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The National Higher Education Textbook Program

for the 11th Five-Year Plan

Business Administration Textbook Series

for Colleges and Universities

Strategic Management

English – Chinese bilingual

second edition

Warnock Davies author

Li Shengxiao auditor

Ren Qingtao translator

Science Press

Beijing

内容简介

本书的目的在于向学生、教师、经理人和执行官全面介绍战略管理的概

念和原理，并详细讨论了这些概念和原理的实际应用。

本书的编写建立在作者丰富的战略管理知识和教学经验的基础上，作者

拥有在美国和中国（2001 年起）讲授本科、MBA 和执行官课程的广泛经验，

并且曾经在 40 多个国家的企业中担任高级执行官和战略顾问。

本书采用双语结构，英文和中文版本被分别做成两个完整独立的部分。

它适合本科、MBA 和执行官等的课程讲授，亦可作为教师、经理人和执行

官的参考书籍使用。

字版名为《SolidWorks 2001 PLUS 教学范本》，由知城数位科技股份

图书在版编目(CIP)数据

战略管理（英汉双语）/（美）王道文著；任庆涛译. —2 版. —北京：科

学出版社，2011

（普通高等教育“十一五”国家级规划教材·高等院校工商管理类教

材系列）

ISBN 978-7-03-030628-9

Ⅰ. ①战… Ⅱ.①王… ②任… Ⅲ. ①企业管理：战略管理–双语教学–高等学校–教材–英、汉 Ⅳ. ①F270

中国版本图书馆 CIP 数据核字（2011）第 049027 号

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Preface to the second edition

The purpose of this book is to provide students, teachers, managers, and executives with a

comprehensive text on the concepts and principles of strategic management – and to provide a

detailed discussion of the practical application of these concepts and principles.

To better achieve the book's purpose, I have made several substantive changes in the

second edition. These include changes in the book's content, structure, and formatting.

These changes have been based on my use of the first edition – and on feedback I have

received from students, teachers, managers, and executives.

1. Content

The changes in the content include the addition of a unit on corporate social responsibility,

and the removal of the units on international business strategy (which belong in a separate

book).

The most extensive content changes, however, relate to the presentation of concepts and

principles in the text. In most of my courses, I require each student, before each class, to email

me a question related to the assigned reading from the book. These questions provide the basis

for my in-class teaching. They also provide valuable data concerning the degree to which

students have understood the concepts and principles contained in the reading.

This data has allowed me to identify problematic parts of the text. In the second edition, I

have addressed these problem areas by simplifying, clarifying, and/or expanding the discussion

of a concept or principle; by explaining the meanings of an increased number of technical terms

in the text, in footnotes, or through the use of cross-referencing; by improving the choice and

use of company examples when explaining a concept or principle; and, in some cases, by

deleting esoteric material.

2. Structure

A decision facing all teachers relates to ordering: where to begin, and in what order to

present the material being studied. My use of the first edition during the past seven years has

allowed me to experiment with teaching the units (and parts of units) in different order

combinations, to observe how these changes have influenced the reading-related questions

from students, and to observe differences in student motivation, learning, and retention.

Based on the results of this process, I have combined some units and divided others;

moved the 'design and decision factors' closer to the front of the book, changed the ordering of

ii

Strateg ic Management

some units that discuss strategic elements, and developed the second edition's three-part

structure.

Also, changes have been made to the book's bilingual structure. In the second edition, the

English and Chinese language texts are presented as two complete and separate books.

3. Formatting

And finally, I have made changes in the formatting of the text. These changes include the

extensive use of headings (and the use of three levels of subheadings), the use of short

paragraphs, the increased use of vertical lists, the use of page headers that facilitate moving

between the two language texts, the extensive use of footnotes and cross-referencing (and the

continuous numbering of footnotes in each unit, so that the footnote numbers are the same in

both language texts), and the separation of company examples from the presentation of

concepts and principles.

These changes will make the book more user friendly – when used as a textbook by

students and teachers, and when used as a reference book by managers and executives.

Warnock Davies

March 2011

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Zilu said, "If you, Master, were given command of the

combined armies, who would you want to go along?"

The Master replied, "The person who would wrestle a

tiger bare-handed or march across the Yellow River, and

who would go to his death without regret – this person

I would not take along. It would have to be someone

who would approach any situation with trepidation,

and who would be fond of planning with an eye to

success." 1

1 Ames, Roger T., and Henry Rosemont. 1998. The analects of Confucius: A philosophical translation.

New York: Balletine Books. 112 – 113.

Contents

Part 1 Understanding strategy

Section 1 The PSRT framework

Unit 1 Introduction ...................................................................................................................................... 3

1. Definitions ................................................................................................................................. 3

2. The Chinese business model ................................................................................................. 3

2.a. Advanced management methods ................................................................................ 4

2.b. Leadership ....................................................................................................................... 5

3. The study of strategic management ..................................................................................... 5

4. The PSRT framework .............................................................................................................. 6

Unit 2 Policy ................................................................................................................................................. 7

1. Definitions ................................................................................................................................. 7

1.a. In government ................................................................................................................. 8

1.b. In business ....................................................................................................................... 8

2. The responsibility for policy ................................................................................................. 8

2.a. The responsibility for policy formulation ................................................................ 8

2.b. The responsibility for policy implementation ......................................................... 9

3. The purposes of corporate policy ......................................................................................... 9

3.a. Operational parameters ................................................................................................. 9

3.b. Priorities and goals .......................................................................................................11

3.c. Constituency communication .....................................................................................11

4. Policy and strategy ..................................................................................................................11

5. Changes in corporate policy ................................................................................................ 13

5.a. Incremental change ...................................................................................................... 14

5.b. Radical change ............................................................................................................. 14

6. Policy-related terms ............................................................................................................... 15

6.a. Policy positions ............................................................................................................ 15

6.b. Operating or managerial policies ............................................................................. 15

6.c. Policy slogans ............................................................................................................... 16

6.d. Vision .............................................................................................................................. 16

6.e. Mission ........................................................................................................................... 17

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Unit 3 Strategy ........................................................................................................................................... 18

1. Definition ................................................................................................................................. 18

2. The primary characteristics .................................................................................................. 19

2.a. Strategies are situation specific ................................................................................ 19

2.b. Strategy and structure ................................................................................................. 20

2.c. The multi-element characteristic .............................................................................. 20

2.d. The non-linear characteristic ..................................................................................... 20

2.e. Complexity and difficulty .......................................................................................... 20

2.f. Mutually reinforcing and synergistic combinations ............................................ 20

2.g. The responsibility for strategy .................................................................................. 21

3. Applications ............................................................................................................................. 21

4. Secrecy ..................................................................................................................................... 22

4.a. In plus-sum situations ................................................................................................. 22

4.b. In zero-sum situations ................................................................................................. 22

4.c. Obfuscation, disinformation, and simplistic answers .......................................... 22

4.d. Secrecy and publicly listed companies ................................................................... 23

5. Strategy-related terms ........................................................................................................... 23

5.a. Strategic ......................................................................................................................... 23

5.b. Strategic thinking ......................................................................................................... 24

5.c. The misuse of the term ............................................................................................... 24

6. Corporate and business-unit strategies .............................................................................. 26

6.a. Corporate strategies ..................................................................................................... 26

6.b. Business units ............................................................................................................... 26

6.c. Business-unit strategies .............................................................................................. 27

6.d. Manufacturing and marketing strategies ................................................................ 27

Unit 4 Resources and tactics ................................................................................................................... 28

1. Resources ................................................................................................................................. 28

1.a. Definitions ..................................................................................................................... 28

1.b. Types of resources ....................................................................................................... 29

1.c. Applications ................................................................................................................. 31

1.d. Combinations ................................................................................................................ 31

2. Tactics ....................................................................................................................................... 33

2.a. Definitions ..................................................................................................................... 33

2.b. Resources and tactics .................................................................................................. 34

2.c. Applications .................................................................................................................. 34

Unit 5 Causality in the PSRT framework ............................................................................................. 35

1. Definitions ............................................................................................................................... 35 1.a. Arrows of causality ...................................................................................................... 35

1.b. Aristotelian classification........................................................................................... 36

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Contents

2. Policy and policy goals ......................................................................................................... 36

3. Strategy ..................................................................................................................................... 37

4. Resources ................................................................................................................................. 38

5. Tactics ....................................................................................................................................... 39

6. The relative importance of the elements ........................................................................... 40

6.a. The dependent variable ............................................................................................... 40

6.b. The weakest or missing element .............................................................................. 41

6.c. Implications ................................................................................................................... 41

Section 2 Design and decision factors

Unit 6 Life cycle positions ...................................................................................................................... 45

1. The life cycle concept ........................................................................................................... 46

1.a. Origins and evolution .................................................................................................. 46

1.b. Non-organic entities .................................................................................................... 46

2. Business life cycles................................................................................................................ 46

2.a. The evolution of business life cycles ...................................................................... 46

2.b. Terminology .................................................................................................................. 47

2.c. Progression in business life cycles ........................................................................... 47

3. Life cycles and strategy ........................................................................................................ 48

3.a. Identifying life cycle positions ................................................................................. 48

3.b. The use of life cycle positions .................................................................................. 49

4. Application generalizations ................................................................................................. 50

4.a. Product life cycles ....................................................................................................... 50

4.b. Industry life cycles ...................................................................................................... 51

4.c. Company life cycles .................................................................................................... 51

5. Combinations .......................................................................................................................... 52

5.a. Phase dissonance .......................................................................................................... 52

5.b. Causes of phase-dissonant combinations ............................................................... 52

6. Company life cycle progression ......................................................................................... 53

6.a. The dreaded decline phase ......................................................................................... 53

6.b. Reversibility .................................................................................................................. 53

6.c. Managing company life cycle progression ............................................................ 54

Unit 7 Plus-sum alternatives ................................................................................................................... 55

1. Types of games ....................................................................................................................... 55

1.a. Zero-sum games ........................................................................................................... 55

1.b. Minus-sum games ........................................................................................................ 56

1.c. Plus-sum games ............................................................................................................ 56

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2. The zero-sum mind-set ......................................................................................................... 57

2.a. Causes of the zero-sum mind-set ............................................................................. 57

2.b. Strategy and the zero-sum mind-set ........................................................................ 57

3. Plus-sum strategies ................................................................................................................ 58

3.a. Plus-sum relationships ................................................................................................ 60

3.b. Manufacturer-distributor relationships ................................................................... 60

3.c. Manufacturer-retailer and manufacturer-supplier relationships ........................ 60

4. The conversion of plus-sum strategies .............................................................................. 61

4.a. Area of domain convergence ..................................................................................... 61

4.b. Vertical integration ...................................................................................................... 61

5. Sustaining plus-sum strategies ............................................................................................ 61

5.a. Plus-sum structures ...................................................................................................... 62

5.b. Plus-sum environments .............................................................................................. 62

5.c. The three-legged stool rule ........................................................................................ 62

Unit 8 Strategic alliances ......................................................................................................................... 63

1. Definition ................................................................................................................................. 63

2. Applications ............................................................................................................................. 64

2.a. Benefits .......................................................................................................................... 64

2.b. International SAs ......................................................................................................... 65

3. The downside .......................................................................................................................... 66

4. Partner risk .............................................................................................................................. 66

4.a. Underlying causes ........................................................................................................ 66

4.b. Direct causes ................................................................................................................. 67

4.c. Managing partner risk ................................................................................................. 68

Unit 9 Corporate social responsibility .................................................................................................. 69

1. Definitions ............................................................................................................................... 69

1.a. CSR policies and behavior ........................................................................................ 70

1.b. The conservative – liberal continuum ..................................................................... 70

2. Conservative views ................................................................................................................ 71

2.a. Fiduciary responsibility .............................................................................................. 71

2.b. Legal compliance ......................................................................................................... 72

2.c. Undifferentiated PETI................................................................................................. 73

3. Liberal views ........................................................................................................................... 73

3.a. Differentiated PETI ..................................................................................................... 73

3.b. Ethical compliance ...................................................................................................... 74

3.c. Discretionary giving .................................................................................................... 74

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Contents

4. Complexity .............................................................................................................................. 75

4.a. Idiosyncratic and company specificity.................................................................... 75

4.b. Multiple positions ........................................................................................................ 75

5. Terminology ............................................................................................................................ 76

5.a. Compliance and commitment ................................................................................... 76

5.b. Passive and active ........................................................................................................ 76

6. CSR policies ............................................................................................................................ 77

6.a. CSR and ethical standards ......................................................................................... 78

6.b. Corporate codes of conduct ....................................................................................... 78

6.c. International standards ................................................................................................ 78

Part 2 Strategic elements

Unit 10 The dichotomous pairs .............................................................................................................. 83

1. The pairs ................................................................................................................................... 83

1.a. The advantages of dichotomous pairing ................................................................. 83

1.b. The composition of the pairs ..................................................................................... 84

1.c. Element classifications ............................................................................................... 84

1.d. Scope of discussion ..................................................................................................... 85

2. Combinations .......................................................................................................................... 85

2.a. Where the elements form a continuum ................................................................... 85

2.b. Where the elements are absolute .............................................................................. 86

3. The equality of the elements ............................................................................................... 86

3.a. Situation specific .......................................................................................................... 86

3.b. Life cycle positions ..................................................................................................... 87

4. Use in strategic analysis ....................................................................................................... 87

5. Use in strategy formulation ................................................................................................. 87

Section 1 Core elements

Unit 11 Core competency maximization & acquisition .................................................................... 91

1. Core competencies ................................................................................................................. 91

1.a. Competitive advantage ............................................................................................... 91

1.b. Origins and scope ........................................................................................................ 92

2. Core competency maximization ......................................................................................... 93

2.a. Competitive strategy ................................................................................................... 93

2.b. Area of domain ............................................................................................................. 93

2.c. Disadvantages ............................................................................................................... 94

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3. Core competency acquisition .............................................................................................. 95

3.a. Performance, productivity, and competitive advantage ...................................... 95

3.b. Area of domain ............................................................................................................. 96

3.c. Disadvantages ............................................................................................................... 96

4. Combinations and application ............................................................................................. 97

Unit 12 Specialized & diversified.......................................................................................................... 98

1. Specialized ............................................................................................................................... 98

1.a. Manufacturing .............................................................................................................. 99

1.b. Marketing ...................................................................................................................... 99

1.c. Investor interest .......................................................................................................... 100

1.d. Disadvantages ............................................................................................................. 100

2. Diversified ............................................................................................................................. 102

2.a. Advantages .................................................................................................................. 102

2.b. Disadvantages ............................................................................................................. 103

3. Related and unrelated diversification .............................................................................. 103

3.a. Related diversification .............................................................................................. 103

3.b. Unrelated diversification .......................................................................................... 104

3.c. Ambiguity .................................................................................................................... 104

3.d. Conglomerates ............................................................................................................ 105

4. Vertical and horizontal diversification ............................................................................ 105

4.a. Vertical diversification .............................................................................................. 105

4.b. Horizontal diversification ........................................................................................ 105

5. Combinations and application ........................................................................................... 106

5.a. The specialized end of the continuum ................................................................... 106

5.b. The middle of the continuum .................................................................................. 107

5.c. The diversified end of the continuum ................................................................... 107 Unit 13 Vertical integration & vertical separation ........................................................................... 109

1. Vertical integration............................................................................................................... 109

1.a. Backward integration ................................................................................................ 109

1.b. Forward integration .................................................................................................... 110

1.c. Uses ................................................................................................................................ 111

1.d. Disadvantages .............................................................................................................. 113

2. Vertical separation ................................................................................................................. 113

2.a. Advantages ................................................................................................................... 113

2.b. Disadvantages .............................................................................................................. 114

3. Combinations and application ............................................................................................ 114

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Unit 14 Profits & growth ....................................................................................................................... 116

1. Emphasizing profits .............................................................................................................. 116

1.a. The U.S. model ............................................................................................................ 117

1.b. Shareholder wealth ..................................................................................................... 117

1.c. Operational requirements .......................................................................................... 117

1.d. Disadvantages .............................................................................................................. 118

2. Emphasizing growth ............................................................................................................. 118

2.a. The Japanese model ................................................................................................... 118

2.b. Shareholder wealth ..................................................................................................... 119

2.c. Model convergence .................................................................................................... 119

2.d. At Chinese companies .............................................................................................. 120

2.e. Disadvantages ............................................................................................................. 121


3.a. Life cycle positions ................................................................................................... 122

3.b. Emphasizing both elements ..................................................................................... 122

Unit 15 Build & buy ............................................................................................................................... 124

1. Build ........................................................................................................................................ 124

1.a. Cost ............................................................................................................................... 124

1.b. Fit .................................................................................................................................. 125

1.c. Feasibility .................................................................................................................... 125

1.d. Disadvantages ............................................................................................................. 125

2. Buy .......................................................................................................................................... 126

2.a. Resources ..................................................................................................................... 126

2.b. Speed ............................................................................................................................ 127

2.c. Risk ............................................................................................................................... 127

2.d. Area of domain ........................................................................................................... 129

2.e. For publicly listed companies ................................................................................. 130

2.f. Disadvantages ............................................................................................................. 131


3.a. Buying components in build strategies ................................................................. 133

3.b. Human resources management ............................................................................... 133

3.c. Life cycle positions ................................................................................................... 134

Unit 16 Allied & alone ........................................................................................................................... 135

1. Allied ....................................................................................................................................... 135

1.a. Mutual benefit and synergy ..................................................................................... 136

1.b. Technology transfer ................................................................................................... 137 1.c. Evaluating merger and acquisition opportunities ............................................... 138

1.d. Disadvantages ............................................................................................................. 138

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2. Alone ....................................................................................................................................... 138

2.a. Managerial and operational reasons ...................................................................... 139

2.b. Reasons related to philosophical beliefs .............................................................. 139

2.c. Disadvantages ............................................................................................................. 140


Section 2 Marketing elements

Unit 17 Consumer centered & competition driven .......................................................................... 143

1. Consumer centered .............................................................................................................. 143

2. Competition driven .............................................................................................................. 143

2.a. Competitive comparisons......................................................................................... 144

2.b. Price wars .................................................................................................................... 144

3. The Japanese and U.S. models .......................................................................................... 144

3.a. The Japanese model .................................................................................................. 144

3.b. The United States model .......................................................................................... 145

3.c. Convergent evolution ................................................................................................ 145


4.a. Situation specificity ................................................................................................... 146

4.b. De facto hybrids ......................................................................................................... 146

4.c. The consumer centered element ............................................................................. 147

Unit 18 Production orientation & market orientation ..................................................................... 149

1. Production orientation ......................................................................................................... 149

1.a. Applications ................................................................................................................ 149

1.b. Idiosyncratic preference ........................................................................................... 150

2. Market orientation ............................................................................................................... 150

2.a. Applications ................................................................................................................ 151

2.b. Product design and development ........................................................................... 151

2.c. Customer and end user ............................................................................................. 153

2.d. Listening and learning .............................................................................................. 154

2.e. Origins .......................................................................................................................... 155


3.a. Production-oriented characteristics ....................................................................... 156

3.b. Market relevance ....................................................................................................... 156

Unit 19 Primary demand & secondary demand ............................................................................... 158

1. Primary demand ................................................................................................................... 158

1.a. Emphasis on education ............................................................................................. 159

1.b. Exceptions ................................................................................................................... 159 1.c. Disadvantages ............................................................................................................. 160

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2. Secondary demand ............................................................................................................... 160

2.a. Market share ................................................................................................................ 161

2.b. Application .................................................................................................................. 161

2.c. Fragmented and concentrated markets .................................................................. 162

2.d. Size of market share .................................................................................................. 162

2.e. Disadvantages ............................................................................................................. 163


3.a. Situation sensitivity ................................................................................................... 163

3.b. The effect of secondary demand strategies .......................................................... 164

3.c. Indirect competitors................................................................................................... 165

Unit 20 Differentiation & segmentation ............................................................................................. 166

1. Differentiation ....................................................................................................................... 166

1.a. Applications ................................................................................................................ 166

1.b. Competitive comparisons ........................................................................................ 167

1.c. Differentiators ............................................................................................................. 167

1.d. Participation in an existing market ........................................................................ 167

1.e. Disadvantages ............................................................................................................. 168

2. Segmentation......................................................................................................................... 169

2.a. Applications ................................................................................................................ 169

2.b. Market variables ........................................................................................................ 169

2.c. Idiosyncratic variables .............................................................................................. 169

2.d. Disadvantages ............................................................................................................. 170


3.a. Better because it is different .................................................................................... 171

3.b. Different because it is better ................................................................................... 172

Unit 21 Push & pull ................................................................................................................................ 173

1. Push ......................................................................................................................................... 174

1.a. Channels of distribution ........................................................................................... 174

1.b. Push strategy mechanisms ....................................................................................... 174

1.c. Disadvantages ............................................................................................................. 175

2. Pull .......................................................................................................................................... 175

2.a. Advertising and pricing ............................................................................................ 175

2.b. Other pull mechanisms ............................................................................................. 176

2.c. Disadvantages ............................................................................................................. 177

3. Applications ........................................................................................................................... 177

3.a. Pull acting as push ..................................................................................................... 178

3.b. Push acting as pull ..................................................................................................... 178 3.c. Direct selling ............................................................................................................... 179

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4. Push-pull strategies .............................................................................................................. 180

4.a. The use of hybrids ..................................................................................................... 180

4.b. Weighting .................................................................................................................... 180

Unit 22 Cost-based pricing & market-based pricing ....................................................................... 182

1. Cost-based pricing ............................................................................................................... 182

1.a. Advantages .................................................................................................................. 183

1.b. Disadvantages ............................................................................................................. 184

2. Market-based pricing .......................................................................................................... 185

2.a. Advantages .................................................................................................................. 186

2.b. Disadvantages ............................................................................................................. 186


3.a. The need for both elements ..................................................................................... 187

3.b. The point of departure .............................................................................................. 188

4. Target pricing ........................................................................................................................ 188

4.a. The method .................................................................................................................. 188

4.b. Target pricing and market-based pricing .............................................................. 189

4.c. Target pricing and cost-based pricing ................................................................... 189

4.d. Applications ................................................................................................................ 189

4.e. Advantages .................................................................................................................. 191

4.f. Disadvantages ............................................................................................................. 191

Section 3 Manufacturing elements

Unit 23 Scale & flexibility .................................................................................................................... 195

1. Scale ........................................................................................................................................ 195

1.a. Economies of scale .................................................................................................... 195

1.b. Purchasing bargaining power .................................................................................. 197

1.c. Division of labor ........................................................................................................ 197

1.d. Improving product quality ....................................................................................... 197

1.e. National models ......................................................................................................... 197

1.f. Applications ................................................................................................................ 198

1.g. Disadvantages ............................................................................................................. 199

2. Flexibility ............................................................................................................................... 200

2.a. Production advantages .............................................................................................. 200

2.b. Marketing advantages ............................................................................................... 201

2.c. Globalization advantages ......................................................................................... 202


3.a. The scale & flexibility continuum ......................................................................... 203

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3.b. Situation specificity................................................................................................... 203

3.c. Country specificity .................................................................................................... 204

3.d. Continuous improvement......................................................................................... 204

Unit 24 Outsource & insource .............................................................................................................. 206

1. Outsource ............................................................................................................................... 206

1.a. Increasing productive capacity ............................................................................... 207

1.b. Reducing costs ........................................................................................................... 207

1.c. Facilitating specialization ........................................................................................ 208

1.d. Saving time ................................................................................................................. 208

1.e. Supporting innovation .............................................................................................. 209

1.f. Providing flexibility .................................................................................................. 209

1.g. Disadvantages ............................................................................................................. 209

2. Insource .................................................................................................................................. 210

2.a. Control .......................................................................................................................... 210

2.b. Cost ................................................................................................................................ 211

2.c. Convenience ................................................................................................................. 211

2.d. Disadvantages .............................................................................................................. 211

3. Combinations and application ............................................................................................ 211

3.a. Situation specificity .................................................................................................... 211

3.b. Evolution and evaluation ......................................................................................... 212

3.c. Area of domain ........................................................................................................... 213

Unit 25 TQM & Six Sigma ................................................................................................................... 215

1. TQM ........................................................................................................................................ 215

1.a. Origins .......................................................................................................................... 216

1.b. Acceptance in the United States ............................................................................. 217

1.c. Rejection in the United States ................................................................................. 218

2. Six Sigma ............................................................................................................................... 220

2.a. Origins .......................................................................................................................... 220

2.b. The Baldrige Award .................................................................................................. 221

2.c. The antithesis of TQM .............................................................................................. 221

2.d. Evolution ..................................................................................................................... 222

3. Differences and similarities ............................................................................................... 222

3.a. Teams ............................................................................................................................ 222

3.b. Continuous improvement......................................................................................... 223

3.c. Empowerment ............................................................................................................. 223

3.d. Process and performance ......................................................................................... 223

3.e. Market orientation and customer requirements .................................................. 223

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4. Application and combinations ........................................................................................... 224

4.a. Size of company ......................................................................................................... 224

4.b. Idiosyncratic variables .............................................................................................. 224

4.c. Application in China ................................................................................................. 224

4.d. Combinations .............................................................................................................. 225

Unit 26 Internal standards & external standards .............................................................................. 227

1. Product standards and process standards ........................................................................ 227

1.a. Product standards ....................................................................................................... 227

1.b. Process standards ....................................................................................................... 228

2. Internal standards ................................................................................................................. 229

2.a. Performance and success ......................................................................................... 229

2.b. Limitations .................................................................................................................. 230

3. External standards ................................................................................................................ 230

3.a. National standards ..................................................................................................... 230

3.b. International standards ............................................................................................. 231

3.c. De facto industry standards ..................................................................................... 233

4. Voluntary standards and compulsory standards ............................................................ 233

4.a. Voluntary standards ................................................................................................... 233

4.b. Compulsory standards .............................................................................................. 234

4.c. Voluntary-compulsory conversion ......................................................................... 235

5. Compliance and application .............................................................................................. 235

5.a. Internal standards ....................................................................................................... 235

5.b. Voluntary external standards ................................................................................... 235

5.c. Compulsory external standards .............................................................................. 235

Part 3 Strategy formulation

Unit 27 The process ................................................................................................................................ 239

1. The purpose ........................................................................................................................... 239

1.a. Policy identification .................................................................................................. 240

1.b. Policy clarification and confirmation .................................................................... 240

1.c. Other functions ........................................................................................................... 240

2. Element selection ................................................................................................................. 241

2.a. The need for a method .............................................................................................. 241

2.b. The dichotomous pairs method .............................................................................. 242

2.c. Advantages .................................................................................................................. 242

2.d. Strategy analysis and modification ........................................................................ 243

3. Improving element selection ............................................................................................. 243

3.a. Avoiding non-selection ............................................................................................. 244

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Contents

3.b. Avoiding wrong selection ........................................................................................ 244

3.c. Formalizing element selection ................................................................................ 245

3.d. Emphasizing situation specificity .......................................................................... 245

4. Weighting ............................................................................................................................... 245

4.a. Culliton's cake ............................................................................................................ 245

4.b. Weighting the elements of a dichotomous pair ................................................... 246

4.c. Weighting the elements of a strategy .................................................................... 246

Unit 28 Feasibility ................................................................................................................................... 248

1. Checking for feasibility ...................................................................................................... 248

1.a. The availability of resources ................................................................................... 248

1.b. Running scenarios ..................................................................................................... 249

1.c. Aggressive downside analysis ................................................................................ 249

1.d. Constituency compatibility ..................................................................................... 249

2. Issue manageability ............................................................................................................. 250

2.a. Manageable issues ..................................................................................................... 251

2.b. Non-manageable issues ............................................................................................ 251

3. Premature rejection .............................................................................................................. 252

3.a. Prima facie flawed strategies .................................................................................. 252

3.b. Nascent strategies ...................................................................................................... 253

4. Desirability – feasibility inversion ................................................................................... 254

Unit 29 Sustainability ............................................................................................................................. 255

1. Definitions ............................................................................................................................. 255

2. Sustainability myopia .......................................................................................................... 256

2.a. Making the quarterly numbers ................................................................................ 256

2.b. Other short-term performance goals ..................................................................... 256

3. Policy solutions .................................................................................................................... 257

4. Strategic solutions ................................................................................................................ 257

4.a. Sustainability criteria ................................................................................................ 257

4.b. Plus-sum strategies, structures, and environments ............................................ 258

Appendices

Glossary of abbreviations ....................................................................................................................... 263

Translation of technical terms ................................................................................................................ 265

References .................................................................................................................................................. 278

About the author ....................................................................................................................................... 279

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Part 1 Understanding strategy

Section 1 The PSRT framework

3

Sect ion 1 The PSRT f ramework Uni t 1 In t roduct ion

Unit 1

Introduction

This unit discusses:

1. Definitions

2. The Chinese business model

3. The study of strategic management

4. The PSRT framework

1. Definitions

Strategy is a multi-element plan for implementing policy and achieving policy goals,1 by

maximizing the use of resources and tactics.2

Management is the sum of the decisions and actions taken by a manager or executive, or

by a group of managers and/or executives, to achieve a goal or objective.

Strategic management is an advanced managerial method, where the decisions and actions

taken by managers and executives are driven by corporate and business-unit policies and

strategies.3

2. The Chinese business model

Since joining the WTO, China has become the world's most dynamic and high-growth

1 Policy and policy goals are discussed in unit 2. 2 Resources and tactics are discussed in unit 4. 3 Corporate and business-unit strategies are discussed in unit 3.6.

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Strateg ic Management Par t 1 Understanding s t ra tegy

business environment. But the Chinese business environment is also becoming increasingly

complex and competitive. The transformation of China from a planned economy to a market

economy, and the continued opening up of China, has meant that companies in China are now

exposed to increasing levels of domestic and foreign competition.4

In the past, most Chinese companies have survived and succeeded by investing in

infrastructure, marketing, and technology.

In the future, these factors will continue to be important – but the Chinese business model

is changing. As the business environment in China continues to become more open, more

developed, more complex, and more competitive – managers and executives are becoming

increasingly aware of the relationship between advanced management methods and company

performance.4

2.a. Advanced management methods

The recognition of the importance of advanced management methods in China is not new.

Deng Xiaoping's vision for the rapid development of China's productive forces included both

hardware and software. He said, "all our technologies and equipment should be modern…we

must run enterprises with advanced management and operation techniques and…we must

initiate a revolution in technology and management"5 and "if we ourselves don't know about

advanced methods of management, we should learn from those who do."6

Until recently, however, the focus was more on equipment and technology. Now, there is

an increasing emphasis on the software side of the equation. In the areas of corporate policy and

strategy, senior executives who were famous for their arbitrary managerial decision making are

now tending to define clear and consistent policies, policy goals, and priorities.

This is producing more disciplined areas of domain7 – and is resulting in the more strategic

use of resources, strategy-driven structures,8 strategy-based alliances,9 and other applications

of the principles of strategic management.

4 This section includes material from: Davies, Warnock, and Li Shengxiao. 2006. The Chinese business

model: Past, present, and the juggernaut scenario. Journal of Applied Business and Economics, Volume 6 (3), October. 38-50

5 Deng, Xiaoping. 1978. Update enterprises with advanced technology and managerial expertise. Selected Works of Deng Xiaoping, September 18.

6 Deng, Xiaoping, 1978. Emancipate the mind, seek truth from facts and unite as one in looking to the future. Selected Works of Deng Xiaoping, December 13.

7 The term 'area of domain' is discussed in unit 2, sections 3.a.iii., 4.a., and 5. 8 Strategy-driven structures are discussed in unit 3, sections 2.b. and 3.6.b.; and in units 7.5, 8, and 29.4.b. 9 Strategic alliances are discussed in units 8 and 16.

5

Sect ion 1 The PSRT f ramework Uni t 1 In t roduct ion

2.b. Leadership

The leadership in the use of advanced management methods is coming from several

sources. These include senior executives at publicly listed companies, who are being influenced

by the expectations of investors, and the managers of foreign-domestic alliances – which have

facilitated the transfer of advanced management methods to Chinese companies.10

The increased emphasis on the use of advanced management methods is also being

influenced by the State-owned Asset Supervision and Administration Commission (SASAC).

In an effort to improve the productivity and performance of state owned enterprises (SOEs), the

SASAC is pursuing a scale and specialization strategy. It is merging same-industry companies,

and combining same-industry operations from different SOEs, to achieve economies of scale11 –

and to achieve the managerial and operational benefits that come from specialization.12

3. The study of strategic management

In many countries, the design and content of business education programs (and especially

MBA programs) reflect the needs and priorities of companies and their senior executives.

Because of this, strategic management has become a central element in business education.

For example, in the United States, strategic management is the 'capstone course' that

comes at the end of most MBA programs.

Courses on strategic management and business strategy cover a wide range of subject

areas, teaching materials, and teaching methods.

But despite this diversity, all strategy-related courses can be divided into two basic groups.

In the first group, the focus is on understanding strategy and selected strategy-related issues. In

the second group, which is found more frequently in MBA programs and executive development

programs, the focus is on strategic analysis and strategy formulation.

This basic division is reflected in the three parts of this book.

In Part 1, the focus is on understanding strategy and on design and decision issues.

In Part 2, the focus is on the elements that are used in strategic analysis and strategy

formulation.

In Part 3, the focus is on the strategy formulation process.

10 This is discussed in unit 7.1.c. and unit 8. 11 The term 'economies of scale' is discussed in unit 23.1.a. 12 The benefits of specialization are discussed in unit 12.1.

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4. The PSRT framework

Because the purpose and functions of strategy are inextricably related to policy, achieving

policy goals, and maximizing the use of resources and tactics – it is difficult or impossible to

understand strategy as an isolated stand-alone phenomenon.

The most effective way to study strategy is to see it as part of a framework that includes

four fundamental elements: (1) policy and policy goals, (2) strategy, (3) resources, and (4) tactics.

This framework is shown in figure 1.1.

Policy and policy goals in the PSRT framework are discussed in unit 2. Strategy is

discussed in unit 3. Resources and tactics are discussed in unit 4.

The causal relationships between the four elements of the PSRT framework, which are

indicated by the arrows of causality in figure 1.1, are discussed in unit 5.

Unit 2

Policy


1. Definitions

2. The responsibility for policy

3. The purposes of corporate policy

4. Policy and strategy

5. Changes in corporate policy

6. Policy-related terms

Strategy is a multi-element plan for implementing policy and achieving policy goals, by

maximizing the use of resources and tactics.

Because the fundamental purpose of strategy is to implement policy and achieve policy

goals, it is impossible to understand strategy unless we have some understanding of policy and

policy goals.

Understanding policy is also important because when managers and executives are

formulating strategies they must first identify or define relevant and related corporate and/or

business-unit policies and policy goals.1

1. Definitions

Policies specify the purpose, scope, principles, objectives, and priorities of a political,

social, military, or commercial entity – and govern the conduct and administration of the entity.2 1 This aspect of strategy formulation is discussed in unit 5.6 and unit 27.1. 2 In English, the word policy is a derivation of the word polis, the ancient Greek city-state.

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Policies include general and specific objectives, which are referred to as policy goals.

1.a. In government

In government, policy is the product of a legislature that delineates the principles,

priorities, and goals of a nation-state, province, or city, or of a government department or

agency. For example, in 1978, the Third Plenary Session of the Eleventh Central Committee,

under the leadership of Deng Xiaoping, adopted socialist modernization as the central element

of China's domestic policy.

In 2002, at the 16th Communist Party of China (CPC) Convention in Beijing, Chairman

Jiang Zemin said China's policy goal is to become – by the year 2020 – a medium well-off

society. This is a general policy goal. One of China's specific policy goals is the reunification of

the mainland of China and Taiwan.

1.b. In business

In business, corporate policies specify what a company does, why the company exists, and

where the company operates. They define a company's priorities and goals, and they drive

strategy.

2. The responsibility for policy

In business, the responsibility for policy and policy goals is divided into policy

formulation and policy implementation.

2.a. The responsibility for policy formulation

2.a.i. Corporate policies

The responsibility for formulating corporate policy and policy goals rests with the body

that represents the owners of the company. At privately owned and publicly listed companies,

the responsibility for defining policy and policy goals rests with the company's board of

directors. 3

At state-owned enterprises in China, the responsibility for formulating corporate policy

and policy goals rests with one or more government department or agency. For example, at 3 The board of directors of a company is elected by the shareholders. In most cases, this election occurs at

the annual meeting of shareholders.

9

Sect ion 1 The PSRT f ramework Uni t 2 Pol icy

SOEs owned or controlled by the central government, the responsibility for formulating policy

rests with the State-owned Asset Supervision and Administration Commission.

2.a.ii. Business-unit policies

The responsibility for formulating business-unit policy (that is, for formulating the policy

and policy goals for each of a company's divisions, subsidiaries and/or other business units)

rests with the senior management of the parent company.4

2.b. The responsibility for policy implementation

The responsibility for implementing corporate and business-unit policies, and for

achieving policy goals, rests with a company's chief executive officer (CEO) and the other

officers of the company.5

3. The purposes of corporate policy

Corporate policy defines a company's operational parameters, defines a company's

priorities and goals, and facilitates constituency communication.

3.a. Operational parameters

Corporate policy defines what a company does, why it exists, and where it operates. These

three criteria can be referred to as a company's operational parameters.

3.a.i. What a company does

Corporate policy defines what a company does.

For example, First Automotive Works (FAW) makes and markets trucks, cars, and

buses; Haier makes and markets home appliances; General Electric (GE) produces and

markets a large range of consumer and industrial products and services;6 Galanz makes

and markets electrical appliances; and Coca-Cola makes ingredients for the manufacture 4 Business units are discussed in unit 3.6.b.

5 The CEO and other officers of a company are selected and appointed by the company's board of directors.

The members of the board of directors are elected by the shareholders.

6 The term 'product' or 'products' has been used to cover both products and services - except when referring

to a particular service.

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of soft drinks, makes and markets soft drinks, and operates a global network of bottlers7

who manufacture and distribute soft drinks.

3.a.ii. Raison d'être

In some cases, policy defines a company's raison d'être: why the company exists.8 For

many companies, and especially companies based in Western societies, the implicit raison

d'être is 'to maximize shareholder wealth.' But companies may exist for other reasons.

FAW

First Automotive Works was founded in 1953, in Jilin Province, under the direction

of Premier Zhou Enlai.

FAW's raison d'être, which was developed by Chairman Mao Zedong when he

visited the Stalin Automobile Factory in the Soviet Union in 1949, was to contribute to

China's social and economic development by making medium-sized trucks.

3.a.iii. Area of domain

Policy also defines where a company operates. This is referred to as the company's 'area of

domain'.

Area of domain has two primary dimensions: industry and geography. In some cases, a

company may use other factors, such as the identity of its customer base or the raw materials it

uses in manufacturing, to define its area of domain.

Some companies operate in more than one industry and, therefore, have multiple industry

areas of domain. Many companies operate in more than one country and, therefore, have

multiple geographical areas of domain.

Haier

The Haier Group, which was founded in 1984, is China's largest manufacturer and

marketer of home appliances. Haier's industry area of domain is the home appliance industry.

The company's geographical area of domain is defined by its 'three-thirds' policy.

Haier says one-third of its products will be made and sold in China; one-third will be made in

China and sold in foreign countries; one-third will be made and sold in foreign countries. 7 'Bottlers' is the term used by Coca-Cola when referring to companies that make and market Coca-Cola

beverages.

8 The literal translation of the French term 'raison d'être' is 'reason for being.' In English the term is usually

translated as 'reason or purpose for existing.'

11


3.b. Priorities and goals

Policy defines a company's priorities and goals. Areas covered by priorities and goals can

include sales volume, market share, revenue, profitability, growth, diversification, and

corporate social responsibility.

FAW

FAW's corporate policy gives a high priority to growth in production and sales

volume.9 When FAW's deputy general manager said, "Output of 1 million units is just the

first step. We will then advance towards 2 million and then 3 million," he was stating a

specific policy goal.

3.c. Constituency communication

Policy allows management to communicate a company's vision, mission, policy goals, and

operational domain to its internal and external constituencies.10

GE

In 1998 and 1999, surveys done by Fortune magazine found that General Electric

was the 'Most Admired Company' in the world. In 2000, Fortune magazine named Jack

Welch (who served as chairman and CEO of GE from 1981 to 2001), as the 'Manager of

the Century.'

Part of the reason GE and Jack Welch received these awards was due to GE's

consistently high growth in revenues, earnings,11 and stock price.12 It was also because

Welch developed clearly defined corporate policies, and because he was able to successfully

communicate these policies to the company's internal and external constituencies.

4. Policy and strategy

In the PSRT framework, the most important characteristic of policy is that it drives

strategy. 9 This is discussed in unit 14.2.d. 10 Corporate constituencies are discussed in unit 28.1.d. 11 The terms 'earnings' and 'profits' are synonymous. 12 The terms 'share price' and 'stock price' are synonymous.

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In figure 2.1, this relationship is indicated by the arrow of causality that runs from policy

and policy goals to strategy. The causal relationships between policy (and policy goals) and the

other elements of the PSRT framework are discussed in unit 5.2.

In the conduct of business, the dependent variable is policy and achieving policy goals.13

Because policy and policy goals are the dependent variable, they drive (or should drive) the

formulation and implementation of strategy.

As discussed in unit 27.1, when there is no antecedent policy – or when the antecedent

policy is poorly defined – it is impossible to develop a strategy. In well-managed companies,

however, an antecedent policy does exist – and it is well defined.

GE

When Jack Welch was appointed chairman and CEO of GE in 1981, the company

manufactured and marketed a large range of products – which included household

electrical appliances, aircraft engines, and nuclear power plants – and was famous for

being an extremely well-managed and successful company.

But there was a problem: many of GE's products were mature, and most of its

operations were in the mature- or decline-phase of their industries' life cycles.14

13 This is discussed further in unit 5.6.a.

14 Industry life cycle phases are discussed in unit 6.

13


Shortly after becoming CEO, Welch redefined GE's area of domain by drawing a

Venn diagram15 to prescribe the three areas on which the company would concentrate.

One of these circles included some of GE's existing manufacturing operations; the

other two were totally unrelated to the company's existing area of domain. One of the new

circles was broadcasting and communication, the other was financial services. Later,

Welch also changed GE's manufacturing area of domain to emphasize services.

The area of domain defined by Welch's Venn diagram provided senior management

with criteria for developing GE's acquisition and divestiture strategies.16

FAW

In China, the relationship between corporate policy and strategy can be seen in FAW's

decision to acquire Tianjin Xiali.17

In the year before Tianjin Xiali was acquired by FAW, Tianjin Xiali lost one billion

RMB; its accumulated losses were more than seven billion RMB.

But despite Tianjin Xiali's terrible financial position, FAW proceeded with the

acquisition because: (1) Tianjin Xiali had annual production and sales of 110,000 cars, and

its acquisition offered several other growth-related advantages,18 (2) growth in production

and sales volume were principal elements of FAW's corporate policy, and (3) FAW's

strategies are driven by its policy goals.

5. Changes in corporate policy

The what, why, and where parts of policy, and a company's policy priorities and goals, may

go unchanged for decades. But they can also change.

Changes in corporate policy can be either incremental or radical. When the changes

include diversification, it can be either related diversification or unrelated diversification.19

15 A Venn diagram is a 'diagrammatic representation' using three overlapping circles. It was introduced by

English mathematician John Venn, in 1880.

16 The realignment of GE's area of domain is discussed in unit 15.2.d.

17 FAW's acquisition of Tianjin Xiali is discussed in unit 14.2.d.

18 These growth-related advantages are discussed in unit 14.2.

19 Related and unrelated diversification are discussed in unit 12.3.

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5.a. Incremental change

FAW

FAW's raison d'être hasn't changed. But in 1986, China's '7th Five-Year Plan'

expanded FAW's industry area of domain to include the manufacture of cars.20 FAW's

industry area of domain has also changed as the company has forward integrated into

marketing operations.21

FAW's original geographical area of domain was China, but the company now has

business units, representative offices, and/or dealers in 23 other countries.22

5.b. Radical change

Galanz

Galanz was founded in 1979, in Guangdong Province, as Guizhou Down Product

Factory. The company's 200 employees hand-washed duck feathers, which were exported

for use by foreign manufacturers. Over the next fourteen years, the company engaged in

diversification that was incremental and related: it expanded its area of domain to include

wool spinning and the manufacture of quilts and clothing – which were sold with the

Galanz brand.

But in 1992, the company engaged in radical unrelated diversification. It established

the Galanz Electric Appliances joint venture, changed its name to Guangdong Galanz

Enterprises, and began to manufacture and market microwave ovens.

By 1999, Galanz was the largest microwave manufacturer in the world: it made more

than six million microwave ovens a year, and held a 67% market share in China and a 25%

market share in the European Union. In 1999, Galanz closed its last textile manufacturing

factory, which completed the change in its industry area of domain.

20 These changes can be classified as related diversification, because trucks and cars are both part of the

motor vehicle industry.

21 Forward integration is discussed in unit 13.1.b.

22 Information on FAW's international operations can be found at http://www.faw.com/webcontent/sales_

services_list.jsp.

15


6. Policy-related terms

The term 'policy' can be ambiguous because the word is used in at least three derivative

forms: 'policy positions,' 'operating or managerial policies,' and 'policy slogans.'

Also, there are two important terms that are related directly to corporate policy: vision and

mission.

6.a. Policy positions

Policy positions are formal statements that define a company's basic values and beliefs.

6.a.i. Basic policy positions

Basic policy positions can refer to hiring practices, professional ethics, the environment,

and customer service.

Coca-Cola

Coca-Cola is expressing basic values when it says one of its "fundamental principles

for conducting business in over two hundred countries around the world is respect for

human and labor rights," and says it "treats employees with fairness, dignity and respect,

and follows all local laws."

6.a.ii. Specific policy positions

Policy positions can also define a company's position on a specific issue.

Coca-Cola

Coca-Cola (China) Beverages Ltd., which has minority equity interests in thirty five

bottling plants in China, is defining its position on a specific issue when it says the

company "will not seek majority or controlling shares in local joint ventures, even if the

Chinese Government allows it."

6.b. Operating or managerial policies

Operating or managerial policies are rules, regulations, guidelines, and/or standards that

govern the conduct and management of a company's day-to-day operations.

For example, a retailer's 'return and exchange policy' (which specifies the terms and

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conditions governing the return and/or exchange of merchandise), and a company's 'employee

travel policy' (which includes the class of air travel employees may use), are operating or

managerial policies.

6.c. Policy slogans

Policy slogans are frequently repeated phrases. They are used to present and promote a

particular characteristic of a company and/or its products; to present and promote the company's

values, standards, and/or beliefs; to motivate employees, suppliers,23 and/or strategic alliance24

partners; and/or to strengthen the company's relations with its host communities.

Haier and Coca-Cola

Haier says it is "dedicated to the motherland by pursuing excellence." Coca-Cola says,

"the Coca-Cola Company exists to benefit and refresh everyone who is touched by our

business."

Policy slogans can be important and effective communication, marketing, leadership, and

motivational tools. In some cases, policy slogans look like corporate policy; they are, in fact,

methods resources or tactics.25

6.d. Vision

Vision is seeing a desired future situation. When talking about art, religion, science, social

structures, and politics, Jean-Paul Sartre26 defined vision as the ability to think of what is not.

6.d.i. In government

Almost 20 years before the creation of New China, Chairman Mao Zedong described the

coming of a socialist New China as "a ship far out at sea whose mast-head can already be seen

from the shore; it is like the morning sun in the east whose shimmering rays are visible from a

high mountain top."27

23 The term 'supplier' refers to a manufacturer that supplies another manufacturer with materials, parts, and

components, or with contract manufacturing services.

24 Strategic alliances are discussed in unit 8.

25 Resource methods and tactics are discussed in unit 4.

26 Jean-Paul Sartre: French philosopher, dramatist, and novelist; 1905 - 1980.

27 Mao, Zedong. 1930. "A Single spark can start a prairie fire". Mao Zedong Reference Archive. January 5.

17


6.d.ii. In business

In business, vision provides a conceptual precursor to the creation of a company's raison

d'être and corporate policies. The image of what a company will be, what it will do, and where

it will do it provides the conceptual basis for its corporate policies.

GE

Shortly after Jack Welch became Chairman and CEO of GE, he said, "A decade from

now I would like General Electric to be perceived as a unique, high-spirited,

entrepreneurial enterprise."

Amazon.com

In 1994, Jeffrey Bezos imagined the virtual bookstore, and in 1999 he saw

Amazon.com as the "earth's biggest river, the earth's biggest selection".

The visual image of how a company's policy goals will be achieved provides the

conceptual basis for its strategies.

6.e. Mission

A company's mission defines an organization's raison d'être, its reason or purpose for

existing. Mission statements are mechanisms for communicating a company's raison d'être to

its internal and external constituents.

Some mission statements refer to a company's policy goals. When mission statements

address how the institution's mission will be achieved, they refer to strategy and resources and,

in some cases, tactics.

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Unit 3

Strategy


1. Definition

2. The primary characteristics

3. Applications

4. Secrecy

5. Strategy-related terms

6. Corporate and business-unit strategies

1. Definition

Strategy is a multi-element plan for implementing policy and achieving policy goals, by

maximizing the use of resources and tactics.1

In government, Deng Xiaoping's strategy for achieving socialist modernization and

economic development in China included opening to the outside world, the 'four

modernizations' (the modernization of industry, agriculture, national defense, and science and

technology), and the "rapid development of our productive forces."2

In China today, the government's multi-element plan for transforming China into a

'medium well-off society' includes international trade, foreign direct investment, education,

rural development, infrastructure development, public health, the ecological environment,

military preparedness, peaceful development in domestic and foreign policies, and cooperation 1 In English, the word 'strategy' is derived from the Greek word strategos, which means general. 2 Deng, Xiaoping, 1978. Emancipate the mind, seek truth from facts and unite as one in looking to the future.

Selected Works of Deng Xiaoping, December 13.

19

Sect ion 1 The PSRT f ramework Uni t 3 St rategy

and common progress in international relations.

2. The primary characteristics

In business, strategies are multi-element plans for achieving a company's policy goals.

Strategies determine what resources and tactics will be needed to achieve a company's policy

goals, how resources and tactics will be acquired, and how resources and tactics will be used.

In figure 3.1, these primary characteristics are indicated by the arrows of causality that run

from policy and policy goals to strategy, that run both ways between strategy and resources, and

that run from strategy to tactics. These causal relationships are discussed in unit 5.3.

2.a. Strategies are situation specific

Because the purpose of a strategy is to achieve a particular policy goal, at a particular

company, in a particular industry, in a particular geographical location, at a particular time, and

under a particular set of economic and competitive conditions – we can say all strategies are

situation specific.

Because strategies are situation specific, a strategy that has been used successfully in one

situation may not be successful if used in another situation, even if the two situations appear to

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be similar or the same.3

2.b. Strategy and structure

Because of the causal relationships between strategy and resources,4 strategies influence

what business units a company will use to achieve its policy goals, and how a company's

business units will be structured.

2.c. The multi-element characteristic

Strategies include and combine multiple resources and the use of multiple tactics. The

multi-element characteristic of strategies distinguishes them from single-element plans.

2.d. The non-linear characteristic

A linear solution employs a single-line sequence of single-option actions, which is driven

by a single outcome. Linear solutions have the advantage of simplicity.

Strategies are non-linear phenomena. They offer alternative courses of action (or paths),

they allow each path to include more than one option, and some strategies allow for more than

one outcome.

2.e. Complexity and difficulty

The multi-element and non-linear characteristics of strategies can make them more

complex to design and more difficult to implement than single-element linear solutions.

But these same characteristics make strategies more effective in complex environments,

more flexible in diverse situations, and more able to maximize the use of a company's resources

and tactics. Because of these characteristics, strategies are able to achieve policy goals that can't

be achieved by using single-element linear solutions.

2.f. Mutually reinforcing and synergistic combinations

Strategies are multi-element plans. In most strategies, the choice and configuration of

elements results in mutually reinforcing combinations. In some strategies the combination of

elements is synergistic.5

3 This is discussed in unit 27.3.d. 4 The causal relationships between strategy and resources are discussed in unit 5.4. 5 The term 'synergy' refers to a combination where the whole is equal to more than the sum of the parts.

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2.g. The responsibility for strategy

In business, the responsibility for strategy formulation and implementation rests with a

company's managers and executives, under the leadership of the company's chief executive

officer (CEO).

3. Applications

GE

Jack Welch used divestiture strategies to remove business units that fell outside the

parameters of his Venn diagram;6 he used acquisition strategies to add business units that

fitted with his vision of GE as a unique, high-spirited, entrepreneurial enterprise; he used

vertical and horizontal diversification strategies7 to achieve the company's policy shift

from hardware to a mix of hardware and services.

Haier

Haier became China's largest manufacturer and marketer of household appliances by

using manufacturing, marketing, and international business strategies that focus on the

acquisition and maximization of core competencies,8 using a product diversification

strategy while continuing to specialize9 in household appliances, using an aggressive buy

strategy 10 that provided growth by acquisition, and by using a quality- and

technology-based differentiation strategy.11

Volkswagen

In China, Volkswagen has said that one of its policy goals is to maintain market share.

According to the company, Volkswagen's strategy 'for achieving this end' includes

adopting measures to continuously lower costs, sharing resources effectively with its joint

venture partners, strengthening cooperation and coordination with its joint venture

partners, and improving the company's competitive strength.

6 Welch's Venn Diagram is discussed in unit 2.4. The realignment of GE's area of domain is discussed in unit

15.2.d. 7 Vertical and horizontal diversification are discussed in unit 12.4. 8 Core competency maximization & core competency acquisition are discussed in unit 11. 9 Specialized & diversified elements are discussed in unit 12. 10 Build & buy elements are discussed in unit 15. 11 Differentiation & segmentation are discussed in unit 20.

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4. Secrecy

The role of secrecy in strategy formulation and implementation is determined by the

situation.

4.a. In plus-sum situations

In plus-sum situations, 12 companies frequently share information concerning their

business-unit strategies. For example, sharing privileged information is one of the primary

characteristics of strategic alliances.13

4.b. In zero-sum situations

What works in plus-sum situations, however, doesn't work in zero-sum situations.14

Because competitive strategies are zero-sum games, one of the most important characteristics

of competitive strategy is secrecy.

For an executive to reveal his or her company's competitive strategy would be as foolish as

a general, before or during a battle, making public his or her plan for defeating the enemy.

Companies frequently discuss their policy goals and resources. Because most companies

operate in a competitive environment, they rarely discuss their strategies.

4.c. Obfuscation, disinformation, and simplistic answers

The secrecy aspect of competitive strategy explains why many executives (and especially

successful executives) obfuscate when asked about their company's strategy, or, in some cases,

offer disinformation or simplistic answers.

Haier

On the numerous occasions when Zhang Ruimin has been asked "what is the secret of

Haier's success," he has given the same answer: famous brand.

But brand is only one element of a marketing strategy, and marketing strategy is only

one element of corporate strategy.

12 Plus-sum situations are discussed in unit 7.1.c. 13 Strategic alliances are discussed in unit 8. 14 Zero-sum situations are discussed in unit 7, sections 1.a and 2.

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Even if brand (rather than product design, product quality, distribution, service and/or

pricing) has been the central element in Haier's marketing strategy, it is simplistic to

attribute the success of Haier solely to its marketing strategy.

Haier, which now makes more than 15,000 different products in almost 100

categories, which are sold in more than 100 countries, became China's largest

manufacturer and marketer of home appliances by pursuing a complex mix of

manufacturing, marketing, and international business strategies. Each of these strategies

includes a large number of complex and diverse elements.

4.d. Secrecy and publicly listed companies

The need for secrecy in competitive strategy can create a problem for publicly listed

companies who have a legal obligation to provide information to their shareholders and to the

public.

Alibaba.com

In 2005, the chairman and CEO of Alibaba.com said one reason the company was

deferring its initial public offering15 was that, by staying private, the company will have no

obligation to disclose its financial and operating data, so that competitors such as eBay can

not know Alibaba's business strategies and moves from public resources.

5. Strategy-related terms

5.a. Strategic

When used literally, the adjective 'strategic' indicates a direct causal relationship with

policy. For example, 'strategic' is often used to distinguish a decision or action that is driven by

policy criteria from one that is driven by operational criteria.

15 For a privately-held company to become a publicly-listed company, it must issue shares on a stock

exchange by making an initial offering of shares to the public. This is called an 'initial public offering',

which is commonly referred to as an IPO.

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IBM and Lenovo

In 2003 IBM sold its personal computer (PC) division to Lenovo. Several years prior

to the sale, IBM had redefined its area of domain. This new area of domain focused on

software and solutions for corporate customers, and didn't include the manufacture and

marketing of personal computers. Also, for years prior to the sale, IBM's PC division had

been operating at a substantial loss.

If IBM divested its PC division because the division fell outside the company's area

of domain, the decision was strategic. If, however, IBM divested its PC division because

the division wasn't profitable, then the decision was operational.

5.b. Strategic thinking

The policy criterion can also apply to the terms 'strategic thinking' and 'thinking

strategically.' Both terms mean to think in a way that is related to achieving policy goals. In this

sense, strategic thinking is synonymous with 'policy-driven thinking' or 'policy-centered

thinking.'

As discussed in section 2.d. of this unit, strategies are characterized by multiple paths,

options and outcomes. Because of this, the terms 'strategic thinking' and 'thinking strategically'

can be used to mean a thinking process that considers multiple options and alternatives.

For the same reasons, 'strategic thinking' and 'thinking strategically' can be used to mean a

thought process that favors taking several steps, or taking an indirect or even circuitous route, to

achieve an objective. In these senses, the terms 'strategic thinking' and 'thinking strategically'

are synonymous with 'non-linear thinking'.16

5.c. The misuse of the term

5.c.i. Strategy and long-term

The word 'strategic' is sometimes used as an adjective to mean 'long-term', but the terms

'strategic' and 'long-term' are not synonymous.

The term 'strategic' means policy-related, and policy-related actions and activities can

occur over the long term or in the short term. For example, when a company changes its area of

domain through the acquisition or divestiture of a business unit, these actions and activities can

occur in the short term – and are strategic.

16 The meaning of 'non-linear' is discussed in section 2.d. of this unit.

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5.c.ii. Strategy and policy

The term strategy is frequently applied to what is in fact policy. For example, Professor

Michael Porter has argued that 'choice of industry' is the critical variable in a company's

survival and success,17 and has referred to the choice of industry as strategy.18 But industry is

one of the primary dimensions of area of domain, and area of domain is an element of policy.19

Another misuse of the term 'strategy' can be seen in policy-strategy inversion: the word

strategy is applied to the goal; the word policy is applied to the means for achieving the goal. In

most of these cases, the term policy refers either to policy positions20 or to operating or

managerial policies.21

In some cases, an excessive focus on the strategy element of the PSRT framework has

obscured the fact that policies and policy goals drive the formulation of corporate and

business-unit strategies.22 This has prompted Professors Gary Hamel and C. K. Prahalad to

invent the term 'strategic intent'23 when referring to policy and to its causal relationship with

strategy.

5.c.iii. Strategy and resources

The term strategy has also been applied to what are in fact resource methods. For example,

some proponents of total quality management, benchmarking, best practices, outsourcing, and

core competencies have presented these resource methods as strategies.

5.c.iv. Strategy and tactics

The most pervasive misuse of the word strategy occurs when the term is applied to what

are in fact tactics.

For example, The Art of War by Sun Zi (the 5th century BC classic from China), The Prince

by Nicolo Machiavelli (the 14th century classic from Italy), and The Book of Five Rings by

Miyamoto Musashi (the 17th century classic from Japan) are widely revered as seminal works

on strategy. But each of these works is a compilation of recommendations relating to the use of

resources and tactics – and few if any of these recommendations are multi-element plans for

achieving policy goals.

17 This is discussed in unit 29.3. 18 Porter, Michael. E. 1979. How competitive forces shape strategy. Harvard Business Review, March-

April. 137-145. 19 Area of domain is discussed in unit 2.3.a.iii. 20 Policy positions are discussed in unit 2.6.a. 21 Operating or managerial policies are discussed in unit 2.6.b. 22 This relationship between policy and strategy is discussed in unit 2.4, unit 5.2, and unit 27.1. 23 Hamel, Garry, and C. K. Prahalad. 1989. "Strategic intent." Harvard Business Review, May-June. 63-76.

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6. Corporate and business-unit strategies

6.a. Corporate strategies

Corporate strategies are multi-element plans that are driven by corporate policies, and are

designed to achieve corporate policy goals.

The word 'corporate' indicates that the policy, policy goal, or strategy applies to the entire

company.

GE

The strategies used by Jack Welch at GE, which are discussed in section 3 of this unit,

were corporate strategies.

6.b. Business units

Medium-sized and large companies use organizational structures that (1) separate the

company's central policy, strategy, and administrative activities from its revenue-producing

activities, and (2) divide the company's revenue-producing activities into discrete business units.24

Business units are managed as separate operational entities, which can have varying

degrees of managerial, operational, and financial autonomy. Most business units are structured

as profit centers: each has its own budget, accounting, and financial reporting.

Business units are often called 'divisions' or 'subsidiaries.' In large companies, business

units are often structured as separate companies.

FAW

FAW's website says, "FAW has 28 wholly owned subsidiaries and a controlling

interest in 18 partially owned subsidiaries. Among these are FAW Jiefang Truck Co. Ltd.

and FAW Bus and Coach Co. Ltd., which are wholly owned subsidiaries; FAW Car Co.

Ltd., Tianjin FAW Xiali Automobile Co. Ltd., and Changchun FAW Sihuan Automobile

Co. Ltd., whose shares are traded on the stock exchange, and FAW-Volkswagen

Automobile Co. Ltd. and Tianjin FAW Toyota Motor Co. Ltd., both of which are

Sino-foreign joint ventures."25 24 Most small companies are operated as a single business unit – which means at most small companies

there is no distinction between corporate strategy and business-unit strategy. 25 About FAW http://www.faw.com/webcontent/aboutfaw.jsp?pros=profile.jsp&phight=850&about=Profile.

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6.c. Business-unit strategies

Business-unit strategies are multi-element plans that are designed (1) to achieve the policy

goals of a division, subsidiary, or other business unit, and (2) to contribute to the achievement of

corporate policy goals.

Coca-Cola

Coca-Cola (China) Beverages Ltd. is a business unit of Coca-Cola. Coca-Cola's

sponsorship of Project Hope in China is an element of a business-unit strategy.26

When a business-unit strategy addresses the same area as a corporate strategy, the

business-unit strategy is subordinate to the corporate strategy.

Coca-Cola

The participation by Coca-Cola (China) Beverages Ltd. in Project Hope is governed

by Coca-Cola's corporate social responsibility (CSR) policy, and is part of and subordinate

to Coca-Cola's CSR strategy.27

6.d. Manufacturing and marketing strategies

In most cases, a company's manufacturing and marketing strategies are business-unit

strategies: they are formulated and implemented by managers and executives at a company's

individual business units.

26 Coca-Cola's sponsorship of Project Hope in China is discussed in unit 9, sections 2, 4, and 6. 27 CSR is discussed in unit 9.

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Unit 4

Resources and tactics


1. Resources

2. Tactics

1. Resources

1.a. Definitions

A resource can be defined as an entity or thing that can be used to satisfy a need or want,

produce an effect, or contribute to producing an effect. The most significant characteristic of a

resource is its utility: its ability to be used.

In the PSRT framework, resources are the things companies use to implement strategies.

They are the things used by tactics to achieve policy goals.

Resources are a sine qua non1 of strategy: without resources strategy can achieve nothing.

In figure 4.1, the relationships between resources and the other elements of the PSRT

framework are indicated by the arrows of causality that run both ways between strategy and

resources, that run both ways between resources and tactics, and that run from resources to

policy and policy goals.

1 The term 'sine qua non' is Latin for 'without this nothing'.

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Sect ion 1 The PSRT f ramework Uni t 4 Resources and tact ics

The causal relationships between resources and the other elements of the PSRT framework

are discussed in unit 5.3.

1.b. Types of resources

There are many types of resources. Resources can be classified as tangible or intangible;

they can also be classified as internal (within the company) or external (outside the company).

Toyota

The Global Body Line (GBL) assembly system developed by Toyota in 2002,2 and

now used in all of its manufacturing plants, is a tangible and internal resource.

Toyota's relationships with the members of its keiretsu3 are an intangible and external

resource.

Resources can also be grouped into seven types: (1) physical resources, (2) financial

resources, (3) human resources, (4) intellectual property resources, (5) relationship resources,

(6) reputation resources, and (7) methods resources.

2 Toyota's GBL assembly system is discussed in unit 23, sections 2.a. and 2.c., and unit 26.2.a. 3 Toyota's keiretsu is discussed in unit 13.2.a.ii., and unit 24, sections 1.b. and 1.e.

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1.b.i. Physical resources

Physical resources include factories, warehouses, and office buildings; machine tools,

manufacturing equipment, and production lines; computers and office furniture and equipment;

motor vehicles; and mines, forests, and farms.

1.b.ii. Financial resources

Financial resources include cash on hand, income from the sale of products and services,

revenue from other sources, retained earnings, the ownership of equity in other companies, the

ownership of bonds and other financial instruments, the ability to borrow, and (in the case of

publicly listed companies) the ability to generate equity capital through the sale of shares.

1.b.iii. Human resources

Human resources include a company's workers, supervisors, managers, and executives. A

company's human resources can also include the employees of the company's distributors,

suppliers,4 and/or strategic alliance partners.5

1.b.iv. Intellectual property resources

Intellectual property resources include patents, copyrights, and trademarks; product

designs; and manufacturing and marketing technology.

1.b.v. Relationship resources

Relationship resources include alliances with other companies, supply chain management

networks, and relationships with suppliers; outsourcing relationships,6 distribution networks,

and relationships with distributors; corporate social responsibility relationships,7 employee and

customer loyalty, and teams8 and quality circles.9

1.b.vi. Reputation resources

Reputation resources include the reputation of a company and its products with each of its

internal and external constituencies.10

4 The use of a supplier's human resources is discussed in unit 24.1.

5 Strategic alliances are discussed in unit 8.

6 Outsourcing is discussed in unit 24.1.

7 Corporate social responsibility is discussed in unit 9.

8 Teams are discussed in unit 23.3.c., and unit 25, sections 3.a., and 3.c.

9 Quality circles are discussed in unit 25.1.a.

10 Constituencies are discussed in unit 28.1.d.

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1.b.vii. Methods resources

Methods resources include a range of methods related to corporate management and

business-unit management, and methods related to the functions performed by individual

business units.11

General methods resources include manufacturing, marketing, financial management, and

supply chain management methods; human resources management methods; motivational,

negotiating, alliance management, change management, and outsourcing methods; and core

competencies.12

Specific methods resources include benchmarking, best practices, business re-engineering,

Kaizen, TQM, Six Sigma, and lean manufacturing.13

1.c. Applications

Haier

Haier's reputation resources include its brand recognition (which is the highest of any

company in China), and the company's reputation with suppliers, distributors, retailers,

customers and investors. Its intellectual property resources include thousands of patents

(which number more than any other company in China). Its physical resources include

manufacturing facilities in China and other countries. Its human resources include a large

highly trained workforce.

Haier's resource methods include its acquisition and development of advanced

managerial methods, its continuous improvement and continuous technical innovation, its

research and development resources (which produce hundreds of new marketable products

every year), and its aggressive pursuit of quality.

In 1985, Zhang Ruimin created an innovative quality-related resource method. This

was the ceremonial smashing of 76 defective refrigerators by the employees who had

made them.

1.d. Combinations

The seven resource types listed in section 1.b. are not discrete. There is often an overlap

between two or more resource types. Also, there is a high degree of interrelationship between

11 The terms 'corporate' and 'business-unit' are discussed in unit 3.6. 12 Core competencies are discussed in unit 11. 13 Kaizen, TQM, Six Sigma, and lean manufacturing are discussed in unit 26.

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resource types.

For example, intellectual property resources and relationship resources involve the use of

human resources and methods resources, and the acquisition of most types of resources require

the use of financial resources and/or relationship resources. Most manufacturing and marketing

operations use a combination of all seven resource types.

Toyota

The GBL assembly system developed by Toyota is an intellectual property resource

and a methods resource, which uses physical resources (factory buildings and

manufacturing machinery), human resources (production-line workers and supervisors),

and relationship resources (the teams and quality circles that are an essential part of

Toyota's assembly operations) – all of which require the use of financial resources.

Galanz

The transition by Galanz from textiles to small electrical appliances14 required the

combined use of several types of resources. These included methods resources (the vision

and planning abilities of the company's senior management) and financial resources (which

included more than ten years of accrued earnings from its textile industry operations).

The company used its financial resources and relationship resources to acquire

human resources, intellectual property resources, and methods resources, by convincing

five specialists from Shanghai Number 18 Wireless Factory to join Galanz Electric

Appliance Company.

The location of the company's physical resources in Shunde City (combined with the

use of financial resources) also facilitated the acquisition of human resources, because it

allowed Galanz to recruit designers, production-line workers and supervisors, and marketing

personnel. The location of the company's physical resources also supported the development

of relationship resources, by providing Galanz with convenient access to the suppliers of

components and services that the company needed to manufacture its microwave ovens.

14 This transition is discussed in unit 2.5.b.

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2. Tactics

2.a. Definitions

The term 'tactics' refers to an action or series of actions that are intended to produce a

specific effect or result.

In the PSRT framework, tactics are the actions and activities companies use to implement

strategies. Tactics use resources to achieve policy goals.

Like resources, tactics are a sine qua non of strategy: without tactics, strategy can achieve

nothing.

Tactics are the actions and activities that make it possible for companies to formulate and

implement corporate strategies and business-unit strategies – by operationalizing the use of

resources.

In figure 4.2, the relationships between tactics and the other elements of the PSRT

framework are indicated by the arrows of causality that run from strategy to tactics, that run

both ways between resources and tactics, and that run from tactics to policy and policy goals.

The causal relationships between tactics and the other elements of the PSRT framework

are discussed in unit 5.4.

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2.b. Resources and tactics

Resources and tactics are highly interdependent, because resources can't be

operationalized without the use of tactics, and tactics require resources.

In some cases it is difficult to distinguish between resources and tactics. One way to tell

the difference between these two elements of the PSRT framework is grammatical: resources

are things (they are nouns); tactics are actions or activities (they are verbs).

Haier

When Haier is implementing its corporate and business-unit strategies, it employs

tactics to operationalize the use of its resources.

In 1985, Haier staged the ceremonial smashing of 76 defective refrigerators by the

employees who had made them. This event can be seen as a methods resource (which

involved the use of physical resources, financial resources, and human resources). The use

of this methods resource was tactics.

The publicizing of this event in the media, which enhanced the company's reputation

resources, was also tactics.

2.c. Applications

Volkswagen

Volkswagen China is talking about tactics when the company says it will take the

following actions, or engage in the following activities:

restructure stocking procedures;

strengthen its brand image;

support China's automotive parts and accessories industry;

establish a modern management, sales, and service network;

expand its services to include car financing, leasing, and the sale of used cars;

cultivate Chinese technological expertise;

introduce a new model every year;

promote the localization and internationalization of administrative personnel.

Unit 5

Causality in the PSRT framework


1. Definitions

2. Policy and policy goals

3. Strategy

4. Resources

5. Tactics

6. The relative importance of the elements

1. Definitions

The term 'causality' can be defined broadly as the dependency of one entity on another

entity – "where the word entity means any physical object, phenomenon, situation, or event."1

The four entities (or elements) in the PSRT framework are highly interdependent. Each of

the elements has both direct and indirect causal relationships with the other three elements in

the framework.

1.a. Arrows of causality

The causal relationships between the four elements are indicated by the arrows in figures

5.1 to 5.4. These arrows, which are known as the 'arrows of causality', run from cause to effect.

In each of the figures, the numbered arrows indicate the direct relationships between the

subject element and the other three elements. The unnumbered arrows indicate the indirect

relationships.

1 Born, Max. 1949. Natural philosophy of cause and chance. New York: Dover Publications.

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1.b. Aristotelian classification

Aristotle2 classified 'causes' into four types. These four types correspond to the four

elements in the PSRT framework: final cause (policy), formal cause (strategy), material cause

(resources), and efficient cause (tactics).

2. Policy and policy goals

In Aristotelian classification, policy and policy goals are the 'final cause' (or 'telos'), which

defines the purpose, objective, aim, or goal that is to be achieved.

In figure 5.1, arrow number [1] indicates that a corporation's policies and policy goals

drive the formulation of strategies.

Arrow number [2] indicates the availability or lack of resources can:

influence the formulation of policy and policy goals,

in some cases drive the formulation of policy and policy goals.

2 Aristotle, 384 BC – 322 BC. Greek philosopher, and one of the three founders of Western philosophy. His

writings cover morality and aesthetics, logic and science, and politics and metaphysics. His discussion of causality is contained in "Metaphysics 1013a."

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Section 1 The PSRT framework Unit 5 Causality in the PSRT framework

Arrow number [3] indicates that corporations use tactics to implement policies and

achieve policy goals:

by implementing strategies,

by operationalizing the use of resources.

3. Strategy

In Aristotelian classification, strategies are the 'formal cause', which provides the form,

pattern, or plan that arranges the use of the 'material cause' (resources) and 'efficient cause'

(tactics) that result in achieving the 'final cause' (policy and policy goals).

In figure 5.2, arrow number [1] indicates that a corporation's policies and policy goals

drive the formulation of strategies.

Arrow number [2] is double headed. This indicates there is a two-way causal relationship

between strategies and resources.

[ ]: The arrow of causality that runs from resources to strategy indicates the availability

or lack of resources influences the formulation of strategies.

[ ]: The arrow of causality that runs from strategy to resources indicates:

strategies drive decisions related to the acquisition and development of

resources,

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strategies drive the choice and use of resources,

resources provide the things needed to implement strategies.

Arrow number [3] indicates:

strategies drive the choice and use of tactics,

corporations use tactics to implement strategies.

4. Resources

In Aristotelian classification, resources are the 'material cause,' which is used by the

'formal cause' (strategy) and 'efficient cause' (tactics) to achieve the 'final cause' (policy and

policy goals).

In figure 5.3, arrow number [1] is double headed. This indicates there is a two-way causal

relationship between resources and strategies.

[ ]: The arrow of causality that runs from resources to strategy indicates the availability

or lack of resources influences the formulation of strategies.

[ ]: The arrow of causality that runs from strategy to resources indicates:

strategies drive decisions related to the acquisition and development of

resources,

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strategies drive the choice and use of resources,

resources provide the things needed to implement strategies.

Arrow number [2] is also double headed. This indicates there is a two-way causal

relationship between resources and tactics.

[ ]: The arrow of causality that runs from resources to tactics indicates resources are the

things used by tactics to achieve policy goals.

[ ]: The arrow of causality that runs from tactics to resources indicates tactics are used in

the acquisition and development of resources.

Arrow number [3] indicates the availability or lack of resources can:

influence the formulation of policy and policy goals,

in some cases drive the formulation of policy and policy goals.

5. Tactics

In Aristotelian classification, tactics are the 'efficient cause,' which is the agent, actions, or

activities that are used by the 'formal cause' (strategy), and that use the 'material cause'

(resources), to achieve the 'final cause' (policy and policy goals).

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In figure 5.4, arrow number [1] indicates:

strategies drive the choice and use of tactics,

corporations use tactics to implement strategies.

Arrow number [2] is double headed. This indicates there is a two-way causal relationship

between tactics and resources.

[ ]: The arrow of causality that runs from resources to tactics indicates resources are the

things used by tactics to achieve policy goals.

[ ]: The arrow of causality that runs from tactics to resources indicates tactics are used in

the acquisition and development of resources.

Arrow number [3] indicates that corporations use tactics to implement policies and

achieve policy goals:

by implementing strategies,

by operationalizing the use of resources.

6. The relative importance of the elements

A frequently asked question relates to which PSRT element is most important – and which

element or elements are less important.

There are two answers to this question.

6.a. The dependent variable

In Aristotelian classification, the 'final cause' or 'telos' of the PSRT framework is policy

and policy goals. In current scientific classification, policy and policy goals are the dependent

variable.3 In both Aristotelian classification and current scientific classification, policy and

policy goals are the purpose, objective, aim, or goal that is to be achieved.

Because policy and policy goals are the dependent variable in the PSRT framework, it can

be argued that policy is the most important element.

The other three elements in the PSRT framework (strategy, resources, and tactics) are the

independent variables: they are what allow or enable the dependent variable (policy and policy

goals) to be achieved – or cause it not to be achieved.

3 In the social sciences, the term 'dependent variable' refers to what is to be achieved. The term 'independent

variables' refer to the factors that contribute to, or work against, achieving the dependent variable.

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6.b. The weakest or missing element

Because the elements of the PSRT framework are interdependent, it can be argued that the

element that is most important – the element that should receive the most attention – is the

element that is weakest or the element that is missing.

This principle can be seen in expressions such as 'a barrel can only hold as much wine as

its shortest stave' and 'a chain is only as strong as its weakest link'.

This answer doesn't contradict the first answer, but expands upon it. If the dependent

variable (policy) is weak or missing, this makes it difficult or impossible to maximize the use of

the independent variables. If one of the independent variables (strategy, resources, or tactics) is

weak or missing, this makes it difficult or impossible to achieve the dependent variable.

More specifically:

if policy is weak or missing, this makes it difficult or impossible to formulate strategy –

and difficult or impossible to achieve policy goals;

if strategy is weak or missing, this makes it difficult or impossible to maximize the use

of resources and tactics – and achieve policy goals;

if one or more critical resources are weak or missing, this makes it difficult or

impossible to implement strategies – and achieve policy goals;

if tactics are weak or missing, this makes it difficult or impossible to operationalize the

use of resources, to implement strategies – and achieve policy goals.

6.c. Implications

For students, managers, and executives engaged in the study of strategic management, it is

important to develop an understanding of all elements of the PSRT framework, and to develop

an understanding of the causal relationships between the elements.

For managers and executives engaged in the formulation and implementation of strategies,

it is important to ensure that all four elements of the PSRT framework are present, and

important to maximize the use of all elements.

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Sect ion 2 Des ign and dec is ion factors Uni t 6 L i fe cyc le pos i t ions

Unit 6

Life cycle positions


1. The life cycle concept

2. Business life cycles

3. Life cycles and strategy

4. Application generalizations

5. Combinations

6. Company life cycle progression

Figure6.1 Life cycle phases

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1. The life cycle concept

Every product, industry, and company can be seen as having a life, which can be divided into

four stages or phases: the introductory phase, growth phase, mature phase, and decline phase.

1.a. Origins and evolution

The term 'life cycle' refers to the series of stages that organic entities1 pass through during

their lives. When applied literally, the life cycle concept is characterized by a sequence of stages

that occur in a fixed hierarchical progression that is not reversible.

The life cycle concept allows for the possibility that the lives of some entities will end

before they pass through all life cycle stages.

1.b. Non-organic entities

The life cycle concept can also be applied to non-organic entities that appear to follow a

regular pattern of development. For example, when discussing the economic development of

different nation-states, we can say China is in the growth phase of its economic-development

life cycle, whereas the United States in the mature phase.

2. Business life cycles

In business, the use of the life cycle concept began in marketing in the 1960s. The term

'life cycle' was first used in an article published in 1965, in the Harvard Business Review. 2

In that article, Professor Ted Levitt said most successful products pass through four

'recognizable stages,' which he defined as: market development, market growth (which he also

called the 'takeoff stage'), market maturity, and market decline.

2.a. The evolution of business life cycles

The product life cycle principles3 discussed by Professor Levitt have been extended to

industries (industry life cycles) and to companies (company or organizational life cycles).

1 Organic entities include humans, animals, and plants. 2 Levitt, Theodore. 1965. Exploit the product life cycle. Harvard Business Review, November–December.

81-94. 3 The term 'product life cycle' covers both products and services.

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In their book on organizational development, 4 Professors Gibson, Ivancevich, and

Donnelly said, "Marketing experts acknowledge the existence of product-market life cycles. It

seems reasonable to conclude that organizations also have life cycles."

2.b. Terminology

The four 'recognizable stages' defined by Professor Levitt are now usually classified as:

introductory, growth, mature, and decline. They are called either stages or phases.

2.b.i. Life cycle positions

The term 'life cycle position' (LCP) refers to the position of a product, industry, or

company in its life cycle. For example, when we say beer in China is in the mature phase of its

product life cycle, we are referring to its life cycle position.

Because each life cycle phase covers a large area, it is common to refer to a product,

industry, or company LCP as being in the early, middle, or late part of a phase – or being on the

border between phases. For example, we can say the beer industry in China is in the

middle-growth phase of its industry life cycle, and that Tsingtao is in the late-growth or early

mature phase of its company life cycle.

2.b.ii. Industry shakeouts

The term 'industry shakeout' or 'industry-segment shakeout' refers to competitive activity

that results in one or more products or companies being eliminated from an industry. A shakeout

can occur during any industry life cycle phase.

2.c. Progression in business life cycles

Business life cycles comply with most of the criteria from the life cycle concept. All

products, industries, and companies follow the same order of progression when passing through

their life cycles.

Also, consistent with the life cycle concept, some product, industry, and company lives

end before they pass through all life cycle phases. For example, the life of a product in the

growth phase of its life cycle may end (without going through the mature and decline phases)

when a competitive or substitute product5 enters the market.

4 Gibson, James L., John M. Ivancevich, and James H. Donnelly. 1994. Organizations: Behavior, structure,

processes. Toronto: Irwin. 5 The term 'substitute product' refers to a product that replaces an existing product by performing the same

function in a better or more cost-effective way. For example, digital photography can be seen as a substitute product for film photography.

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2.c.i. Exceptions

There are two exceptions, where business life cycles don't comply with the progression

criteria from the life cycle concept.

The first relates to product life cycles. In some cases, a product skips one or two life cycle

phases. For example, when a competitive or substitute product enters the market, a product in

the growth phase of its life cycle may skip the mature phase and go directly to the decline phase.

The second exception relates to company life cycles. In some cases, the progression of

company life cycles doesn't comply with the non-reversible criterion.6 This exception is

discussed in section 6.b of this unit.

2.c.ii. Geographical phase difference

One of the characteristics of business life cycles is that a product, industry, or company can

be at different life cycle positions in different geographical areas.

For example, a product may be in the mature phase of its life cycle in economically

developed countries, and in the growth phase in developing countries. A company may be in the

early decline phase in its home country, in the late-introductory phase in one host country, and

in the late-growth phase in another host country.

3. Life cycles and strategy

Understanding product, industry, and company life cycle phases and LCPs can help

students, scholars, managers, and executives when they are engaged in strategy analysis.

Managers and executives can also use life cycle phases and LCPs when they are

formulating and implementing strategies.

3.a. Identifying life cycle positions

Identifying the LCPs of new products, industries, and companies is not difficult: they are

at the beginning of the introductory phase.

But after the product, industry, or company has moved beyond the beginning of the

introductory phase, it is increasingly difficult to say with certainty where it is in its life cycle.

This is due to several factors.

6 The non-reversible criterion is discussed in section 1.a. of this unit.

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3.a.i. Predicting life-cycle length and shape

First, it is difficult or impossible to predict what will be the length and shape of a particular

product, industry, or company life cycle; or to predict when (or if) a product, industry, or

company will go through each of its life cycle phases. Some products, industries, and

companies stay in the introductory phase for an extended period (or indefinitely), have an

extremely short or long growth phase, or end abruptly while still in their growth phase or

mature phase.

3.a.ii. Qualitative phenomena

Second, life cycle phases are qualitative phenomena that do not lend themselves to

quantitative measurement. In most cases, when we say a product, industry, or company is in a

particular phase of its life cycle, we are making a tentative or provisional estimate that is based

on qualitative indicators.

3.a.iii. Phase start and finish dates and overlap

Third, the process of making, confirming, and/or refuting life cycle estimates can be

difficult because:

life cycle phases are characterized by imprecise start and finish dates,

as indicated by the ellipses in figure 6.1, they share large areas of overlap with the

phases that precede and/or follow them.

3.b. The use of life cycle positions

The highly qualitative character of life cycles and LCPs is of concern to many scholars

whose research areas emphasize quantitative methods and empirical analysis, and many

scholars find life cycle phases and LCPs totally unusable.

But the qualitative character of life cycles and LCPs doesn't make them less useful as tools

for strategy analysis. We frequently use qualitative indicators and other soft data7 when

analyzing a huge range of social, professional, and personal situations. When we say China is in

the growth phase of its economic-development life cycle, or that the United States is in the

mature phase, we are making these statements based largely on qualitative observations, which

are not less valid because they are qualitative.

Also, the qualitative character of life cycles and LCPs is not of concern to most managers

and executives – who frequently make managerial decisions and formulate and implement

strategies based on a combination of quantitative and qualitative data.

7 The term 'soft data' refers to data that cannot be quantitatively measured.

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4. Application generalizations

Because all strategies are situation specific,8 it is not possible to say which strategic

elements will be most suitable for use in a particular strategy at each phase of a product,

industry, or company life cycle.

It is possible, however, to make some generalizations, which can be used by students,

scholars, managers, and executives when they are doing strategy analysis – and by managers

and executives when they are formulating and implementing strategies.

The following parts of this section discuss some frequently used generalizations. These are

based on the strategic elements from Part 2 of the book, which are correlated with different

product, industry, and company LCPs.

4.a. Product life cycles

4.a.i. Profits & growth9

It is logical to assume that the growth element will be used during the introductory and

early growth phases of a product's life cycle, and the profits element will be used when the

product has moved further into the growth phase.

But in many cases, managers and executives are under pressure to select the profits

element early in a product's life cycle. In small- to medium-sized companies the choice of

profits over growth is often driven by the need for positive cash flow. In large public companies

senior management is under pressure to make the quarterly numbers.10

Managers and executives sometimes select the profits element during the introductory and

early growth phases, if they believe: (1) that a product's competitive advantage11 is not

sustainable,12 or (2) that a product may have a short life expectancy, which sometimes occurs

with information technology (IT) software products.

4.a.ii. Production orientation & market orientation13

During the introductory and early growth phases of many technical products, the

8 This characteristic of strategies is discussed in units 3.2.a. and 27.3.d. 9 Profits & growth are discussed in unit 14. 10 Making the quarterly numbers is discussed in units 14.1.d and 29.2.a. 11 Competitive advantage is discussed in unit 11.2.a. 12 Sustainability is discussed in unit 29. 13 Production orientation & market orientation are discussed in unit 18.

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engineering influence of those who design, develop, and manufacture the product – and the

technical orientation of many end users14 – can cause managers and executives to select the

production orientation element.

During later phases of the product life cycle, the widening of the market to non-technical

end users, and the need to make the product more user-friendly, usually result in a shift to the

market orientation element.

4.b. Industry life cycles

Two frequently used generalizations relating to industry life cycles are based on strategic

elements from the consumer centered & competition driven dichotomy15 and from the primary

demand & secondary demand dichotomy.16

In most cases, managers and executives select the consumer centered and primary demand

elements when the industry (or industry segment or sub-segment) is in its introductory phase,

and select competition driven and secondary demand elements during later phases of the

industry life cycle.

4.c. Company life cycles

4.c.i. Profits & growth, 17 specialized & diversified, 18 and vertical integration & vertical

separation 19

Companies in the introductory or early growth phases of their life cycles usually choose

the growth, specialized, and vertical separation elements.

Companies in the mature or decline phases of their life cycles often choose the profits,

diversified, and vertical integration elements.

4.c.ii. Build & buy 20

Companies in the early phases of their company life cycles usually choose the build

element, and later shift to the buy element – or to a build & buy hybrid. 21

14 The term 'end user' is discussed in unit 18.2.c.

15 Consumer centered & competition driven are discussed in unit 17.

16 Primary demand & secondary demand are discussed in unit 18.

17 Profits & growth are discussed in unit 14.

18 Specialized & diversified are discussed in unit 12.

19 Vertical integration & vertical separation are discussed in unit 13.

20 Build & buy are discussed in unit 15.

21 The use of hybrids is discussed in unit 10.2. and in units 11 to 26.

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4.c.iii. Alone & allied 22

Companies in the early phases of their company life cycles usually choose the alone

element. Companies that use the allied element are, in most cases, in the late-growth or mature

phases of their company life cycles.

An exception to this generalization is that some companies in the IT industry select the

allied element during the early or middle-growth phase.

4.c.iv. Core competency maximization & core competency acquisition 23

Companies in the early phases of their company life cycles usually focus on core

competency acquisition.

Companies in the mature phase of their life cycles usually draw on both elements from this

dichotomy. They maximize their traditional core competencies, and acquire new core

competencies.

5. Combinations

5.a. Phase dissonance

Phase-dissonant combinations occur when one life cycle position is in a different phase

than the other two – or when the product, industry, and company life cycle positions are all in

different phases.

5.b. Causes of phase-dissonant combinations

Phase-dissonant combinations sometimes occur when young companies enter mature

industries or acquire mature products.

The most common phase-dissonant combination occurs when a company in the mature

phase of its life cycle is combined with a product or industry that is in the introductory or

growth phase of its life cycle.

This combination occurs frequently because many companies try to avoid the dreaded

decline phase of the company life cycle by migrating to growth industries, and/or by acquiring

products and companies that are in the growth phase of their life cycles.

22 Alone & allied are discussed in unit 16. 23 Core competency maximization and core competency acquisition are discussed in unit 11.

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6. Company life cycle progression

All three life cycles are important; they are not, however, equal in terms of their potential

to threaten the continued survival and success of a company.

Every product has a finite life, but companies are able to develop and/or acquire new

products. Also, the potentially debilitating effects of being in mature or declining industries is,

in most cases, manageable. Companies can use divestiture and acquisition strategies to move

into industries that are at earlier phases of their life cycles.

6.a. The dreaded decline phase

In most cases, the life cycle that is (or should be) of greatest concern to board members and

senior executives is the company life cycle. This is because the greatest threat to a successful

company is not from its competitors and their products – but from the decline phase of its

company life cycle.

There are many internal and external factors that can cause or contribute to a company's

progression into the decline phase of its life cycle.

These factors include the LCPs of the company's products, the LCP of the company's

industry area of domain, the nature and degree of competition in the company's industry area of

domain, the company's lack of suitable and sufficient resources, the competence of the

company's senior management, or a combination of these and other factors.

It is common to think that a company may be in the late-mature or decline phase of its

company life cycle because of its age. But, except at the beginning of the introductory phase,

the age of a company is not an indicator or cause of its life cycle position.

6.b. Reversibility

When applied literally, the life cycle concept is characterized by a sequence of stages that

occur in a fixed hierarchical progression that is not reversible.24

But, when the life cycle concept is used in business, the non-reversible criterion doesn't

apply to company life cycles. In some cases, the hierarchical progression of company life

cycles can be reversed.25

24 The non-reversible characteristic is discussed in sections 1.a. and 2.c.i. of this unit. 25 This principle can't be applied to product and industry life cycles.

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6.c. Managing company life cycle progression

Companies can use build, buy, and alliance strategies26 to move into growth industries; to

acquire new core competencies, new technologies, new products and/or product lines, new

markets and/or additional market share, motivated and experienced employees, company

names, product brands, and company and product reputations; and to acquire companies that

are in the introductory, growth, or early mature phases of their life cycles.

Each of these actions, or a combination of two or more of these actions, can retard or

reverse a company's life cycle progression. 27

26 Build & buy strategies are discussed in unit 15; alliance strategies are discussed in units 8 and 16. 27 An example of this can be seen in the rejuvenation of GE, under the leadership of Jack Welch. This is

discussed in unit 2.4.

Unit 7

Plus-sum alternatives


1. Types of games

2. The zero-sum mind-set

3. Plus-sum strategies

4. The conversion of plus-sum strategies

5. Sustaining plus-sum strategies

Every business situation can be classified as a zero-sum, minus-sum, or plus-sum game.

These classifications can be useful when students, scholars, managers, and executives are

engaged in strategy analysis, and when managers and executives are engaged in strategy

formulation and implementation.

1. Types of games

The terms 'zero-sum game,' 'minus-sum game,' and 'plus-sum game' refer to the three

essential elements of game theory, which was developed by John von Neumann.1

The term 'game theory' refers to situations where the participants make decisions and take

actions that affect each other.

1.a. Zero-sum games

The 'zero-sum game' is a win-lose situation.

1 Von Neumann, John, and Oskar Morgenstern. 1944. Theory of games and economic behavior. Princeton:

Princeton University Press.

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Poker, chess, backgammon, and bridge are all examples of zero-sum games because "the

players' actions affect only the distribution, and not the size, of the pie."2 In all of these games,

the total of the stakes the players take when they leave the game is the same as the total of the

stakes they brought to the game.

In zero-sum games, some players win and some lose, which results in the pie being

redistributed among the players. But, because the total of the wins equals the total of the losses,

the size of the pie doesn't change.

Coca-Cola and Pepsi

The 'cola wars' in the United States between Coca-Cola and Pepsi have been

zero-sum games, because the strategic focus has been on the redistribution of market share.

The annual growth in the cola segment of the soft drink market in the United States is

negligible, which means that for either Coca-Cola or Pepsi to increase cola sales requires a

corresponding loss by the other company.

In zero-sum games, "for every winner there is a loser, and winners can only exist if losers

exist." 3

It is called a zero-sum game because the difference in the sum of the losses and the sum of

the gains is zero.

1.b. Minus-sum games

The 'minus-sum game' is a lose-lose situation.

In a minus-sum game the size of the pie is reduced. The total value of what leaves the

game is less than the total value of what was brought to it.

It is called a minus-sum game because the difference in the sum of the losses and the sum

of the gains is negative.

1.c. Plus-sum games

The 'plus-sum game' is a win-win situation.

FAW

Since FAW was founded in 1953,4 it has functioned as a plus-sum game. Its products

2 McMillan, John. 1992. Games, strategies and managers. New York: Oxford University Press, USA. 26 3 Thurow, Lester C. 1980. The zero-sum society. New York: Basic Books. 11 4 FAW's origins are discussed in unit 2.3.a.ii.

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Sect ion 2 Des ign and dec is ion factors Uni t 7 P lus-sum a l ternat ives

have improved the quality of life of millions of people in China, it has provided hundreds

of thousands of jobs to employees in Jilin and other provinces5, it has contributed to the

economies and to the social and industrial infrastructures of Jilin and other provinces, its

strategic alliances6 with foreign companies have facilitated the transfer of manufacturing

technology and advanced management methods to China, and it has contributed to China's

social and economic development.

In a plus-sum game the size of the pie is increased. The total value of what leaves the game

is more than the total value of what is brought to the game.

It is called a plus-sum game because the difference in the sum of the losses and the sum of

the gains is positive.

2. The zero-sum mind-set

The 'zero-sum mind-set' is the tendency for some managers and executives to see all

business situations as zero-sum games. Because the zero-sum mind-set is based on the belief

that the size of the pie is fixed, it doesn't allow for plus-sum possibilities.

2.a. Causes of the zero-sum mind-set

The zero-sum mind-set can be due to a combination of factors. These include an

executive's social and cultural background; his or her motivational type and professional

experience; and market-share data, the media, and the zero-sum character of competitive

sporting events.

The zero-sum mind-set is also due to the fact that competitive strategy has come to

dominate strategic thinking – and because most competitive strategies are based on zero-sum

assumptions.7

2.b. Strategy and the zero-sum mind-set

The zero-sum mind-set can adversely influence all areas of management and executive

5 This includes FAW's past and present employees, plus the employees of the company's hundreds of

suppliers and distributors. 6 Strategic alliances are discussed in unit 8. 7 The emphasis on competitive strategy is so dominant that the terms strategy and competitive strategy are

sometimes treated as if they were synonymous.

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behavior. It can be especially damaging to strategy formulation and strategic management –

because it restricts the choice of paths, options, and outcomes8 to those that are zero-sum.

When formulating strategies, the zero-sum mind-set can also cause managers and

executives to choose the wrong strategic elements.9

3. Plus-sum strategies

Even in competitive environments, companies can improve the success and sustainability

of their strategies by choosing to use plus-sum alternatives.

FAW

A large part of the success and sustainability of FAW has been the ability of its senior

management to think in plus-sum terms, and to create and implement plus-sum situations

and solutions.

Jilin acquisitions

In 1986, FAW entered into strategic alliances with Jilin Light-type Automotive

Factory, Changchun Light-type Car Factory, Changchun Light-type Engine Factory, and

Changchun Gear Factory. By the late 1980s, FAW was having problems with these

alliances, because FAW and the local governments that owned the four companies had

conflicting policy goals.10

FAW believed the problems could be corrected if it owned the four companies. It

didn't, however, have the funds to make the acquisitions. But the local governments

believed they and their constituents11 would benefit if the companies were owned by FAW

– so agreed to transfer their ownerships to FAW on extremely favorable terms. FAW made

no initial payment, but assumed the debt of the acquired companies and used future profits

from these companies to make purchase payments to the former owners.

The great success of these companies following their acquisition by FAW benefited

all parties – and established FAW's reputation for formulating and implementing win-win

solutions. This reputation facilitated FAW's numerous subsequent acquisitions.

8 Paths, options, and outcomes are discussed in unit 3, sections 2.d. and 5.b. 9 Strategic elements are presented in units 11 to 26. 10 These strategic alliance are discussed in unit 8.2. 11 Constituencies are discussed in unit 28.1.d.

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Goldcup merger

The merger of FAW and Shenyang Goldcup Company, in 1995, also showed FAW's

ability to participate in the formulation and implementation of plus-sum solutions.

Goldcup had serious operational problems and its share of the motor-vehicle market had

declined dramatically, which resulted in huge unused productive capacity, high fixed costs,

and low earnings.

Because Goldcup was a publicly listed company, it was able to issue new shares to

raise operating capital. But its low earnings had depressed its stock price, and the funds

from the issue of new shares were insufficient to solve the company's cash flow problems.

FAW's position was the opposite: it needed more productive capacity, and it was very

successful at making and marketing motor vehicles. Also, by 1995, FAW had ample

financial resources, strong financial management skills, and strong turnaround skills.12

FAW's weakness was structural: it was not a publicly listed company. This limited

FAW's ability to raise capital, prevented it from using shares to make acquisitions, put it at

a disadvantage when structuring joint ventures with publicly listed companies, and limited

its human-resources compensation options.

The 1995 merger of FAW and Goldcup was a perfect plus-sum solution. It provided

Goldcup with FAW's motor vehicle manufacturing and marketing abilities, FAW's

financial management and turn-around skills, and FAW's operating capital. By 1996,

Goldcup's operations had started to show a profit.

The merger increased FAW's productive capacity, its number of product lines, and the

size of its workforce and distribution network – and gave FAW a back-door listing on the

Shanghai Stock Exchange.

Tianjin Xiali acquisition

FAW's acquisition of Tianjin Xiali, in 2002, was also a plus-sum game.13 The

acquisition benefited the employees of Tianjin Xiali, who kept their jobs; it benefited

Tianjin Xiali's suppliers, who continue to supply Tianjin Xiali with parts and components;

it benefited the distributors of Xiali, who continue to have a product to sell; it benefited

Xiali owners, who continue to get service for their Xiali cars; and it benefited future

customers, who will be able to buy low-priced Xiali cars. It benefited Tianjin Xiali

Automotive Industry Corporation, the previous owner of Tianjin Xiali, by relieving it of a

loss-making operation.

12 The term 'turnaround skills' refers to skills needed to return a loss-making company to profitability. 13 FAW's acquisition of Tianjin Xiali is also discussed in unit 2.4. and 14.2.d.

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The acquisition benefited FAW by providing it with a well-trained workforce, by

increasing its market share, by increasing its productive capacity, by enhancing its

distribution network, and by providing it with a new low-priced car product.

3.a. Plus-sum relationships

When a strategy involves more than one company, most plus-sum strategies rely on the

companies' complementary areas of domain and/or complementary core competencies.14

Plus-sum principles can be applied in most inter-company relationships, if the focus of the

relationship is on asset generation and not on asset distribution.

Strategic relationships between suppliers 15 and manufacturers, manufacturers and

distributors, and distributors and retailers can be potentially plus-sum games, because:

the parties have different and complementary areas of domain and core competencies,

they want different things from the relationship,

they share a mutual interest in increasing the size of the pie.

3.b. Manufacturer-distributor relationships

Manufacturer-distributor relationships can be structured as a plus-sum strategy because

increasing sales, market penetration, and market share benefits both parties.

In these relationships:

the manufacturer has core competencies in manufacturing and has products, which the

distributor does not;

the distributor has core competencies in distribution, and has a physical presence in a

market segment, sub-segment, or geographical area, which the manufacturer does not.

The relationship between the manufacturer and the distributor is a plus-sum game that

allows both parties to achieve what they could not achieve on their own.

3.c. Manufacturer-retailer and manufacturer-supplier relationships

The plus-sum principles that apply to relationships between manufacturers and

distributors also apply to relationships between manufacturers and retailers, and between

manufacturers and suppliers.

14 Core competencies are discussed in unit 11. 15 The term 'supplier' refers to a manufacturer that supplies another manufacturer with materials, parts, and

components, or with contract manufacturing services.

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4. The conversion of plus-sum strategies

Plus-sum strategies that include manufacturers and distributors, and manufacturers and

suppliers, are based on the assumption that both companies will maintain the difference in their

areas of core competency and the difference in their areas of domain.

4.a. Area of domain convergence

But manufacturers, distributors, and suppliers frequently expand their areas of core

competency, and in some cases change their areas of domain. When one company in a strategic

relationship moves into the other company's area of domain, this can be referred to as 'area of

domain convergence'.

Area of domain convergence can convert a strategic relationship from a plus-sum game to

a zero-sum game.

4.b. Vertical integration

Area of domain convergence often occurs in relationships when one of the companies

engages in vertical integration.16

A distributor may engage in backward vertical integration into manufacturing. A supplier

may engage in forward integration into manufacturing. A manufacturer may engage in forward

or backward vertical integration, and expand its area of domain into distribution or into the area

of domain of a supplier.17

In any of these situations, area of domain expansion can cause the companies in a strategic

relationship to become competitors. When this occurs, it changes the relationship between the

companies from plus-sum to zero-sum.

5. Sustaining plus-sum strategies

The risk that a company's plus-sum strategies will be converted to zero-sum strategies is,

in most cases, manageable. Companies can reduce conversion risk by establishing and

maintaining plus-sum structures and plus-sum environments.

16 Vertical integration is discussed in unit 13.1. 17 Backward integration and forward integration are discussed in unit 13, sections 1.a. and 1.b.

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5.a. Plus-sum structures

Like strategies, organizational structures can be classified as zero-sum, minus-sum, or

plus-sum.

When used in the implementation of plus-sum strategies, zero-sum structures can be

disastrous. Because the zero-sum game is a game of pure conflict, a zero-sum structure sets up

financial, personnel, logistical, and operational situations that are inherently adversarial and

confrontational. It creates a win-lose contest, which can result in the demise or destruction of

even the best-designed plus-sum strategies.

The use of a plus-sum structure counters the zero-sum mind-set by setting up the strategy

in a way that is consistent with plus-sum assumptions, and that influences and rewards

plus-sum behavior.

Because an organization's work environment is influenced by its organizational structure,

a plus-sum structure facilitates the establishment of a plus-sum environment.

5.b. Plus-sum environments

In a zero-sum environment, possibilities are evaluated against zero-sum criteria, decisions

are based on win-lose assumptions, and actions are motivated by the belief that the size of the

pie is fixed.

In a plus-sum environment, possibilities are evaluated against plus-sum criteria, decisions

are based on win-win assumptions, and executives and senior management see each strategic

element as an opportunity that will (to varying degrees and usually in different ways) benefit all

participants.

A plus-sum environment counters the zero-sum mind-set by creating a corporate culture in

which all strategy-related goals, decisions, and actions are based on plus-sum criteria.

When a strategy is being formulated in a plus-sum environment, the plus-sum potential of

the strategy is so dominant, so clearly articulated, and so well understood and internalized that

there is a low tolerance for anything except plus-sum possibilities and plus-sum actions.

5.c. The three-legged stool rule

Plus-sum strategies, structures, and environments are interrelated and interdependent.

Implementing these three plus-sum elements follows the three-legged stool rule. Because

the three elements are interdependent, having two out of three doesn't work – and the strength

of one or two elements can't compensate for not having the third.

Unit 8

Strategic alliances


1. Definition

2. Applications

3. The downside

4. Partner risk

1. Definition

A strategic alliance (SA) is a less-than-arm's-length relationship1 between companies,

which is characterized by the merging of complementary interests, the sharing of privileged

information, and intimate collaboration and cooperation.

SAs can be highly productive, sustainable,2 plus-sum structures.3

The reason they are called strategic alliances, rather than simply alliances, is because their

purpose is to implement policy and achieve policy goals.

Strategic alliances include equity and non-equity joint ventures, research and development

(R&D) agreements, product-development agreements, technical assistance agreements,

manufacturing and/or marketing agreements, distribution agreements, and franchising and

licensing agreements. 1 The terms 'arm's-length' and 'less-than-arm's-length' are borrowed from international transfer pricing. 2 Sustainability is discussed in unit 29. 3 Plus-sum structures are discussed in unit 7.5.a.

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2. Applications

2.a. Benefits

Strategic alliances allow companies to:

acquire products, technology, and core competencies;

increase production capacity, engage in joint manufacturing, and achieve economies of

scale;4

enter new industries, access new markets, and increase market share;

engage in joint R&D, and collaborate on product development and component

sourcing;

share costs and share resources;

expand their industrial and geographical areas of domain.

FAW

In 1986, when China's '7th Five-Year Plan' directed FAW to diversify into the

manufacture of passenger cars, FAW acquired 7,000 mu of land on which to build a

factory.

But, because it lacked passenger-car manufacturing core competencies, working

capital, and a product distribution network, FAW decided to make and market passenger

cars by forming strategic alliances with Jilin Light-type Automotive Factory, Changchun

Light-type Car Factory, Changchun Light-type Engine Factory, and Changchun Gear

Factory.

Nokia

In 2002, China Unicom started offering Code-Division Multiple-Access (CDMA)

service to customers.

Nokia was prevented from participating in this industry segment, because it was not

one of the nineteen companies licensed by the Ministry of Information Industry to make

and market CDMA phones in China. This put Nokia at a serious competitive disadvantage

with manufacturers who held CDMA licenses.

4 The meaning of 'economies of scale' is discussed in unit 23.

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Sect ion 2 Des ign and dec is ion factors Uni t 8 St ra teg ic a l l iances

To solve this problem, Nokia formed a strategic alliance with Capitel, a

Chinese-owned mobile phone manufacturer, who transferred its CDMA license to the new

joint venture company.

2.b. International SAs

International strategic alliances provide all of the benefits of domestic SAs, and can be

highly effective country-access mechanisms.

Haier

Haier has acquired washing machine technology through its international SAs with

Merloni Corporation, and multimedia, digital, frequency conversion, and other technology

from Philips and Panasonic.

Midea

Midea's success in the Chinese air conditioner market was possible because of the

technology it acquired through its SAs with Toshiba, NEC, and other foreign companies.

Midea entered into an SA with Toshiba, which created the Toshiba-Macro

Compressor Company and facilitated Midea's backward integration5 into refrigeration

compressors. Midea's SA with Toshiba Carrier Corporation allowed it to diversify

horizontally 6 into the commercial central air conditioner market.

Galanz

Galanz used a strategic alliance to acquire production line technology from Toshiba.

Lenovo

Lenovo has used strategic alliances to acquire mobile phone technology from Texas

Instruments, and to acquire hand-held operating systems from PalmSource.

FAW, Volkswagen, and Toyota

FAW has used strategic alliances to acquire manufacturing technology, products, and

managerial and marketing expertise from Volkswagen and Toyota. Volkswagen and

Toyota have use these SAs to acquire productive capacity, distribution networks,

component sourcing, and country access from FAW.

5 Backward integration is discussed in unit 13.1.a. 6 Horizontal diversification is discussed in unit 12.4.b.

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Tsingtao and Anheuser-Busch

Tsingtao has used strategic alliances to acquire an infusion of capital, and beer

making and management expertise, from Anheuser-Busch. Anheuser-Busch has used

these SAs to improve its China country access and to strengthen its operations in China.

3. The downside

Strategic alliances can be inconvenient: it takes time for a company to find an alliance

partner and to negotiate an SA, and operating in an SA can be complicated and time-consuming.

Also, SAs can have serious operational problems – and many are short lived.

Since the 1990s, the business media in the United States, Europe, and other Western

countries has been littered with horror stories of companies losing their products, customers,

and markets – and marketing strategies, strategic plans, and other intellectual property – to their

SA partners.

The principal cause of SA operational problems, and SA failures, is that all SAs come with

an inescapable downside called 'partner risk.'

4. Partner risk

Partner risk is the exposure by a partner in a strategic alliance to the possibility of

opportunistic behavior by the other partner. 7

The term 'opportunistic behavior' refers to behavior that takes advantage of an opportunity

without regard or concern for ethical or moral principles; or, more simply, to profit at others'

expense.

4.a. Underlying causes

4.a.i. Opportunity

Partner risk is unique to strategic alliances. Because the partners in an SA have access to

privileged information, they have the opportunity to behave opportunistically.

7 Davies, Warnock. 2000. Partner risk: Managing the downside of strategic alliances. West Lafayette, IN:

Purdue University Press.

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Sect ion 2 Des ign and dec is ion factors Uni t 8 St ra teg ic a l l iances

4.a.ii. Motive

In some cases, SA partners have a motive to behave opportunistically. This can be due to a

perceived need for control, a need to compensate for the perceived underperformance of the

other partner, and/or by a perceived inequity of benefits.

4.b. Direct causes

Partner risk has three direct causes: (1) intramural competition, (2) an excessive emphasis

on tactics, and (3) the zero-sum mind-set.

4.b.i. Intramural competition

Competition is a critical component of a free market economy. Competition can result in

better products and better service, lower prices, and a wide range of goods and services. In all

societies, competition is used to allocate access, rewards, and recognition.

But in some cases competition can be counter-productive or destructive. Competition

between the partners of an SA is a principal cause of opportunistic behavior. It erects barriers

that impede the merging of interests, it makes it difficult to develop trust (which is needed to

foster and sustain the sharing of privileged information), and it wreaks havoc with the

collaboration and cooperation requirements of the relationship.

Intramural competition within SAs can be exacerbated by the competitive culture of

business, pressure from senior management, and an executive's motivational type.

4.b.ii. An excessive emphasis on tactics

As discussed in unit 4.2, tactics are the actions and activities companies use to implement

strategies and achieve policy goals. Without tactics (and without resources) strategy can

achieve nothing. There is a tendency, however, for executives and senior management to focus

too much attention on tactics.

Strategic alliances require that executives and senior management focus on policy goals –

and that they focus on the strategic, structural, and managerial mechanisms that are needed to

achieve those policy goals. When executives focus too much attention on tactics, this can cause

policy, strategy, and structural and managerial issues to be ignored.

4.b.iii. The zero-sum mind-set

Strategic alliances are a plus-sum concept.8 SAs are based on the belief that the merging of

complementary interests, the sharing of privileged information, and intimate collaboration and

cooperation can produce strategic results that exceed anything that either of the partners can 8 Plus-sum concepts are discussed in several sections of unit 7.

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produce on their own or through an arm's-length agreement.

The 'zero-sum game' is a win-lose situation.9 The zero-sum mind-set is the tendency for

some managers and executives to see all business situations as zero-sum games.10

The zero-sum mind-set contributes to opportunistic behavior in SAs, because it is based on

the belief that the size of the pie is fixed, and because it doesn't allow for plus-sum possibilities.

4.c. Managing partner risk

Companies can use plus-sum strategies, structures, and environments11 to countervail the

underlying and direct causes of partner risk. But implementing these measures can be difficult,

and they can be demanding in terms of managerial commitment, time, and effort.

Also, the consequences of partner risk can be disastrous for companies and careers.

Because of this, some senior managers at companies in the United States, Europe, and other

Western countries have lost some of their enthusiasm for SAs, and career-conscious executives

often avoid SA assignments.

9 Zero-sum games are discussed in unit 7.1.a. 10 The zero-sum mindset is discussed in unit 7.2. 11 Plus-sum strategies, structures, and environments are discussed in unit 7.5.

Unit 9

Corporate social responsibility


1. Definitions

2. Conservative views

3. Liberal views

4. Complexity

5. Terminology

6. CSR policies

1. Definitions

The term 'corporate social responsibility' (CSR) refers to the responsibilities of a

corporation to society and, more specifically, to the societies within which it operates.

What are, and what are not, a corporation's responsibilities to society is the subject of

widespread disagreement and debate. There is no issue in business that is the subject of such a

diverse set of positions and arguments.

This is due to the diversity of the participants in the debate. CSR is of interest to company

board members and senior executives in all industries. In academia, the subject is of interest to

students and faculty from all sub-disciplines of management and business – and from economics,

law, philosophy, political science, sociology, religion, and ethics. Outside of companies and

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1.a. CSR policies and behavior

Decisions relating to a company's CSR policies and behavior are influenced by how the

company's board members and senior executives view the concept of 'corporate social

responsibility.'

Every board member and senior executive will assert that he or she believes their company

must behave in a way that is socially responsible. But there are many different opinions

concerning what is meant by socially responsible behavior.

This has resulted in companies adopting a wide range of CSR policies and practices.

To understand why companies adopt widely differing CSR policies and practices, we must

examine the underlying values, beliefs, and priorities that drive CSR-related decisions and

actions.

1.b. The conservative – liberal continuum

CSR-related values, beliefs, and priorities can be classified as either conservative or liberal.

The range of conservative and liberal views can be seen as forming a continuum.

The following two sections of this unit define six benchmarks at points along the CSR

continuum. Section 2 defines three views on the conservative side; section 3 defines three views

on the liberal side.

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Sect ion 2 Des ign and dec is ion fac tors Unit 9 Corporate social respons ib i l i t y

The presentation of these six CSR views begins with the most conservative views, and

ends with the most liberal views.

2. Conservative views

2.a. Fiduciary responsibility

The fiduciary responsibility (FR) view says that a company is being socially responsible if

it maximizes return to its shareholders.

The FR view says that for a publicly listed company to engage in social activity and giving

may be legally, managerially, and sociologically irresponsible. The second and third elements

(managerial and sociological irresponsibility) also apply to companies that are not publicly

listed.

2.a.i. Legal irresponsibility

The FR view argues that a company's primary legal responsibility is to its shareholders,

and when a company is engaged in social activity or giving it may be violating its legal

fiduciary responsibility.

An exception to this prohibition is if the social activity materially benefits the company

and its shareholders.

Coca-Cola

Since 1993, Coca-Cola has sponsored Project Hope in China, at a cost of more than

60 million RMB – plus a huge amount of managerial and employee time. Since 1993,

'Coca-Cola Project Hope' has built 59 primary schools, 100 libraries, and helped more than

60,000 children gain access to education.

The FR view of CSR would oppose Coca-Cola's sponsorship of Project Hope, unless

the company could show that this social activity has contributed to the company's sales

and/or profits – or has provided the company and its shareholders with some other material

benefit.

2.a.ii. Managerial irresponsibility

The FR view argues that for a company to engage in social activity is managerially

irresponsible, because:

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it causes senior management to apply time and effort to activities that are not related to

the purpose of the company;

it takes the company outside its industry area of domain.

This last argument also says a company should not engage in social activity, because it

lacks expertise in areas that are outside its industry area of domain.

Coca-Cola

The FR view would argue against Coca-Cola Project Hope in China (which covers

primary, secondary, and college education; and teacher training, online learning, and job

placement) on the grounds that Coca-Cola's areas of expertise don't include education.

2.a.iii. Sociological irresponsibility

In its most extreme form, the fiduciary responsibility view of CSR argues that social

activity and/or giving is sociologically irresponsible, because it usurps functions that belong to

government.

2.b. Legal compliance

The legal compliance (LC) view says a company is being socially responsible if it

complies with the laws and regulations of the communities and countries within which it

operates.

The LC view says it is the role of government to identify the values and priorities of

society – and to codify these values and priorities by drafting and adopting laws and regulations

that govern the behavior of corporations.

The LC view argues that legal compliance should drive a company's CSR agenda, because

laws and regulations provide companies with specific directives related to all areas of CSR. For

example:

product health and safety laws and regulations provide companies with standards for

designing, developing, manufacturing, and marketing products;

labor laws and regulations specify how a company must treat its employees;

environmental protection laws and regulations specify the permissible impact of a

company's operations on the physical environment;

tax laws and regulations specify the economic contribution a company should make

to society;

antitrust laws are developed by governments to regulate the competitive business

environment and to protect consumers and competitors from monopolistic behavior.

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The LC view also argues that limiting CSR to legal compliance is equitable, because

government laws and regulations apply to all companies, and because all companies have equal

access to the legal mechanisms that govern the implementation of laws and regulations.

2.c. Undifferentiated PETI

The two views closest to the center of the continuum focus on products,1 employment,

taxes, and infrastructure (PETI).

The undifferentiated PETI (U-PETI) view says a company is fulfilling its responsibility to

society when it provides society with products, employment, taxes, and infrastructure.

The U-PETI view doesn't differentiate between products, employment, and infrastructure

based on qualitative conditions, standards, or criteria.

The U-PETI view says a company is fulfilling its responsibility to society when it:

(1) provides society with products;

(2) provides people with employment – and when the company uses materials, parts, and

products from other companies that provide people with employment;

(3) makes an economic contribution to society by paying taxes;

(4) makes economic and structural contributions to society by adding to the productive

infrastructure of the communities and countries where it operates.

3. Liberal views

3.a. Differentiated PETI

The differentiated PETI (D-PETI) view says a company is being socially responsible if it

provides society with products, employment, taxes, and infrastructure – that comply with

qualitative conditions, standards, or criteria.

The D-PETI view differentiates between products, employment, and infrastructure that

make a positive contribution to society and those that do not.

For example, this view says a company can't claim to be socially responsible:

on the grounds that it provides products to society, if its products are of marginal

benefit to society (such as ice cream or soft drinks) or are detrimental to society (such

as cigarettes);

1 As noted in unit 2.3.a.i, the term 'product' or 'products' has been used to cover both products and services -

except when referring to a particular service.

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on the grounds that it provides jobs to society, if it doesn't treat its employees well;

on the grounds that it provides infrastructure to society, if its factories pollute the

environment.

The DP view argues that a company is being socially responsible:

(1) if the products the company provides actually benefit consumers, end users,2 and

society; if the products it provides are safe; and if its products do no harm to the

environment – either during or after the usable life of the product;

(2) if the company complies with labor laws and regulations; treats its employees well in

terms of pay, benefits, and working conditions; and if the company takes steps to

ensure that these standards are followed by the company's suppliers, distributors, and

retailers;

(3) if the company pays its full share of taxes;

(4) if the company's manufacturing facilities, equipment, and operations do not cause

harm to the environment; and if the company takes steps to ensure that these standards

are followed by the company's suppliers.

3.b. Ethical compliance

The ethical compliance (EC) view says that compliance with laws and regulations is

necessary but not sufficient.

The EC view argues that government laws and regulations were never meant to define

what is good social behavior for a person or for a corporation, and that laws and regulations

can't be used as a social code of conduct.

The EC view argues that, to be socially responsible, a company must go beyond simply

complying with laws and regulations relating to taxes, labor, environmental protection, product

health, and safety, deceptive advertising, financial reporting requirements, and restrictive trade

practices.

The EC view says that to be socially responsible, a company must comply with the ethical

standards that apply in the communities and countries where it operates.

3.c. Discretionary giving

The discretionary giving (DG) view says that to be socially responsible a company must

participate in social programs, and/or must make philanthropic donations to socially worthy causes.

The DG view takes two forms, which are based on motivation.

2 The term 'end user' is discussed in unit 18.2.c.

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3.c.i. Motivated by mutual benefit

This form of the DG view argues that companies should engage in socially beneficial

activities and giving, because these actions produce mutual benefit: the actions benefit society –

and can also result in significant material benefits for the company.

The DG mutual benefit view is similar to the exception to the fiduciary responsibility view,

which is discussed in section 2.a.i. The difference between these two views is that the priorities

are reversed: in the FD exception, the primary purpose of the activity is to benefit the company

and its shareholders; in the DG view, the primary purpose of the activity is to benefit society.

3.c.ii. Motivated by altruism

In its most extreme form, the DG view argues that companies should engage in socially

beneficial activities and giving that are not designed or intended to benefit the company.

4. Complexity

4.a. Idiosyncratic and company specificity

A company's CSR policies and practices often reflect a multiplicity of different views. The

individual members of a company's board of directors may hold different views relating to CSR,

and each board member may hold different CSR views related to different issues and to

different situations.

A director who serves on the boards of more than one company may have different views

on the same issue if the companies are in different industries, are at different phases of their

company life cycles, make and/or market different products, and have different levels of

profitability.

4.b. Multiple positions

In most cases, a company's different CSR policies, activities, and actions are not covered

by a single position on the conservative – liberal continuum. Instead, they reflect a complex mix

of the six views discussed in sections 2 and 3.

Apple Most of Apple's CSR policies and practices are on the conservative side of the

continuum. But the company's environmental protection policies and activities, and its

'Supplier Code of Conduct,' are on the liberal side of the continuum.

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Coca-Cola

Coca-Cola's participation in social programs in China is on the liberal side of the continuum. But the value of the company's products to society, and its past behavior of insisting it was not responsible for the unethical or illegal behavior of its bottlers in developing countries, are on the conservative side of the continuum.

5. Terminology

The CSR discussion and debate is made more complex by the use of alternative terms. Alternative terms for 'conservative' include 'legalist' and 'compliance.' Alternative terms for 'liberal' include 'ethicist', 'moralist' and 'commitment.'

5.a. Compliance and commitment

The dominant CSR issue for many manufacturing and industrial companies is the physical environment. In these cases, the CSR views held by board members and senior executives can range from a 'compliance view' of CSR to a 'commitment view' of CSR.

5.a.i. Compliance

The views on the 'compliance' side of the continuum argue that a company is fulfilling its

CSR if it complies with the legal requirements relating to environmental protection.

5.a.ii. Commitment

The views on the 'commitment' side of the continuum argue that a company must go

beyond compliance, and must commit not to damage the physical environments in which it

operates – and, if possible, to improve its physical operational environment.

5.b. Passive and active

Two of the most frequently used terms in CSR discussions, articles, and books are 'passive'

and 'active.' These terms have a specific meaning and a general meaning.

5.b.i. Specific meaning

When used in the media and books, and in some scholarly articles, the terms passive and

active indicate the degree to which a company engages in (or doesn't engage in) social programs

and corporate giving.

Apple Based on this usage, Apple's CSR policies and behavior can be classified as passive,

because the company doesn't sponsor or participate in social programs.

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Coca-Cola

Based on this usage, Coca-Cola's CSR policies and behavior in China can be

classified as active, because the company is a sponsor of Project Hope and participates in

other social programs in China.

5.b.ii. General meaning

The terms passive and active can, however, also be used when referring to any company

activity or action that relates to CSR.

Apple

Apple's non-participation in social programs is passive. But its environmental

protection policies and activities – and the development and aggressive implementation of

its 'Supplier Code of Conduct' – are active.3

Coca-Cola

Coca-Cola's participation in social programs in China is active. But Coca-Cola's

record of avoiding responsibility for the behavior of its bottlers is passive.

5.b.iii. Passive – active combinations

In most cases, the CSR behaviors of companies can't be covered by a single element from

the passive – active dichotomy. This is consistent with the fact that, at most companies,

CSR-related policies, activities, and actions aren't covered by a single position on the

conservative – liberal continuum.

6. CSR policies

CSR policies are those parts of corporate policy and policy goals that relate to a company's

responsibilities to society and, more specifically, to the societies within which the company

operates. Like other parts of corporate policy, CSR policy is developed by a company's board of

directors.

CSR policies drive the formulation and implementation of a company's CSR strategies. A

company's CSR policies can also influence other corporate and business-unit strategies.

3 Supplier Code of Conduct http://www.apple.com/supplierresponsibility/

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6.a. CSR and ethical standards

Most liberal views of CSR emphasize ethical behavior. This can be problematic when

formulating CSR policies, because ethics are the norms and values of a particular society: what

is ethical in one culture may not be ethical in another. Also, even within a single society, what is

or is not ethical tends to be a subjective judgment and open to interpretation.

6.b. Corporate codes of conduct

Some companies have avoided these ethics-related issues by focusing on legal and

regulatory compliance. This policy option is frequently chosen by companies whose board

members hold conservative views of CSR.

Many companies, however, have developed ethical standards – which are referred to as

'corporate codes of conduct.' In some cases, a company's code of conduct includes standards

that apply to its suppliers and/or distributors – or a company may have a separate code of

conduct for these standards.

When formulating corporate codes of conduct, some companies borrow concepts,

principles, and specific language from governmental, non-governmental, and international

standards.

6.c. International standards

Because of the large number of nation-states in the world – and the diversity of their

socio-political ideologies, social systems, and cultures – there is a wide range of social and

ethical norms and a wide range of CSR standards.

6.c.i. The codification of international standards

Since the 1970s, the United Nations (UN), the International Labor Organization (ILO), the

Organization for Economic Cooperation and Development (OECD), and other

intergovernmental and international non-governmental organizations have developed

guidelines, standards, and corporate codes of conduct that relate directly or indirectly to CSR.

These include:

UN Commission on Transnational Corporations Code of Conduct

UN Convention Against Corruption

UN Norms on the Responsibilities of Transnational Corporations and other Business

Enterprises with Regard to Human Rights

ILO Code of Practice in Safety and Health

ILO International Labor Standards

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OECD Guidelines for Multinational Enterprises

The Ethical Trading Initiative Base Code

Electronic Industry Code of Conduct

6.c.ii. ISO 26000

In 2010, the International Organization for Standardization (ISO)4 published a CSR

standard: ISO 26000. Unlike ISO 9000 and most other ISO standards, ISO 26000 is not a

certification standard.

4 The International Organization for Standardization (ISO) is discussed in unit 26.3.b.

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