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CHAPTER 1 • THE NATURE OF STRATEGIC MANAGEMENT 9

E-commerce and globalization are external changes that are transforming business
and society today. On a political map, the boundaries between countries may be clear, but
on a competitive map showing the real flow of financial and industrial activity, the bound-
aries have largely disappeared. The speedy flow of information has eaten away at national
boundaries so that people worldwide readily see for themselves how other people live and
work. We have become a borderless world with global citizens, global competitors, global
customers, global suppliers, and global distributors! U.S. firms are challenged by large
rival companies in many industries. To say U.S. firms are being challenged in the automo-
bile industry is an understatement. But this situation is true in many industries.
The need to adapt to change leads organizations to key strategic-management ques-
tions, such as “What kind of business should we become?” “Are we in the right
field(s)?” “Should we reshape our business?” “What new competitors are entering our
industry?” “What strategies should we pursue?” “How are our customers changing?”
“Are new technologies being developed that could put us out of business?”

Key Terms in Strategic Management

Before we further discuss strategic management, we should define nine key terms: competi-
tive advantage, strategists, vision and mission statements, external opportunities and threats,
internal strengths and weaknesses, long-term objectives, strategies, annual objectives, and
policies.

Competitive Advantage
Strategic management is all about gaining and maintaining competitive advantage. This
term can be defined as “anything that a firm does especially well compared to rival firms.”
When a firm can do something that rival firms cannot do, or owns something that rival firms
desire, that can represent a competitive advantage. For example, in a global economic reces-
sion, simply having ample cash on the firm’s balance sheet can provide a major competitive
advantage. Some cash-rich firms are buying distressed rivals. For example, BHP Billiton,
the world’s largest miner, is seeking to buy rival firms in Australia and South America.
Freeport-McMoRan Copper & Gold Inc. also desires to expand its portfolio by acquiring
distressed rival companies. French drug company SanofiAventis SA also is acquiring dis-
tressed rival firms to boost its drug development and diversification. Cash-rich Johnson &
Johnson in the United States also is acquiring distressed rival firms. This can be an excellent
strategy in a global economic recession.
Having less fixed assets than rival firms also can provide major competitive advan-
tages in a global recession. For example, Apple has no manufacturing facilities of its own,
and rival Sony has 57 electronics factories. Apple relies exclusively on contract manufac-
turers for production of all of its products, whereas Sony owns its own plants. Less fixed
assets has enabled Apple to remain financially lean with virtually no long-term debt. Sony,
in contrast, has built up massive debt on its balance sheet.
CEO Paco Underhill of Envirosell says, “Where it used to be a polite war, it’s now a
21st-century bar fight, where everybody is competing with everyone else for the customers’
money.” Shoppers are “trading down,” so Nordstrom is taking customers from Neiman
Marcus and Saks Fifth Avenue, T.J. Maxx and Marshalls are taking customers from most
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other stores in the mall, and even Family Dollar is taking revenues from Wal-Mart. Getting
and keeping competitive advantage is essential for long-term success in an organization.
The Industrial/Organizational (I/O) and the Resource-Based View (RBV) theories of orga-
nization (as discussed in Chapters 3 and 4, respectively) present different perspectives on
how best to capture and keep competitive advantage—that is, how best to manage strategi-
cally. Pursuit of competitive advantage leads to organizational success or failure. Strategic
management researchers and practitioners alike desire to better understand the nature and
role of competitive advantage in various industries.
Normally, a firm can sustain a competitive advantage for only a certain period due to
rival firms imitating and undermining that advantage. Thus it is not adequate to simply obtain
competitive advantage. A firm must strive to achieve sustained competitive advantage by