. Etter, “Sam’s Club, Costco Ration Rice Amid Hoarding Worries,”
Wall Street Journal, April 24, 2008, B1.

48. L. Barton, Crisis in Organizations II (Cincinnati: South-Western Publishing Co., 2001); R.
R. Ulmer, “Effective Crisis Management Through Established Stakeholder Relationships,”
Management Communication Quarterly 14 (2001): 590-615.

49. N. N. Taleb, The Black Swan: The Impact of the Highly Improbable (New York: Random
House, 2009); N. N. Taleb, D. G. Goldstein, and M. W. Spitznagel, “The Six Mistakes
Executives Make in Risk Management,” Harvard Business Review 67, no. 10 (2009): 78-81.

50. P. Shrivastava, I.I. Mitroff, D. Miller, and A. Miglani, “Understanding Industrial Crises,”
Journal of Management Studies 25 (1988): 205-303.

51. J. Leow and L. Chao, “China Seeks to Contain Dairy Crisis as Illness Count Doubles,”
Wall Street Journal, September 22, 2008, B1.

52. W. Crandall, J. A. Parnell, and J. E. Spillan, Crisis Management in the New Strategy

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 26 of 33

http://www.chinadaily.com.cn/english/doc/2005-04/11/content_432925.htm

http://www1.china.org.cn/english/2006/Sep/181859.htm

http://www.chinadaily.com.cn/china/2006-09/18/content_691155.htm

http://www.sagepub.com

landscape (Thousand Oaks, CA: Sage, 2010).

Strategy + Business Reading: How to Prevent Self-inflicted Disasters

All too often, companies unintentionally create their own worst crises.
With a little awareness of your organizational DNA, you can avoid that
fate—and the headlines that go with it.

by Eric Kronenberg

During the last few years, a number of well-publicized “black swan” events—highly
destructive calamities that seemingly come from out of nowhere, and that are diverse
enough to include oil rig explosions, automobile recalls, major production delays,
financial meltdowns, and at least one phone-tapping scandal—have had immense
negative effects on the companies involved. When you look in more detail at these
crises, you often find that they were self-inflicted to some degree. An overly aggressive
production schedule may have driven employees to disregard or downplay the
company’s safety or risk prevention procedures. Internal staff may have warned their
peers about potential dangers, but those warnings never made it to the top of the
company. Decision makers may have ignored, misunderstood, or even suppressed bad
news, in a way that ultimately backfired. After the event, the leaders of the company
often have to admit: “We did it to ourselves.”

The unintended consequences associated with a self-inflicted black swan can be
devastating. They include negative publicity; huge, sudden costs; lost revenues;
lawsuits and criminal judgments; and regulatory penalties. Analysis of the stock prices
of companies that suffered such events in 2009 and 2010 in the oil, automobile, aircraft
manufacturing, and financial-services industries shows that within two months after a
visible self-inflicted crisis, an average of 18 percent of shareholder value was lost,
relative to the S&P 500. Moreover, stock price performance continued to diminish over
time: On average, shareholder value came down 33 percent within a year.

Self-inflicted black swans have occurred in many industries in widely varying
circumstances, but always with one common factor. Although the initial trigger
appeared to be an exogenous event, the critical decisions were largely under the
control of management. Typically, a number of people within the company knew about
the situation and saw the potential downside in advance; if this knowledge had been
acted upon with diligence and in a timely manner, the problem could have been
prevented. Often, these companies had formal procedures in place designed to avoid
these precise risks, but the procedures were routinely ignored or bypassed by
employees.

How could companies that knew better fall into these traps? Because the perception of
risk diminishes over time. It’s not unlike the dangerous habit of texting while driving.
Imagine that one day under pressure, you send a text message while behind the
wheel, and nothing bad happens. You promise yourself that you won’t do it again, but
the pressures continue, and you start to make a habit of it. A few months go by with no
mishap, and you come to believe that the “no texting while driving” rule shouldn’t apply

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 27 of 33

http://www.sagepub.com

to you. You are one of those favored people who can successfully multitask without
much risk. But when you’re feeling lucky is just when you’re most likely to cause an
accident. Companies that get into similar habits—overlooking or sidestepping their risk
management practices—are similarly primed for a self-inflicted black swan.

For example, more than one oil and gas company has been informed at some time by
subcontractors of the potential for a severe explosion. Mitigation measures have
typically been at hand to rectify the problem, but because implementing them would
temporarily halt the operation, leading to lost revenue, the manager of the oil rig is
under pressure to find some way to cover over the problem. If everyone else involved in
the rig tacitly accepts this decision, even though it contradicts official company policies,
there might well be an explosion within months.

Similarly, at the outset of the global financial crisis, some people within banks and
insurance companies were warning of the declining standards for securitized
mortgages, CDOs (collateralized debt obligations), and other high-risk investments.
But others had strong incentives to ignore these warnings—not just the formal
motivators such as pay, but equally powerful informal incentives such as the traders’
fiercely felt need to outperform others. In the U.K. voicemail hacking scandal, the news
media had a similarly strong competitive motivation: to scoop rival publications. The
i n s t i t u t i o n s t h a t s u r v i v e u n s c a t h e d t e n d t o b e t h o s e t h a t m a i n t a i n i n f o r m a l
commitments to back up their formal rules on safety and integrity.

An Introduction to Organizational DNA

If you are a senior leader, you may already be wondering whether your company is
vulnerable. Are there systemic organizational characteristics, embedded in both the
policies and the culture of your company, that contribute to self-inflicted disasters? Do
your safety, compliance, and risk management practices truly have teeth, or do they
actually add to the danger by giving you a false sense of security? What practices and
organizational designs will help you be more efficient and effective in the short term,
while mitigating the risk of self-inflicted black swans over the long term?

The answers to these questions vary from one company to the next. You must start by
recognizing the distinct ways in which your company operates, the elements of your
organizational DNA.

The organizational DNA framework is a vehicle for understanding the formal and
informal elements that drive and constrain day-to-day behavior in your company. (See
Exhibit.) This framework, introduced by Booz & Company in the early 2000s, has been
used by almost 200,000 individuals to profile and improve the health of their
organizations. Like molecular DNA, organizational DNA has four “bases”: components
of activity that fit together like building blocks. They determine how an organization
executes—what changes it can make and what actions its members can take. The four
bases are:

Decision rights and norms. The rules and practices that govern how actions in an
organization are shaped and focused.

Motivators and commitment. The values and principles that drive employee behavior

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 28 of 33

http://www.sagepub.com

and engagement.

Information flow and mindsets. The patterns of thinking and communication that
inform what people do in an organization.

Organizational structure and networks. The links and connections that guide how
people work with one another throughout the hierarchy.

When put together, the formal sides of each organizational DNA base make up the
official part of the organization’s operating model: decision rights, motivators and
incentives, information-carrying channels and metrics, and the structure of reporting
relationships (the organization chart). These are the documented, official standards for
company operations across all levels.

However, official rules alone cannot determine everything about the way the thousands
of employees in a large company make and execute decisions. The informal sides of
each base have an equally strong impact. These include the norms that people keep in
mind about what matters and who is important, the commitments that individuals make
about why they care, the mindsets that people (and groups) adopt that shape their
perceptions of their work, and the networks through which people in a company
develop relationships.

Companies with self-inflicted crises nearly always have formal elements in place that
are intended to help the organization avoid accidents and problems: reports, explicit
procedures, and watchdog and prevention measures that prevent catastrophes when
nominally followed. But the informal elements determine the way that policy is
implemented. In many cases these unwritten rules, values, standards, and workplace
routines treat these formal procedures as bureaucratic overkill. The reports are
ignored, and the procedures are followed only in a pro forma fashion. Like the driver
who texts in traffic, the company gets away with noncompliance for a long time, while
the effectiveness of its procedures gradually erodes. The crisis doesn’t occur until a
long time after the noncompliance began.

Exhibit Four Components of Organizaional DNA

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 29 of 33

http://www.sagepub.com

The Key to Capability

In a typical large company, a self-inflicted black swan can emerge in many ways.
Rather than trying to prepare for each specifically, companies should approach the
issue by developing an effective capability for anticipating and managing large,
unrealized risks in general. Here are four starting points, each based on one of the
building blocks of organizational DNA:

Clarify who is responsible for which decisions, taking into account the
influence that informal leaders already have (decision rights and norms).
The decision rights for large, unrealized risks are probably unclear, because by
their nature, these risks involve long-term concerns with an uncertain payoff.
Risk prevention and mitigation measures may also involve a complex group of
actors, especially when work is outsourced or offshored. Some companies,
including many financial-services firms, assign risk exposure to specialized
departments. But these risk departments—which are typically disconnected

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 30 of 33

http://www.sagepub.com

from mainstream operations and led by managers with little authority—may lead
to a false sense of security. People feel little need to concern themselves,
because the department is there to take care of it. Yet if the risk department
does not have the authority or influence to affect company decisions, then who
will step in to ensure that self-inflicted black swans don’t appear?

To establish a more appropriate group of decision rights, you may need to set
up a cross-organizational team to manage information on significant risks. Make
sure that some members of this team have the requisite decision rights to
ensure that practices are put in place and that people comply. Other members
may be influential people who have no formal role in preventing risk, but who
are personally committed to the idea and well connected informally.

Formal decision rights should be backed up by informal discussions to
establish general agreements. For example, what if a contractor sees a practice
that seems dangerous? Whom should he or she inform? What if that person
doesn’t act on it? Who should then step in? Once these informal general
a g r e e m e n t s h a v e b e e n r e a c h e d , d e s i g n t h e f o r m a l d e c i s i o n r i g h t s t o
complement those agreements.

Align incentives and other motivators to promote awareness of potential
risks and their prevention (motivators and commitment). B e c a u s e
incentives are rarely designed with self-inflicted black swans in mind, they may
produce conflicting priorities. The CEO of a financial institution may be charged
by the board with looking out for long-term health, but individual traders are
compensated on the short-term revenues they generate. Or a manufacturing
company may have a safety-conscious culture alongside a high-pressure
production schedule; managers who can’t keep up are seen as letting everyone
else down.

It’s not easy to resolve these tensions, and people often rely on both formal and
informal support. If the company has established rules about the priorities and
rewards involved in anticipating risk, and if most people are regularly exposed
to informal conversations about the dangers of cutting corners, they are more
likely to avoid peril. It also helps when people involved in a complex situation
can meet openly to hash out the issues and think together about ways to
resolve the tension between being fast and being safe.

You can often find evidence of poorly aligned incentives by talking to managers
in the field. Have they “normalized” their view of problems, discounting the idea
that catastrophes could happen and letting excessive risk become business as
usual? Their mindset can be similar to that of one oil company engineer who
wrote in an internal e-mail, just before a disaster, “Who cares? It’s done, end of
story, we’ll probably be fine and we’ll get a good [follow-up] job.”

To redesign motivators and commitments may require an explicit review of your
organization’s gaps and inconsistencies. How closely aligned are the promotion
and bonus structures with the behaviors you want to promote? Do employees
care about short-term gain only, or do they have long-term growth and the
preservation of their jobs in mind? Once you have established some answers to
these questions—through surveys and analysis of your existing incentives—you

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 31 of 33

http://www.sagepub.com

3.
4.

c a n t h e n b e g i n m o v i n g t h o s e i n c e n t i v e s c l o s e r t o t h e m o t i v a t o r s a n d
commitments you need.

Create formal and informal communication channels to raise awareness of
current conditions on the ground (information flow and mindsets). I n
preventing self-inflicted black swans, one central challenge is ensuring that
senior decision makers can get an accurate, timely, and independent overview
of “ground truth”: the realities of project progress and potential problems. They
need to independently verify the information they receive from their direct
reports. In most companies, executives receive messages selectively filtered
and tailored to what people believe they want to hear. Basic human nature
seems to include reluctance to communicate bad news.

Outsourcing and offshoring exacerbate the problem. Subcontractors may be
located far from the headquarters of their client companies. Supplier contracts
typically limit the type and amount of information that can be shared, and
sometimes impose penalties for delays—thus giving subcontractors an extra
incentive to withhold troubling information, for fear of becoming the messenger
of bad news or in hope that another subcontractor might be forced to
communicate first. These challenges can be overcome, but only by establishing
open communication channels—both formal and informal—through which
senior leaders can interact with lower-level employees to get their perspective.
Regular review meetings will not suffice; it takes regular interaction, ideally in
casual face-to-face settings, to give senior management an accurate picture of
what is happening.

This kind of conversation also gives lower-level personnel a clear understanding
of management goals—and improves their judgment about which types of
problems are worth reporting, and how to report them. Beyond that, some
senior leaders make a point of cultivating multiple sources of information; you
might, for example, ask a quality department and a production department to
report independently on the same projects. The point in all this is to broaden
the flow of information to and from senior management, as well as around the
organization generally.

Set up better reporting relationships and prevention guidelines, using
work-arounds as diagnostics (organizational structure and networks).
When under pressure to produce, employees often develop work-arounds,
shortcuts that allow them to sidestep the formal checks and balances of risk
prevention. After a work-around has been in place for a while, it becomes
second nature; people almost forget that the old rules exist. In fact, maybe the
formal rules are truly superfluous and unneeded—or perhaps they’re genuinely
important, like the law against texting while driving. You may have to find out
the hard way if you have never examined these rules.

The presence of a work-around can provide a valuable clue that some process is
unclear or cumbersome and needs to be either enforced or changed. If you try to
outlaw the work-around strictly through edict and penalty, without addressing the
issues that made people turn to it in the first place, then they will simply find another
nonstandard approach. Instead, you need to bring formal structures and informal

SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 32 of 33

http://www.sagepub.com

networks together; talk to people directly about the reasons that work-arounds have
developed, and institute new policies that address the underlying issues.

One common work-around is found at the corporate level: An organization becomes
focused on managing the public perception of a problem (or potential problem) rather
than actually trying to solve it. If you find yourself continually defensive about queries
from the public or from regulators, that’s a clue that you have a deeper internal issue to
explore. Defend your company, by all means, but also begin to follow the trail. Is there
something within your organization that is masking a potential catastrophe?

An Ethic of Integrated Action

In companies primed for a self-inflicted black swan, some or all of these problems may
exist side by side. The lack of open information flow, unclear decision-making authority,
an inefficient organizational structure, and inconsistent values and incentives all
negatively reinforce one another. By the time the problem comes to light—whether
through an explosion, a technological failure, a legal challenge, or some other visible
catastrophe—it is too late to stop the damage.

An organizational DNA analysis doesn’t prevent any particular crisis; instead, it gives
you a better capability for identifying whether your organization is vulnerable to all such
crises. This type of analysis is equally useful for other problems that require
organizational change: building a high-performance organization, moving into new
markets, or adopting a more coherent strategy. You can’t immediately change the way
your organization behaves by simple fiat. But with a close look at the core elements of
your organizational DNA, you can recognize the design steps that can lead to better
behavior very soon.

Author Profile:

Eric Kronenberg is a partner with Booz & Company in Florham Park, N.J. He
specializes in developing capabilities for program and project management,
engineering and design, and manufacturing and construction in multiple industries,
including aerospace and defense, energy, and transportation.

http://dx.doi.org/10.4135/9781506374598.n12
SAGE SAGE Books
Contact SAGE Publications at http://www.sagepub.com.

SAGE Books – Strategic Control and Crisis ManagementPage 33 of 33

http://dx.doi.org/10.4135/9781506374598.n12

http://www.sagepub.com

Turn in your highest-quality paper
Get a qualified writer to help you with

“ SIA Strategy Mod 6 ”

Get high-quality paper

NEW! AI matching with writer

Hire a Writer

Client Reviews

4.9

Sitejabber

4.6

Trustpilot

4.8

Our Guarantees

100% Confidentiality

Information about customers is confidential and never disclosed to third parties.

Original Writing

We complete all papers from scratch. You can get a plagiarism report.

Timely Delivery

No missed deadlines – 97% of assignments are completed in time.

Money Back

If you're confident that a writer didn't follow your order details, ask for a refund.

New to Your Trusted Assignment Help Service? Sign up & Save

Calculate the price of your order

Type of paper needed:

Pages:

You will get a personal manager and a discount.

Academic level:

We'll send you the first draft for approval by at

Total price:

$0.00

Power up Your Academic Success with the
Team of Professionals. We’ve Got Your Back.

Power up Your Study Success with Experts We’ve Got Your Back.

Order Now Order Now