Friday, February 6, 2015

Chapter 1: Fundamentals of Strategic Management

Chapter Outline
1-1 What Is Strategic Management?
1-1a Intended and Realized Strategies
1-1b Scientifi c and Artistic Perspectives on Strategic Management
1-2 Infl uence on Strategic Management
1-3 Strategic Decisions
1-4 Summary
Key Terms
Review Questions and Exercises
Practice Quiz
Reading 1-1

Today’s business world is global, Internet driven, and obsessed with
speed. The challenges it creates for strategic managers are often complex,
ambiguous, and unstructured. Add to this the constant allegations
of top management wrongdoings, ethical blunders, and skyrocketing
executive compensation, and it is easy to see why fi rm leaders are under greater
pressure than ever to respond to strategic problems quickly, decisively, and
responsibly. Hence, the need for effective strategic management has never been
more pronounced than it is today. This text presents a framework for addressing
these immediate strategic challenges.
This chapter introduces the notion of strategic management, highlights its
importance, and presents a fi ve-step process for strategically analyzing an organization.
The remaining chapters expand on the various steps in the process, with
special emphasis on their application to ongoing enterprises.
1-1 What Is Strategic Management?
Strategy refers to top management’s plans to develop and sustain competitive
advantage—a state whereby a fi rm’s successful strategies cannot be easily
duplicated by its competitors1—so that the organization’s mission is fulfi lled.2
Following this defi nition, it is assumed that an organization has a plan, its competitive
advantage is understood, and that its members understand the reason
for its existence. These assumptions may appear self-evident, but many strategic
problems can be traced to fundamental misunderstandings associated with
defi ning the strategy. Debates over the nature of the organization’s competitive
advantage, its mission, and whether a strategic plan is really needed can be widespread.
3 Comments such as “We’re too busy to focus on developing a strategy”
or “I’m not exactly sure what my company is really trying to accomplish” can be
overheard in many organizations.
Strategic management is a broader term than strategy and is a process that
includes top management’s analysis of the environment in which the organization
operates prior to formulating a strategy, as well as the plan for implementation
and control of the strategy. The difference between a strategy and the
strategic management process is that the latter includes considering what must
be done before a strategy is formulated through assessing the success of an
implemented strategy. The strategic management process can be summarized in
fi ve steps, each of which is discussed in greater detail in subsequent chapters of
the book (see Figure 1-1).4
1. External analysis: Analyze the opportunities and threats or constraints that exist in
the organization’s external environment, including industry and macroenvironmental
2. Internal analysis: Analyze the organization’s strengths and weaknesses in its internal
environment. Consider the appropriateness of its mission.
3. Strategy formulation: Formulate strategies that build and sustain competitive
advantage by matching the organization’s strengths and weaknesses with the environment’s
opportunities and threats.
4. Strategy execution: Implement the strategies that have been developed.
5. Strategic control: Measure success and make corrections when the strategies are
not producing the desired outcomes.
Is it necessary to address these steps sequentially? The answer depends on
one’s perspective. Outsiders analyzing a fi rm should apply a systematic approach
that progresses through these steps in order. Doing so develops to a holistic
understanding of the fi rm, its industry, and its strategic challenges.

In organizations, however, strategies are being formulated, implemented, and
controlled simultaneously while external and internal factors are being assessed
and reassessed. In addition, changes in one stage of the strategic management
process will inevitably affect other stages as well. After a planned strategy is
implemented, for example, it often requires modifi cation as conditions change.
Hence, because these steps are so tightly intertwined, insiders treat all of the steps
as a single integrated, ongoing process.5
Consider the strategic management process at a fast-food restaurant chain. At
any given time, top managers are likely assessing changes in consumer taste preferences
and food preparation, analyzing the activities of competitors, working
to overcome fi rm weaknesses, controlling remnants of a strategy implemented
several years ago, implementing a strategy formulated several months ago, and
formulating strategic plans for the future. Although each of these activities can
4 Chapter 1
be linked to a distinct stage in the strategic management process, they occur
An effective strategy is built on the foundation of the organization’s business
model, the mechanism whereby the organization seeks to earn a profi t by selling
its goods. In a general sense, all fi rms seek to produce a product or service and
sell it at a price higher than its production and overhead costs, thereby generating
a profi t. A business model is stated in greater detail, however. For example, a
magazine publisher might adopt a “subscription model,” an “advertising model,”
or perhaps some combination of the two. Profi ts would be generated primarily
from readers in the former case whereas they would come primarily from
advertisers in the latter case. Needless to say, identifying a fi rm’s business model
is rarely diffi cult at a basic level, but can become more complex when considering
intricate details. Progressive fi rms often devise innovative business models
that extract revenue—and ultimately profi ts—from sources not identifi ed by
Developing a successful strategy for the fi rm is not an easy task. Realistically,
a number of factors are typically associated with successful strategies, including
the following:
1. Strategic managers thoroughly understand the competitive environment in which the
organization competes.
2. Strategic managers understand the organization’s resources and how they translate
into strengths and weaknesses.
3. The strategy is consistent with the mission and goals of the organization.
4. Plans for putting the strategy into action are designed with specifi city before it is
5. Possible future changes in the proposed strategy (i.e., strategic control) are evaluated
before the strategy is adopted.
Careful consideration of these factors reinforces the interrelatedness of the steps
in the strategic management process. Each factor is most closely associated with
one of the fi ve steps, yet they fi t together like pieces of a puzzle. The details associated
with the success factors—and others—will be discussed in greater detail in
future chapters.
Top managers make effective strategic decisions when they remain informed
of issues that affect their industries, as well as the business world in general.
Information vital to effective strategic decision making can be found in a variety
of publications. In addition to the business sections of most major newspapers,
publications such as Fortune, Business Week, Industry Standard, Strategy+Business,
and Wall Street Journal report on a wide variety of strategic management topics
(see Table 1-1). Not only are these concepts of interest to top managers, but they
are also a concern for employees, supervisors, and middle managers of all organizations.
An appreciation of the organization’s strategy helps all of its members
relate their work assignments more closely to the direction of the organization.
Strategic management is not limited to for-profi t organizations. Top managers
of any organization, regardless of profi t or nonprofi t status, must understand
the organization’s environment and its capabilities and develop strategies
to assist the enterprise in attaining its goals. Drexel University President
Constantine Papadakis, for example, is widely considered to be a leading strategic
thinker among university top executives. The innovative Greek immigrant
promotes Drexel through aggressive marketing, while campaigning for
an all-digital library without books. In many respects, he manages the university
in the same way that other executives manage profi t-seeking enterprises.
Interestingly, his salary in 2005 was about $900,000 per year—not including
Business Model
The economic mechanism
by which a business
hopes to sell its
goods or services and
generate a profi t.
 TA B L E 1-1 Select Onl ine Sources of Business St rategy News
Publication Contact Information
Business Week
E-Commerce Times
Economist (payment required for full access)
Fast Company
Industry Standard
Strategy+Business (payment required for full access)
Wall Street Journal (payment required for full access)
income from outside sources—making him one of the highest paid university
presidents in the country.6
1-1a Intended and Realized Strategies
A critical challenge facing organizations is the reality that strategies are not always
implemented as originally planned. Henry Mintzberg introduced two terms to
help clarify the shift that often occurs between the time a strategy is formulated
and the time it is implemented. An intended strategy, that which management
originally planned, may be realized just as it was planned, in a modifi ed form, or
even in an entirely different form. Occasionally, the strategy that management
intends is actually realized, but the intended strategy and the realized strategy,
which is what management actually implements, usually differ.7 Hence, the original
strategy may be realized with desirable or undesirable results, or it may be
modifi ed as changes in the fi rm or the environment become known.
The gap between the intended and realized strategies usually results from
unforeseen environmental or organizational events, better information that was
not available when the strategy was formulated, or an improvement in top management’s
ability to assess its environment. Although it is important for managers
to formulate responsible strategies based on a realistic and thorough assessment
of the fi rm and its environment, things invariably change along the way. Hence, it
is common for such a gap to exist, creating the need for constant strategic action
if a fi rm is to stay on course. Instead of resisting modest strategic changes when
new information is discovered, managers should search for new information and
be willing to make such changes when necessary. This activity is part of strategic
control, the fi nal step in the strategic management process.
1-1b Scientifi c and Artistic Perspectives
on Strategic Management
Top executives should take one of two different perspectives on the approach
to strategic management. Most strategy scholars have endorsed a scientifi c perspective,
whereby strategic managers are encouraged to systematically assess the fi rm’s
external environment and evaluate the pros and cons of myriad alternatives
before formulating strategy. The business environment is seen as largely objective,
analyzable, and at least somewhat predictable. As such, strategic managers
should follow a systematic process of environmental, competitive, and internal
analysis and build the organization’s strategy on this foundation.
According to this perspective, strategic managers should be trained, highly
skilled analytical thinkers capable of digesting a myriad of objective data and translating it into a desired direction for the fi rm. “Strategy scientists” tend to
minimize or reject altogether the role of imagination and creativity in the strategy
process, and are not generally receptive to alternatives that emerge from any
process other than a comprehensive, analytical approach.
Others, however, have a different view. According to the artistic perspective on
strategy, the lack of environmental predictability and the fast pace of change
render elaborate strategy planning as suspect at best. Instead, strategists should
incorporate large doses of creativity and intuition in order to design a comprehensive
strategy for the fi rm.8 Mintzberg’s notion of a craftsman—encompassing
individual skill, dedication, and perfection through mastery of detail—embodies
the artistic model. The strategy artist senses the state of the organization, interprets
its subtleties, and seeks to mold its strategy like a potter molds clay. The
artist visualizes the outcomes associated with various alternatives and ultimately
charts a course based on holistic thinking, intuition, and imagination.9 “Strategy
artists” may even view strategic planning exercises as time poorly spent and may
not be as likely as those in the science school to make the effort necessary to
maximize the value of a formal planning process.10
This text acknowledges the validity of the artistic perspective but emphasizes
the scientifi c view. Creativity and innovation are important and encouraged, but
are most likely to translate into organizational success when they occur as part
of a comprehensive approach to strategic management. Nonetheless, the type of
formal, systematic strategic planning proposed in this text is not without its critics.
Some charge that such models are too complex to apply, or that they apply
only to businesses in highly certain environments.11 Others emphasize that the
stages in the process are so closely interrelated and that considering them as
independent steps may be counterproductive. Still others, such as Mintzberg,
argue that planning models stifl e the creativity and imagination that is central to
formulating an effective strategy.12 Although these views have merit, the comprehensive,
systematic model proposed herein is presented as a proper foundation
for understanding the strategic management process. It does not, however, preclude
the application of other approaches.
1-2 Infl uence on Strategic Management
The roots of the strategic management fi eld can be traced to the 1950s when the
discipline was originally called “business policy.” Today, strategic management is
an eclectic fi eld, drawing upon a variety of theoretical frameworks. Three prominent
perspectives are summarized in Table 1-2 and discussed in this section.
TA B L E 1-2 Theoret ical Perspect ives on Fi rm Per formance
Theoretical Primary Infl uence How Perspective Is Applied
Perspective on Firm Performance to the Case Analysis
Industrial organization Structure of the industry Industry analysis portion of the
(IO) theory external environment
Resource-based theory Firm’s unique combination Analysis of internal strengths
of strategic resources and weaknesses
Contingency theory Fit between the fi rm and Strengths, weaknesses,
its external environment opportunities, and threats
(SWOT) analysis and
SW/OT matrix

Industrial organization (IO), a branch of microeconomics, emphasizes the
infl uence of the industry environment upon the fi rm. The central tenet of industrial
organization theory is the notion that a fi rm must adapt to infl uences in its
industry to survive and prosper; thus, its fi nancial performance is primarily determined
by the success of the industry in which it competes. Industries with favorable
structures offer the greatest opportunity for fi rm profi tability.13 Following
this perspective, it is more important for a fi rm to choose the correct industry
within which to compete than to determine how to compete within a given industry.
Recent research has supported the notion that industry factors tend to play
a dominant role in the performance of most fi rms, except for those that are the
notable industry leaders or losers.14
IO assumes that an organization’s performance and ultimate survival depend
on its ability to adapt to industry forces over which it has little or no control.
According to IO, strategic managers should seek to understand the nature of
the industry and formulate strategies that feed off the industry’s characteristics.15
Because IO focuses on industry forces alone, strategies, resources, and competencies
are assumed to be fairly similar among competitors within a given industry. If
one fi rm deviates from the industry norm and implements a new, successful strategy,
then other fi rms will rapidly mimic the higher performing fi rm by purchasing
the resources, competencies, or management talent that have made the leading
fi rm so profi table. Hence, although the IO perspective emphasizes the industry’s
infl uence on individual fi rms, it is also possible for fi rms to infl uence the strategy
of rivals, and in some cases even modify the structure of the industry.16
Perhaps the opposite of the IO perspective, resource-based theory views performance
primarily as a function of a fi rm’s ability to utilize its resources.17 Although
environmental opportunities and threats are important, a fi rm’s unique resources
comprise the key variables that allow it to develop a distinctive competence, enabling
the fi rm to distinguish itself from its rivals and create competitive advantage.
“Resources” include all of a fi rm’s tangible and intangible assets, such as capital,
equipment, employees, knowledge, and information.18 An organization’s
resources are directly linked to its capabilities, which can create value and ultimately
lead to profi tability for the fi rm. Hence, resource-based theory focuses
primarily on individual fi rms rather than on the competitive environment.
If resources are to be used for sustained competitive advantage—a fi rm’s ability
to enjoy strategic benefi ts over an extended time—those resources must be
valuable, rare, not subject to perfect imitation, and without strategically relevant
substitutes.19 Valuable resources are those that contribute signifi cantly to the
fi rm’s effectiveness and effi ciency. Rare resources are possessed by only a few
competitors, and imperfectly imitable resources cannot be fully duplicated by
rivals. Resources that have no strategically relevant substitutes enable the fi rm to
operate in a manner that cannot be effectively imitated by others, and thereby
sustain high performance.
According to contingency theory, the most profi table fi rms are likely to be those
that develop a benefi cial fi t with their environment. In other words, a strategy is most
likely to be successful when it is consistent with the organization’s mission, its competitive
environment, and its resources. Contingency theory represents a middle
ground perspective that views organizational performance as the joint outcome of
environmental forces and the fi rm’s strategic actions. Firms can become proactive
by choosing to operate in environments where opportunities and threats match
their strengths and weaknesses.20 Should the industry environment change in a
way that is unfavorable to the fi rm, its top managers should consider leaving that
industry and reallocating its resources to other, more favorable industries.
Each of these three perspectives has merit and has been incorporated into the
strategic management process laid out in this text. The industrial organization
view is seen in the industry analysis phase, most directly in Michael Porter’s “fi ve
forces” model. Resource-based theory is applied directly to the internal analysis
phase and the effort to identify an organization’s resources that could lead
to sustained competitive advantage. Contingency theory is seen in the strategic
alternative generation phase, where alternatives are developed to improve the
organization’s fi t with its environment. Hence, multiple perspectives are critical
to a holistic understanding of strategic management.21
1-3 Strategic Decisions
How does one think and act strategically, and who makes the decisions? The
answers to these questions vary across fi rms and may also be infl uenced by factors
such as industry, age of the fi rm, and size of the organization. In general,
however, strategic decisions are marked by four key distinctions.
1. They are based on a systematic, comprehensive analysis of internal attributes and
factors external to the organization. Decisions that address only part of the organization—
perhaps a single functional area—are usually not considered to be strategic
2. They are long term and future oriented, but are built on knowledge about the past and
present. Scholars and managers do not always agree on what constitutes the “long
term,” but most agree that it can range anywhere from several years in duration to
more than a decade.
3. They seek to capitalize on favorable situations outside the organization. In general, this
means taking advantage of opportunities that exist for the fi rm, but it also includes
taking measures to minimize the effects of external threats.
4. They involve choices. Although making win-win strategic decisions may be possible,
most involve some degree of trade-off between alternatives, at least in the short run.
For example, raising salaries to retain a skilled workforce can increase wages, and
adding product features or enhancing quality can increase the cost of production.
Such trade-offs, however, may diminish in the long run, as a more skilled, higher
paid workforce may be more productive than a typical workforce, and sales of a
higher quality product may increase, thereby raising sales and potentially profi ts.
Decision makers must understand these complex relationships across the business
Because of these distinctions, strategic decision making is generally reserved
for the top executive and members of the top management team. The chief
executive is the individual ultimately responsible (and generally held responsible)
for the organization’s strategic management, but this person rarely acts
alone. Except in the smallest companies, the CEO relies on a team of top-level
executives—including members of the board of directors, vice presidents, and
various line and staff managers—all of whom play instrumental roles in strategically
managing the fi rm. Generally speaking, the quality of strategic decisions
improves dramatically when more than one capable executive participates in the
The size of the team on which the top executive relies for strategic input and
support can vary from fi rm to fi rm. Companies organized around functions such
as marketing and production generally involve the heads of the functional departments
in strategic decisions. Very large organizations often employ corporate-level
strategic planning staffs and outside consultants to assist top executives in the
process. The degree of involvement of top and middle managers in the strategic
management process also depends on the personal philosophy of the CEO.23
Some chief executives are known for making quick decisions, whereas others
have a reputation for involving a large number of top managers and others in
the process.
Input to strategic decisions, however, need not be limited to members of the
top management team. To the contrary, obtaining input from others throughout
the organization, either directly or indirectly, can be quite benefi cial. In fact,
most strategic decisions result from the streams of inputs, decisions, and actions
of many people. For example, an employee in a company’s research and development
department attends a trade show where vendors discuss a new product
or production process idea that seems relevant to the company. The employee
relates the idea to the next level manager who, in turn, modifi es and passes it
along to a higher level manager. Eventually, the organization’s marketing and
production managers discuss a version of the idea, and later present it to top
management. The CEO ultimately decides to incorporate the idea into the ongoing
strategic planning process. This example illustrates the indirect involvement
of individuals throughout the organization in the strategic management process.
Top management is ultimately responsible for the fi nal decision, but this decision
is based on a culmination of the ideas, creativity, information, and analyses
of others24 (see Strategy at Work 1-1).
Ethics and social responsibility are also key concerns in strategic decision
making. Simply stated, the moral components and social outcomes associated
with a strategic decision, such as the effects of closing an existing production
facility in search of lower costs abroad, should be considered alongside economic
concerns. These issues are discussed in greater detail in Chapters 6 through 9
under the umbrella of strategy formulation (see Case Analysis 1-1).
S T R A T E G Y A T W O R K 1 - 1
Strategic Decisions
Strategic decisions, by their nature, may be characterized
by considerable risk and uncertainty. Unpredictable environmental
changes can quickly threaten well-conceived
plans. Most strategic decision makers clearly recognize
this danger and learn to adapt. Here are two examples.
1. Like all aircarriers, American Airlines faces a number
of challenges: international terrorism, steadily rising
costs, unstable national economies, uncertain volumes
of domestic traffi c, and protectionist threats
to international traffi c. In the face of these threats,
CEO Robert Crandall suggests that senior managers
rarely know the outcomes of these situations anyway
and should be accustomed to dealing with the uncertainty
associated with critical strategic decisions.
2. Bernard Food Industries Inc. is a fi fty-three-year-old
family-held business of more than 1,500 sugarfree,
low-fat, and low-calorie food products. At fi rst,
the company sold most of its products to hospitals,
nursing homes, and other such institutions. In 1996,
however, Steve Bernard, the founder’s son, decided
to expand the market. Although only a handful of
companies were marketing such products at that
time, Bernard viewed the Web as the future. The
fi rm’s online subsidiary, eDietShop (
com) performed extremely well and quintupled retail
sales in the fi rst two years and has continued to grow,
developing into one of its industry’s leaders by the
mid-2000s. As Bernard put it, “We didn’t turn to the
Web because other people were doing it but because
we knew where we wanted our business to go.”
Sources: S. Forster, “Online Brokerage Firms Adopt a ‘Bricks-and-Clicks’
Strategy,” Wall Street Journal Interactive Edition, 6 February 2001;
Anonymous, “Taming the Techno Beast—Technology Is Running Wild.
Learn to Manage Change, or You’ll Get Eaten Alive,” Business Week,
Technology section, 8 June 2000; P. Wright, M. Kroll, and J. A. Parnell,
Strategic Management: Concepts (Upper Saddle River, NJ: Prentice
Hall, 1998); W. M. Carley, “GE and Pratt Agree to Build Engine for
Boeing Jumbo Jet,” Wall Street Journal Interactive Edition, 9 May
1996; J. Cole and C. S. Smith, “Boeing Loses Contest to Become China’s
Partner in Building Plane,” Wall Street Journal Interactive Edition,
2 May 1996.
Case Analysis 1-1
Step 1: Introduction of the Organization
The fi rst step in the case analysis process is to develop familiarity with the organization,
a basic task not directly related to a specifi c theory or set of concepts presented
in this chapter. Analyzing an ongoing enterprise begins with a general introduction
and understanding of the company. When was the organization founded, why, and
by whom? Is any unusual history associated with the organization? Is it privately or
publicly held? What is the company’s mission? Has the mission changed since its
It is also important at this point to identify the business model on which the organization’s
success is predicated. In other words, what is the basic profi t-generating idea
behind the company? Determining this information is simple for some companies
(Ford, for example, hopes to sell cars and offer consumer fi nancing at a profi t) but may
be complicated for others where revenue streams and competitive advantage are more
diffi cult to identify.
Key Terms
business model
competitive advantage
contingency theory
distinctive competence
industrial organization
intended strategy
realized strategy
resource-based theory
strategic management
sustained competitive advantage
top management team

1-4 Summary
Top managers face more complex strategic challenges today than ever before.
Strategic management involves analysis of an organization’s external and internal
environments, formulation and implementation of its strategic plan, and
strategic control. These steps in the process are interrelated and typically done
simultaneously in many fi rms.
A fi rm’s intended strategy often requires modifi cation before it has been fully
implemented due to changes in environmental and/or organizational conditions.
Because these changes are often diffi cult to predict, substantial changes in
the environment may transform an organization’s realized strategy into one that
is quite different from its intended strategy.
The strategic management fi eld has been infl uenced by such perspectives as
industrial organization theory, resource-based theory, and contingency theory.
Although they are based on widely varied assumptions about what leads to high
performance, each of these perspectives has merit and contributes to an overall
understanding of the fi eld.
Strategy formulation is the direct responsibility of the CEO, who also relies
on a team of other individuals, including the board of directors, vice presidents,
and various managers. In its fi nal form, a strategic decision is crafted
from the streams of inputs, decisions, and actions of the entire top management

Review Questions and Exercises
1. Is it necessary that the fi ve steps in the strategic management
process be performed sequentially? Why or
why not?
2. What is the difference between an intended strategy
and a realized strategy? Why is this distinction
3. How have outside perspectives infl uenced the development
of the strategic management fi eld?
4. Does the CEO alone make the strategic decisions for
an organization? Explain.
Practice Quiz
True or False
1. A strategy seeks to develop and sustain competitive
2. Strategic management refers to formulating successful
strategies for an organization.
3. Each step in the strategic management process is
independent so that changes in one step will not
substantially affect other steps.
4. The intended strategy and the realized strategy can
never be the same.
5. Whereas industrial organization theory emphasizes
the infl uence of industry factors of fi rm performance,
resource-based theory emphasizes the role
of fi rm factors.
6. Strategic decisions are made solely by and are ultimately
the responsibility of the chief executive alone.
Multiple Choice
7. Strategies are formulated in the strategic management
stage that occurs immediately after
A. the assessment of internal strengths and
B. implementation of the strategy.
C. control of the strategy.
D. none of the above
8. The strategy originally planned by top management
is called the
A. grand strategy.
B. realized strategy.
C. emergent strategy.
D. none of the above
9. The notion that successful fi rms tend to be the
ones that adapt to infl uences in their industries is
based on
A. industrial organization theory.
B. resource-based theory.
C. contingency theory.
D. none of the above
10. The notion of distinctive competence is consistent
A. industrial organization theory.
B. resource-based theory.
C. contingency theory.
D. none of the above
11. In order to contribute to sustained competitive
advantage, fi rm resources should be
A. valuable and rare.
B. not subject to perfect imitation.
C. without strategically relevant resources.
D. all of the above.
12. Which of the following is not a characteristic of strategic
A. They are long term in nature.
B. They involve choices.
C. They do not involve trade-offs.
D. All of the above are characteristics of strategic

12 Chapter 1
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the Origins of Competitive Advantage,” Strategic Management
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2. P. Wright, M. Kroll, and J. A. Parnell, Strategic Management:
Concepts (Upper Saddle River, NJ: Prentice Hall, 1998).
3. D. C. Hambrick and J. W. Fredrickson, “Are You Sure You
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(2001): 48–59.
4. Based on Wright et al., Strategic Management.
5. A. E. Singer, “Strategy as Moral Philosophy,” Strategic
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6. B. Wysocki, Jr., “How Dr. Papadakis Runs a University Like
a Company,” Wall Street Journal (23 February 2005): A1;
P. Fain, “High Pay Makes Headlines,” Chronicle of Higher
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J. B. Quinn, H. Mintzberg, and R. M. James, eds., The Strategy
Process (Englewood Cliffs, NJ: Prentice Hall, 1988), 14–15.
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in the Domain of Managerial Decision Making,” Journal of
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10. G. Hamel, “Strategy as Revolution,” Harvard Business Review
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12. Hamel, “Strategy as Revolution”; B. Huffman, “What Makes a
Strategy Brilliant?”
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Strategic Management,” Academy of Management Review 6
(1981): 609–620.
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17. It has been argued that the resource-based perspective
does not qualify as an academic theory. For details
on this exchange, see R. L. Priem and J. E. Butler, “Is the
Resource-Based ‘View’ a Useful Perspective for Strategic
Management Research,” Academy of Management Review
26 (2001): 22–40; J. B. Barney, “Is the Resource-Based
‘View’ a Useful Perspective for Strategic Management
Research? Yes,” Academy of Management Review 26
(2001): 41–56.
18. J. B. Barney, “Looking Inside for Competitive
Advantage,” Academy of Management Executive
19 (1995): 49–61.
19. S. L. Berman, J. Down, and C. W. L. Hill, “Tacit Knowledge
as a Source of Competitive Advantage in the National
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R E A D I N G 1 - 1
Insight from strategy+business
Southwest Airline’s Herb Kelleher is widely viewed as an effective organizational leader and strategic thinker.
Under his leadership, the low-cost airline recorded thirty consecutive years of profi ts, a feat unmatched in the
industry. Kelleher provides insight into his philosophy and perspectives on strategy and success in this chapter’s
strategy+business reading.
Herb Kelleher: The Thought Leader Interview
The cofounder and chairman of Southwest Airlines tells why a fi rm’s people are everything.
By Chuck Lucier

The airline industry is a tough place to make
a buck: too many competitors, price-sensitive
customers, high capital intensity, boom-orbust
cyclicality, powerful suppliers, and often
intransigent unions. Nevertheless, Herb Kelleher, the
cofounder and chairman of Southwest Airlines, created
the sort of value that any company leader would envy.
From its start in 1971, Southwest has grown into the
fourth-largest airline in the United States, with 30 consecutive
years of profi tability, in an industry in which no
other company has been profi table for even fi ve straight
years. Total shareholder returns during that period were
almost double the returns for the S&P 500. Southwest
has managed to accrue a market capitalization larger
than that of the rest of the American airlines combined.
Major competitors have tried to imitate Southwest with
clones. Many entrepreneurial startups in the United
States and Europe, including JetBlue and Ryanair, cite
Southwest as their inspiration.
Southwest’s achievements are widely attributed to
its relentless focus. From the start, Southwest’s strategy
has been to draw travelers not from other airlines, but
from cars, buses, and trains, by providing them the least
expensive and fastest service available. To support the
strategy, the company determined to fl y only one type of
airplane, the Boeing 737, and to substitute linear fl ying
for the hub-and-spoke model that has prevailed in the
industry. But at the center of Southwest’s success are
its culture and employees. “Your spirit,” says Mr. Kelleher,
a man fabled for his willingness to party hard with his
staff, is “the most powerful thing of all.”
In recognition of the inspiration he provides all who
study and practice strategy, for his contributions in redefi ning
how companies think about strategy, and for his achievements
in redefi ning an industry, in November 2003 Mr.
Kelleher was granted the Lifetime Achievement Award
by the Strategic Management Society (SMS), the prestigious
global association of academic and corporate
At the SMS annual meeting in Baltimore, Md., where
Mr. Kelleher accepted the award, strategy+ business contributing
editor and “Breakthrough Thoughts” co-columnist
Chuck Lucier led a spirited public conversation with Mr.
Kelleher about Southwest’s success.
S+B: Let’s start with some words from your
award. You made an “audacious commitment” to
putting employees fi rst, customers second, and
shareholders third. How did you get away with
that for 20 years?
KELLEHER: When I started out, business school professors
liked to pose a conundrum: Which do you put
fi rst, your employees, your customers, or your shareholders?
As if that were an unanswerable question. My
answer was very easy: You put your employees fi rst. If
you truly treat your employees that way, they will treat
your customers well, your customers will come back, and
that’s what makes your shareholders happy. So there
is no constituency at war with any other constituency.
Ultimately, it’s shareholder value that you’re producing.
S+B: A dollar invested at Southwest’s 1972 initial
public offering is worth $1,400 today. Does that
come solely from putting your employees fi rst?
KELLEHER: We have been successful because we’ve
had a simple strategy. Our people have bought into it.
R E A D I N G 1 - 1
Insight from strategy+business
Southwest Airline’s Herb Kelleher is widely viewed as an effective organizational leader and strategic thinker.
Under his leadership, the low-cost airline recorded thirty consecutive years of profi ts, a feat unmatched in the
industry. Kelleher provides insight into his philosophy and perspectives on strategy and success in this chapter’s
strategy+business reading.
Herb Kelleher: The Thought Leader Interview
The cofounder and chairman of Southwest Airlines tells why a fi rm’s people are everything.
By Chuck Lucier
Source: Reprinted with permission from strategy+business, the award-winning management quarterly published by Booz Allen Hamilton.