Download Chapter 06 Planning, Strategy, and Competitive Advantage

Chapter 06 - Planning, Strategy, and Competitive Advantage
Chapter 06
Planning, Strategy, and Competitive Advantage
CHAPTER CONTENTS
Learning Objectives
Key Definitions/Terms
Chapter Overview
Lecture Outline
Lecture Enhancers
Management in Action
Building Management Skills
Managing Ethically
Small Group Breakout Exercise
Be the Manager
Case in the News
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LEARNING OBJECTIVES
LO 6-1. Identify the three main steps of the planning process and explain
the relationship between planning and strategy.
LO 6-2. Differentiate between the main types of business-level strategies
and explain how they give an organization a competitive advantage
that may lead to superior performance.
LO 6-3. Differentiate between the main types of corporate-level strategies
and explain how they are used to strengthen a company’s businesslevel strategy and competitive advantage.
LO 6-4. Describe the vital role managers play in implementing strategies to
achieve an organization’s mission and goals.
KEY DEFINITIONS/TERMS
business-level plan: Divisional managers’
decisions pertaining to divisions’ long-term goals,
overall strategy, and structure.
differentiation strategy: Distinguishing an
organization’s products from the products of
competitors on dimensions such as product design,
quality, or after-sales service.
business-level strategy: A plan that indicates how
a division intends to compete against its rivals in an
industry
diversification: Expanding a company’s business
operations into a new industry in order to produce
new kinds of valuable goods or services.
concentration on a single industry: Reinvesting a
company’s profits to strengthen its competitive
position in its current industry.
exporting: Making products at home and selling
them abroad.
corporate-level plan: Top management’s decisions
pertaining to the organization’s mission, overall
strategy, and structure.
focused differentiation strategy: Serving only one
segment of the overall market and trying to be the
most differentiated organization serving that
segment.
corporate-level strategy: A plan that indicates in
which industries and national markets an
organization intends to compete.
focused low-cost strategy: Serving only one
segment of the overall market and trying to be the
lowest-cost organization serving that segment.
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franchising: Selling to a foreign organization the
rights to use a brand name and operating know-how
in return for a lump-sum payment and a share of the
profits.
related diversification: Entering a new business or
industry to create a competitive advantage in one or
more of an organization’s existing divisions or
businesses.
functional-level plan: Functional managers’
decisions pertaining to the goals that they propose
to pursue to help the division attain its businesslevel goals.
strategic leadership: The ability of the CEO and
top managers to convey a compelling vision of
what they want the organization to achieve to their
subordinates.
functional-level strategy: A plan of action to
improve the ability of each of an organization’s
functions to perform its task-specific activities in
ways that add value to an organization’s goods and
services.
strategy: A cluster of decisions about what goals to
pursue, what actions to take, and how to use
resources to achieve goals.
global strategy: Selling the same standardized
product and using the same basic marketing
approach in each national market.
strategic alliance: An agreement in which
managers pool or share their organization’s
resources and know-how with a foreign company,
and the two organizations share the rewards and
risks of starting a new venture.
hypercompetition: Permanent, ongoing, intense
competition brought about in an industry by
advancing technology or changing customer tastes.
strategy formulation: The development of a set of
corporate, business, and functional strategies that
allow an organization to accomplish its mission and
achieve its goals.
importing: Selling products at home that are made
abroad.
time horizon: The intended duration of a plan.
joint venture: A strategic alliance among two or
more companies that agree to jointly establish and
share the ownership of a new business.
SWOT analysis: A planning exercise in which
managers identify organizational strengths (S) and
weaknesses (W) and environmental opportunities
(O) and threats (T).
licensing: Allowing a foreign organization to take
charge of manufacturing and distributing a product
in its country or world region in return for a
negotiated fee.
synergy: Performance gains that result when
individuals and departments coordinate their
actions.
low-cost strategy: Driving the organization’s costs
down below the costs of its rivals.
unrelated diversification: Entering a new industry
or buying a company in a new industry that is not
related in any way to an organization’s current
businesses or industries.
mission statement: A broad declaration of an
organization’s purpose that identifies the
organization’s products and customers and
distinguishes the organization from its competitors.
multidomestic strategy: Customizing products and
marketing strategies to specific national conditions.
vertical integration: Expanding a company’s
operations either backward into an industry that
produces inputs for its products or forward into an
industry that uses, distributes, or sells its products.
planning: Identifying and selecting appropriate
goals and courses of action; one of the four
principal tasks of management.
wholly owned foreign subsidiary: Production
operations established in a foreign country
independent of any local direct involvement.
CHAPTER OVERVIEW
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This chapter explores the manager’s role both as planner and as strategist. First, we discuss the nature
and importance of planning, the kinds of plans managers develop, and the levels at which planning
takes place. Second, we discuss the three major steps in the planning process: (1) determining an
organization’s mission and major goals, (2) choosing or formulating strategies to realize the mission
and goals, and (3) selecting the most effective ways to implement and put these strategies into action.
We also examine several techniques, such as scenario planning and SWOT analysis that can help
managers improve the quality of their planning. We discuss a range of strategies managers can use to
give their companies a competitive advantage over their rivals. By the end of this chapter, you will
understand the vital role managers carry out when they plan, develop, and implement strategies to
create a high-performing organization.
LECTURE OUTLINE
Management Snapshot (pp. 175-176 of text)
Different Ways to Compete in the Soft Drink Business
What Makes It So Hard to Compete in an Industry?
Together Coca-Cola and PepsiCo control over 70% of the global soft drink market. Their success can be
attributed to the different strategies they adopted. Both companies built global brands by manufacturing the soft
drink concentrate that gives cola its flavor but then selling the concentrate in a syrup form to bottlers throughout
the world.The bottlers, who are responsible for distributing the colas, must sign an agreement that prohibits them
from distributing the products of its competitors. Both companies charge the bottlers a premium price for the
syrup. They then invest a large part of the profit in advertising and building brand awareness. Brand loyalty
allows both the companies to charge a premium. In the last decade, Gerald Pencer, an entrepreneur, came up
with a new strategy for competing against them. He produced a high-quality, low-priced cola, manufactured by
the Cott Corporation, that were sold as private-label house brand of major retail stores. He could implement this
strategy because he did not need to spend in advertising and distribution. Retailers were making a higher profit
and building their store brand image. It is currently the world’s largest supplier of retailer-branded soft drinks. It
is still focusing on its low-cost strategy and does not compete with Coke and Pepsi, which pursue differentiation
strategies.
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I. Planning and Strategy
A. Planning is a process managers use to identify and
select appropriate goals and courses of action for an
organization. The organizational plan that results from
the planning process details how managers intend to
attain those goals. The cluster of managerial decisions
and actions to help an organization attain its goals is its
strategy. Planning is a three-step activity:
1. The first step is determining the organization’s
mission and goals. A mission statement is a broad
declaration of an organization’s purpose that
identifies the importance of the organization’s
products to its employees and customers and
distinguishes the organization from its competitors.
2. The second step is formulating strategy.
3. The third step is implementing strategy.
B. The Nature of the Planning Process: To perform the
planning task, managers:
1. establish and discover where an organization is at
the present time,
2. determine where it should be in the future, and
3. decide how to move it forward to reach that future
state.
C. Why Planning Is Important
1. It is necessary to give the organization a sense of
direction and purpose.
2. It is a useful way of getting managers to
participate in decision making about the appropriate
goals and strategies for an organization.
3. It helps coordinate managers of the different
functions and divisions of an organization to ensure
that they all pull in the same direction and work to
achieve its desired future state.
4. It can be used as a device for controlling managers
within an organization.
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D. Henri Fayol said that effective plans should have four
qualities:
1. Unity means that at any time only one central
plan is put into operation.
2. Continuity means that planning is an ongoing
process.
3. Accuracy means that managers should attempt to
collect and use all available information.
4. The planning process should have enough
flexibility so that the plans can be altered and
changed if the situation changes.
E. Levels of Planning: In large organizations, planning
usually takes place at three levels of management:
corporate, business or division, and department or
functional.
1. At the corporate level are the CEO, other top
managers, and their support staff.
2. At the business level are the different divisions or
business units that compete in distinct industries of
the company, usually led by a divisional manager.
3. Each division has its own set of functions or
departments, such as manufacturing, marketing,
R&D, human resources, etc.
F. Levels and Types of Planning
1. The corporate-level plan contains top
management’s decisions pertaining to the
organization’s mission and goals, overall strategy,
and structure.
2. Corporate-level strategy indicates in which
industries and national markets an organization
intends to compete and why.
3. At the business level, the managers of each
division create a business-level plan detailing longterm divisional goals that will allow the division to
meet corporate goals and the division’s businesslevel strategy and structure.
4. Business-level strategy states the methods a
division or business intends to use to compete against
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its rivals in an industry.
5. A functional-level plan states the goals that the
managers of each function will pursue to help the
division attain its business-level goals.
6. Functional-level strategy is a plan of action to
improve the ability of each of an organization’s
functions to perform its task-specific activities in
ways that add value to an organization’s goods and
services.
G. Time Horizons of Plans: Plans differ in their time
horizon, the periods of time over which they are intended
to apply.
1. Long-term plans have a horizon of five years or
more.
2. Intermediate-term plans have a horizon between
one and five years.
3. Short-term plans have a horizon of one year or
less.
4. A corporate-level or business-level plan that
extends over several years is typically treated as a
rolling plan, a plan that is updated and amended
every year to take account of changing conditions in
the external environment.
H. Standing Plans and Single-Use Plans
1. Standing plans are used in situations in which
programmed decision making is appropriate.
Standing plans include a policy, a rule, and a
standard operating procedure.
2. Single-use plans are developed to handle
nonprogrammed decision making. They include:
a. Programs, which are integrated sets of plans
for achieving certain goals.
b. Projects, which are specific action plans
created to complete various aspects of a program.
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II. Determining the Organization’s Mission and
Goals
A. Defining the Business: To determine an
organization’s mission, managers must first define its
business by asking three questions:
1. Who are our customers?
2. What customer needs are being satisfied?
3. How are we satisfying customer needs?
B. Establishing Major Goals: Once the business is
defined, managers must then establish a set of primary
goals to which the organization is committed. These
goals give the organization a sense of direction or
purpose.
1. Strategic leadership, the ability of the CEO and
top managers to convey a compelling vision of what
they want the organization to achieve to their
subordinates.
2. Goals typically possess the following
characteristics:
a. They are ambitious, that is, they stretch the
organization, and require managers to improve
its performance capabilities.
b. They are challenging but realistic—a goal that
is impossible to attain may prompt managers to
give up.
c. The time period in which a goal is expected to
be achieved should be stated. This injects a sense
of urgency and acts as a motivator.
III. Formulating Strategy
A. In strategy formulation, managers work to develop
the set of strategies that will allow an organization to
accomplish its mission and achieve its goals.
1. A SWOT analysis is a planning exercise in which
managers identify internal organizational strengths,
weaknesses, opportunities, and threats. Based on a
SWOT analysis, managers at each level of the
organization identify strategies that will best position
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the organization to achieve its mission and goals.
a. The first step in SWOT analysis is to identify
an organization’s strengths and weaknesses that
characterize the present state of the organization.
b. The next step requires managers to identify
potential opportunities and threats in the
environment that affect the organization in the
present or may affect it in the future.
c. On completion of the SWOT analysis,
managers can begin developing strategies that
allow the organization to attain its goals by
taking advantage of opportunities, countering
threats, building strengths, and correcting
organizational weaknesses.
2. The Five Forces Model: Michael Porter’s five
forces model is another well-known model that helps
managers focus on the most important competitive
forces, or potential threats, in the external
environment. They are:
a. the level of rivalry among organizations within
an industry
b. the potential for entry into an industry
c. the power of large suppliers
d. the power of large customers
e. the threat of substitute products.
3. The term hypercompetition applies to industries
that are characterized by permanent, ongoing, intense
competition brought about by advancing technology
or changing customer tastes, fads and fashions.
IV. Formulating Business-Level Strategies
A. Michael Porter formulated a theory of how managers
can select a business-level strategy to give them a
competitive advantage in a particular market or industry.
According to Porter, to obtain higher profits, managers
must choose between two basic ways of increasing the
value of an organization’s products:
1. Differentiating the product to increase its value
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2. Lowering the costs of making the product
Porter also argues that managers must choose
between serving the whole market or serving just one
segment.
B. Low-Cost Strategy
1. With a low-cost strategy, managers try to gain a
competitive advantage by focusing the energy of all
the organization’s departments on driving the
organization’s costs down.
2. Organizations pursuing a low-cost strategy can sell
a product for less than their rivals, and still make a
good profit.
C. Differentiation Strategy
1. With a differentiation strategy, managers try to
gain a competitive advantage by focusing all the
energies of the organization’s departments on
distinguishing the organization’s products from those
of competitors.
2 As the process of making products unique and
different is expensive, organizations that successfully
pursue a differentiation strategy often charge a
premium price for their products.
D. “Stuck in the Middle”
According to Porter, a company cannot pursue a low-cost
and differentiation strategy simultaneously. He refers to
managers and organizations that have not selected
between the two as being “stuck in the middle.”
E. Focused Low-Cost and Focused Differentiation
Strategies
1. Porter identified two other business-level
strategies used by companies aiming to serve the
needs of customers in one or a few segments of the
market.
2. A company pursuing a focused low-cost strategy
serves one or a few segments of the market and aims
to be the lowest-cost company serving that segment.
3. A company pursuing a focused differentiation
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strategy serves just one or a few segments of the
market and aims to be the most differentiated
company serving that segment.
V. Formulating Corporate-Level Strategies
A. Corporate-level strategy is a plan of action that
determines the industries and countries an organization
should invest its resources in to achieve its mission and
goals.
B. Concentration on a Single Industry: This is a
corporate-level strategy in which a company reinvests its
profits to strengthen its competitive position in its current
industry. It is an appropriate strategy when managers see
the need to reduce the size of their organizations to
increase performance.
C. Vertical Integration: It is the corporate-level strategy
that involves a company expanding its business
operations either backward into a new industry that
produces inputs for the company’s products (backward
vertical integration) or forward into a new industry that
uses, distributes, or sells the company’s products
(forward vertical integration).
1. Managers pursue vertical integration because it
allows them to either add value to their products by
making them special or unique or to lower the costs
of making and selling them.
2. Although vertical integration can increase an
organization’s performance, it can also reduce an
organization’s flexibility to respond to changing
environmental conditions.
3. Vertical integration may sometimes reduce a
company’s ability to create value when the
environment changes. Therefore, many companies
outsource the production of component parts to other
companies and exit the components industry–by
vertically disintegrating backwards.
D. Diversification: It is the strategy of expanding
operations into a new business or industry in order to
produce new goods or services There are two main types
of diversification: related and unrelated.
1. Related Diversification: It is the strategy of
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entering a new business or industry to create a
competitive advantage in one or more of an
organization’s existing divisions or businesses.
a. Synergy is obtained when the value created by
two divisions cooperating is greater than the
value that would be created if the two divisions
operated separately.
b. To pursue related diversification successfully,
managers seek new businesses in which existing
skills and resources can be used to create
synergies.
2. Unrelated Diversification: Managers pursue
unrelated diversification when they establish
divisions or buy companies in new industries that are
not related to their current businesses or industries.
a. By pursuing unrelated diversification,
managers can buy a poorly performing company
and use their management skills to turn around
its business, thereby increasing its performance.
b. Unrelated diversification allows managers to
engage in portfolio strategy, which is the practice
of apportioning financial resources among
divisions to increase financial returns and spread
risks among different businesses.
E. International Expansion: Corporate-level managers
must decide on the appropriate way to compete
internationally.
1. If an organization needs to sell its products abroad
or compete in more than one national market,
managers must ask themselves to what extent should
their company customize its product’s features and
marketing campaign to suit differing national
conditions.
2. Global strategy is selling the same standardized
product and using the same basic marketing approach
in each national market.
3. If managers decide to customize products and
marketing strategies to specific national conditions,
they adopt a multidomestic strategy.
4. The major advantage of global strategy is the
significant cost savings associated with not having to
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customize products and marketing approaches. The
major disadvantage is that by ignoring national
differences, managers are vulnerable to local
competitors.
5. The major advantage of multidomestic strategy is
that by customizing product offerings and market
approaches, managers are able to gain market share
or charge higher prices. The major disadvantage is
that customization raises production costs and puts
the company at a price disadvantage.
F. Choosing a Way to Expand Internationally: Before
setting up foreign operations, managers must analyze the
forces in the environment of a particular country and
choose the best method to expand and respond to those
forces in the most appropriate way.
1. Importing and Exporting: A company engaged
in exporting makes products at home and sells them
abroad. A company engaged in importing sells
products at home that are made abroad (products it
makes itself or buys from other companies).
2. Licensing and Franchising:
a. In licensing, a company allows a foreign
organization to take charge of both
manufacturing and distributing one or more of its
products in the licensee’s country or region of
the world in return for a negotiated fee.
b. In franchising, a company sells to a foreign
organization the rights to use its brand name and
operating know-how in return for a lump sum
payment and a share of the franchiser’s profits.
3. Strategic Alliances: In a strategic alliance,
managers pool or share their organization’s resources
and know-how with those of a foreign company, and
the two organizations share the rewards or risks of
starting a new venture in a foreign company.
a. A joint venture is a strategic alliance among
two or more companies that agree to jointly
establish and share the ownership of a new
business.
b. Risk is reduced and a capital investment is
generally involved.
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4. Wholly Owned Foreign Subsidiaries: When
managers decide to establish a wholly owned foreign
subsidiary, they invest in establishing production
operations in a foreign country, independent of any
local direct involvement. This method is much more
expensive than the others but also offers high
potential returns.
.VI. Planning and Implementing Strategy
After identifying appropriate strategies, managers
confront the challenge of putting those strategies into
action. Strategy implementation is a five-step process:
1. Allocating responsibility for implementation to the
appropriate individuals or groups.
2. Drafting detailed action plans that specify how a
strategy is to be implemented.
3. Establishing a timetable for implementation that
includes precise, measurable goals linked to the
attainment of the action plan.
4. Allocating appropriate resources to the responsible
individuals or groups.
5. Holding specific individuals or groups responsible
for the attainment of corporate, divisional, and
functional goals.
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THE IMPORTANCE OF MISSION STATEMENTS
Mission statements can be defined as “enduring statements of purpose that distinguish one
organization from similar enterprises.” A mission statement should define the exact nature of a
company’s business for each of its group of stakeholders with which it is involved. Business Weeks
Magazine reports that firms with well-crafted mission statements have a 30% higher return on certain
financial measures than firms that lack such documents. In addition, a number of academic studies
suggest there is a positive relationship between mission statements and organizational performance.
Researchers suggest that a well-crafted mission statement can insure unanimity of purpose, arouse
positive feelings about the firm, provide direction, serve as a focal point, provide a basis for objectives
and strategies, and resolve divergent views among managers.
In every organization, there a differing views among managers regarding direction and appropriate
strategies. Discussing these issues in the course of developing a mission statement can help resolve
these divergent views. This can be especially important to firms facing restructuring, downsizing, or
faltering performance.
A mission statement should also be inspiring. The reader should want to be a part of an organization
after reading it. It should also be enduring, project a sense of worth, intent, and effectively
communicate shared organizational expectations. The intrinsic value of the firm’s product should also
be clearly articulated.
Some research suggests that there is a great deal of room for improvement in the mission statements of
some companies. The expected payoff from improving its mission statement is enhanced
communication, understanding, and commitment among managers and employees. This translates into
enhanced individual and organizational performance.
Adapted from” It’s Time to Redraft Your Mission Statement,” Journal of Business Strategy, Vol. 24,
No.1, p. 11.
SCENARIO PLANNING
Consider the horrors of 9/11 and the anthrax scares that followed, the Enron scandal, and the economic
jitters caused by heightened tensions in the Middle East. Each of these occurrences has contributed
significantly to the turbulence of the current business environment. If scenario planning was unable to
help managers foresee and prepare for these specific developments, does that mean that it should be
discredited as a managerial activity? Not if you understand what scenario planning is designed to do,
believes Paul Schoemaker, a research director at the University of Pennsylvania’s Wharton School. He
says scenario planning was never intended to be substitute for crisis planning. It is, in fact, the
opposite of a one-track preparation for a single event. If a company is using scenario planning to
prepare for specific crises, they are missing the point. The purpose of scenario planning is to broaden
the array of possible future paths that are being contemplated by an organization. Those future paths
can hold either opportunities or threats. If a company sees that they are on a different path than the one
they are expected to be on, scenario planning provides the option to switch.
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Below are a few examples of companies that have engaged in scenario planning. Past events have
taught them to prepare for the future by envisioning a variety of paths that may need to be traveled,
given the uncertainty in which we all live.
WHAT IF your risk profile shifts dramatically? U.S. insurers rethought risk-sharing in the wake of
1992's Hurricane Andrew, which caused a then-record $16.8 billion in losses. Primary insurers (think
Allstate) began to share risk more broadly among themselves and sell off more to reinsurers (think
Lloyds of London), which provide surplus coverage for major losses. These insurers upgraded their
computer models to predict payouts and avoid overextending themselves. As a result, the insurance
industry expects to fare better today even though the damages from future attacks could easily surpass
those of Hurricane Andrew.
WHAT IF demand suddenly falls off? How can a company quickly find allies who could help it
consolidate the industry and save jobs? Arrow Electronics (Melville, N.Y.), a distributor of electronic
components and computer products, faced such a dilemma when computer sales flattened in 1985.
Arrow, the industry's scrappy No. 2 player, was able to acquire the No. 3 player. This swift move
catapulted Arrow to the No.1 position, which it still holds. Chairman Stephen Kaufman says his
company's outward focus has enabled it to react more quickly than its competitors. Companies today
should take a cue from Arrow reviewing their competitive landscape and thinking through merger
scenarios.
WHAT IF global events disrupt your supply chain? Compare General Motors' plight in the days after
September 11th to Dell's. GM had to close down factories in Ontario due to parts delays at the
Canadian border. Dell, which has built one of the world's best supply chain networks, chartered an
airliner to fly parts from Taiwan to its Texas factory, ran factories day and night, and converted three
18-wheel trucks into mobile technology and support facilities in order to supply 24,000 computers to
New York City and Washington, D.C.
WHAT IF prices drop precipitously? The high-cost producer sets the price during boom times, and
most competitors make money. In difficult times, the low-cost producer sets the price, thereby
controlling the level of competitors' profit margins. Intel has cut
prices on its microprocessors by 35%. Dell halved its prices and still makes money—not so for some
of its competitors. The speed of the economy's decline underscores the importance of relative cost
position. Therefore, firms must scrutinize their purchasing costs and cycle times relative to their
competitors, detect the inefficient processes, and fix them.
Adapted from “Five Reasons why You Still Need Scenario Planning,” Harvard Management Update,
June 2002 and “How to Think Strategically in a Recession, Harvard Management Update, November
2001
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MANAGEMENT IN ACTION
Notes for Topics for Discussion and Action
DISCUSSION
1. Describe the three steps of planning. Explain how they are related.
The first step in planning involves determining the organization’s mission and goals. The second step
is formulating strategy in which managers analyze the organization’s current situation and then
conceive and develop the strategies necessary to attain the organization’s mission and goals. The third
step is strategy implementation, in which managers decide how to allocate the resources and
responsibilities required to put those strategies into action so that change will occur within the
organization. The first step, determining the organization’s mission and goals, guides the following
two steps in the planning process by defining which strategies are appropriate and which are
inappropriate.
2. What is the relationship among corporate-, business-, and functional-level strategies, and how do
they create value for an organization?
A corporate-level strategy is a plan that indicates in which industries and national markets an
organization intends to compete. A business-level strategy indicates how a division intends to compete
against its rivals in an industry. A functional-level strategy is a plan of action that managers of
individual functions can follow to improve the ability of each function to perform its task-specific
activities. In a planning process, it is important that there is a consistency in planning across the three
divisions. When consistency is achieved, the organization operates with increasing efficiency and
effectiveness.
3. Pick an industry and identify four companies in the industry that pursue one of the four main
business-level strategies (low-cost, focused low-cost, etc.).
Within the commercial airline industry, American Airlines attempts to differentiate itself by
maintaining a reputation of providing superior service on a national level. Jet Blue pursues a focused
differentiation strategy, since it also attempts to distinguish itself by providing superior service but
only in secondary hubs. Southwest has successfully executed a low cost strategy for many years.
Sprint Airlines is also pursuing a low cost strategy, but like Jet Blue, is restricted to servicing only
secondary hubs.
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4. What is the difference between vertical integration and related diversification?
Related diversification is a strategy that entails entering a new business or industry with the intention
of creating a competitive advantage by capitalizing on a current strength or core competency. Related
diversification adds values to the company when managers can find ways for its various divisions or
business units to share their valuable skills or resources so that synergy is created. Vertical integration
is a strategy that entails entering a new business that either produces inputs for the company’s products
(backward vertical integration) or assists in the distribution or selling of the company’s products
(forward vertical integration).
ACTION
6. Ask a manager about the kinds of planning exercises he or she regularly uses. What are the
purposes of these exercises, and what are their advantages or disadvantages?
The text discusses two types of strategy planning, SWOT Analysis and the Five Forces Model. SWOT
analysis is the process by which managers identify organizational strengths (S), weaknesses (W),
environmental opportunities (O) and threats (T.) Based on the results of this analysis, managers at the
different levels of the organization then select the corporate-, business-, and functional-level strategies
to best position an organization to achieve its mission and goals.
Michael Porter created the Five Forces Model to help managers identify forces in the environment that
are potential threats. He identified five principal factors that are major threats because they affect how
much profit organizations competing with the same industry can expect to make. These five forces
include:
1. The level of rivalry among organizations in an industry
2. The potential for entry into an industry
3. The power of the suppliers
4. The power of the customer
5. Substitute products.
7. Ask a manager to identify the corporate- and business-level strategies used by his or her
organization.
A corporate-level strategy is a plan of action concerning which industries and countries an
organization should invest its resources in to achieve its mission and goals. Corporate-level strategies
that managers use include: (1) concentration on a single business, (2) diversification, (3) international
expansion, and (4) vertical integration.
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A business-level strategy is a plan to gain a competitive advantage in a particular market or industry.
Managers choose to pursue one of four basic kinds of business-level strategies: a low-cost strategy, a
differentiation strategy, a focused low-cost strategy or a focused-differentiation strategy.
BUILDING MANAGEMENT SKILLS
How to Analyze a Company’s Strategy
Pick a well-known business organization that has received recent press coverage and that provides its
annual reports at its Web site. From the information in the articles and annual reports, answer these
questions:
1. What is(are) the main industry(ies) in which the company competes ?
Victory Suitings Inc. was a clothing line established in 1970. It was mainly aimed at businessmen and
executives. Its suits and other formal wear were in great demand among the business class. The
company began its production with shirts, trousers, and suits, but quickly moved onto ties and shoes.
In 2004, it decided to expand its market by establishing a clothing line exclusively for children called
Victory Kidswear. This establishment focused on casual and formal clothes for children. Today, it
attracts many customers toward both its clothing lines.
2. What business-level strategy does the company seem to be pursuing in this industry? Why?
When the company first started, it pursued a focused differentiation strategy, in which it only served
the business -class. Later, it used a differentiation strategy wherein it introduced formal wear for
children which were absent in most of its competitors. This allowed the company to appeal to all kinds
of consumers and to establish its own brand image.
3. What corporate level strategies is the company pursuing? Why?
The company is pursuing the corporate-level strategy of concentration on a single industry, wherein it
has never detached itself from the clothing line. This allowed the managers to increase its efficiency as
it is only focusing on a single industry. It has also used the related diversification strategy, wherein it
has tried to create a competitive advantage within its own organization. Through related
diversification, the company has obtained synergy, wherein the two divisions coordinate their actions
to improve the performance of the company.
4. Have there been any major changes in its strategy recently? Why?
The company has not made any recent changes to its strategies because focusing on a single industry
has allowed the company to satisfy all the customers’ needs. If there is an indication of an increased
level of competition, the company can pursue other strategies to expands its businesses.
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3. If bribery is common in a particular country, what effect would this likely have on the nation’s
economy and culture?
Bribery by its competitors, according to one U.S. government study, cost American business $11
billion in a single year. In Germany, a legislator estimated that companies in his nation spend as much
as $5.6 billion a year on bribes. Clearly, the diversion of such a large amount of any nation’s resources
from its production efforts creates inefficiency in its economy and is therefore counterproductive to
growth. Bribery also encourages a creeping erosion of honesty, trust, and other human values that rest
at the foundation of a healthy culture.
SMALL GROUP BREAKOUT EXERCISE
Low Cost or Differentiation?
Form groups of three or four people, and appoint one member as the spokesperson who will
communicate your findings to the class when called on by the instructor.
1. Using scenario planning, analyze the pros and cons of each alternative.
A. Option #1: Buy abroad, lower prices, and pursue low cost strategy.
PROS:
We can effectively compete with Target and Wal-Mart, focus upon attracting a larger volume of
customers, and thereby increase our market share. Also, relationships we build with foreign suppliers
may serve as means of allowing us to expand our sales into foreign markets.
CONS:
A great deal of time must first be devoted to research, if this strategy is to be implemented effectively.
We must first identify a reliable foreign manufacturer capable of producing high quality clothing at a
lower cost. We must then build a relationship with them and determine a way of maintaining control
over a manufacturing process that is occurring in a distant part of the world. Also, our marketing
department must develop less expensive ways of effectively reaching our target audience. Sufficient
resources (time, money, and knowledge) must be made available to conduct this research.
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Option #2: Differentiate and concentrate on high end of market.
PROS:
We can effectively compete with the mall boutiques that are stealing our high-end customers. We can
charge premium prices and justify them with the superior quality of our products. By focusing on the
high end of the market, we can build brand image of superiority and quality. Such a brand image can
help us build a cadre of loyal consumers, which contributes greatly to long-term viability of the
business.
CONS:
This strategy is expensive. It will probably require that we increase spending on product design or
R&D to differentiate their product, forcing costs upward as a result. We must spend more money on
advertising, in an attempt to create a unique image for our store. In addition, it may prove difficult to
develop a competitive advantage that allows the consumer to perceive us as superior and unique, in
comparison to well-established boutiques. Even if we match the high quality of their products, we may
not be able to provide the individual attention that is found at smaller stores. The entrenched brand
loyalty that many of these boutiques enjoy can be hard to overcome.
Option #3:
Pursue a low cost and differentiation strategy.
PROS:
The ability to pursue both strategies simultaneously will result in maximum profitability, since we can
justify premium pricing while also enjoying low costs. Also, we can attract two very different
categories of consumers – those seeking value and those seeking superior quality.
CONS:
We may be courting disaster, since it is very difficult to pursue both of these strategies at the same
time. Very few companies have successfully done so. Differentiation usually causes costs to rise,
which makes discount pricing prohibitive. Porter refers to this as “stuck-in-the-middle.”
2. Think about the various clothing retailers in your local malls and city, and analyze the choices they
have made about how to compete with one another along the f low cost and differentiation dimensions.
One way high-end retailers attempt to differentiate themselves is by providing a great deal of customer
service. Salespersons are always available to assist customers and answer their questions. Their return
policy is usually very liberal. Other examples of personalized customer service include keeping track
of customers’ birthdays and telephoning to alert them of special events or promotions related to their
favorite brands. These stores also use attractive physical appearance as a means of differentiating
themselves from their low cost competitors. Their stores are brightly lit and attractive, the aisles are
wider and carpeted, and soft music is played. Displays are attractive and merchandise is always neatly
arranged.
While both types of retailers hold sales to attract customers, low cost retailers engage in this
promotional technique much more frequently. The low cost competitors usually have fewer
salespersons available to assist customers and their buildings are less appealing visually.
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BE THE MANAGER
Questions
1. List the supermarket chains in your city and identify their strengths and weaknesses.
Answers to this question will vary, depending upon the area of the country in which the students
reside and the size of the local shopping area. You could recommend using a SWOT approach to
compare the various each of the competitors in your specific area. This industry has many different
types of competitors, ranging from mass merchandisers such as Meijers and Kmart to small mom-andpop grocers and farmers' markets. After identifying all of the competitors, students can begin analysis
of each using the planning tools presented in the chapter.
2. What business-level strategies are these supermarkets currently pursuing?
Discounters such as Cub and Aldi (www.aldifoods.com) are using a low-cost strategy. Specialty
retailers such as Wild Oats and Whole Foods are using a differentiation strategy.
3. What kind of supermarket would do best against the competition? What kind of business-level
strategy should it pursue?
The response to this question depends upon the variety of competitors identified in the first question.
Answers should include a rationale that explains why a particular strategy would work. For example,
if students feel that a new store should use a focused differentiation strategy to compete effectively,
possible justifications may include demographic data that is descriptive of households in the
surrounding community or awareness of a potentially lucrative market niche currently untapped by the
competition.
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CASE IN THE NEWS
Case Synopsis: Nestle’s Recipe for Juggling Volatile Commodity Costs: To counter rising
expenses, the Swiss food giant tightens operations and moves upscale.
Nestlé spends more than $30 billion a year on raw materials, including about 10% of the world’s
coffee crop, 12 million metric tons of milk, and more than 300,000 tons of cocoa. Prices for those
ingredients have been anything but stable.. That’s pushed chief executive officer Paul Bulcke to craft a
strategy that doesn’t depend on commodity prices falling. Instead, he’s working to squeeze costs out
of operations while raising prices and launching more upscale, higher-margin products in which raw
material costs account for a smaller portion of the retail price. Bulcke aims for a steady stream of
gradual price increases, regardless of whether ingredient costs rise or fall. To hold on to customers,
Nestlé tries to combat higher raw material costs by educating farmers globally on ways to boost crop
yields, and by wringing out internal savings. Creating premium products is another way Nestlé
minimizes the impact of commodity prices. The premium focus across the company means that when
Nestlé does have to swallow higher commodity costs, it’s hurt less than many rivals since its brands
command price premiums on their names alone
Questions for Discussion
1. What kind of business-level strategy is Nestle pursuing?
Nestle is pursuing a differentiation strategy. Nestle is able to command price premiums for its products
that allows the company to recoup their higher costs.
2. What kind of competencies do its CEO and managers possess that allow it to pursue these
strategies?
Nestle’s CEO and managers possess the ability to develop competencies in planning and R&D, and
then use them to gradually raise prices and make new products for the customers.
3. In what ways may its strategies allow it to outperform its rivals such as Kraft and General Mills?
The differentiation strategy used by Nestle made it difficult for other companies to enter the industry
because Nestle’s brand name attracted most of the customers. This also allowed premium pricing and
resulted in high profits.
Source: Roger O. Crockett, “How Procter & Gamble Plans to Clean Up.” Reprinted from
BusinessWeek online, April 2, 2009
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SUPPLEMENTAL FEATURES
Please see the following collections on the text website.
VIDEO CASE
State Farm Bank
Even organizations as large and successful as State Farm Insurance have to plan for the future.
Without planning, strategies can become obsolete as the environment changes, and organizations can
miss opportunities for growth. In short, an organization without adequate planning has no sense of
direction or purpose and risks becoming mired in the present or the past. For State Farm, planning
involved helping customers plan for their future.
State Farm has been a leader in the highly competitive insurance industry for more than 80 years. The
company, proclaimed in its ads as being “like a good neighbor,” has been at the forefront of insuring
customer liabilities. With 16,000 exclusive insurance agents across the United States, State Farm
management believed it had a perfect opportunity to add more financial services. The deregulation of
the banking industry in 1999 and the explosion of the Internet paved the way to achieving this goal.
Today, State Farm Bank offers traditional services like loans and deposit accounts, but without actual
bank buildings and at lower fees. Clients can do every typical banking transaction either on-line, over
the telephone via State Farm’s 24/7 call center, through ATM machines, or through the same agents
that sell the company’s insurance products.
State Farm’s move into banking was no simple matter. To protect consumers, it has had to meet
requirements keeping the line between insurance and banking very clear. The State Farm insurance
company provides insurance products and services and is required by law to be separate from the State
Farm banking company that offers loans and deposit instruments. The State Farm mutual fund
organization is yet another separate entity providing mutual funds through agents. Since State Farm
mixes multiple businesses, it doesn’t have the same flexibility as traditional banks. For example, State
Farm Bank doesn’t provide loans directly through automobile dealerships. It is subject to federal
banking laws rather than state laws because it is technically a thrift institution, a category that includes
savings banks and savings and loan organizations.
Diversifying into different businesses is creating new opportunities for State Farm, and banking
services is natural fit. Agents find that their insurance review is the perfect opportunity to bring up the
topic of financial services and to make customers aware of their company’s available services. Now
when clients buy a new car or change insurance coverage, an agent can offer to help them with the
loan; it’s a natural to talk about auto insurance and auto financing. Perhaps the best example of the
flexibility State Farm can offer customers is found in the aftermath of Hurricane Katrina. Customers
with mortgages through State Farm Bank received two 90-day extensions on loan payments. State
Farm also forgave the interest on credit cards and allowed customers to miss payments for a period of
time.
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Chapter 06 - Planning, Strategy, and Competitive Advantage
For now, State Farm Bank is focused on growing the business among current customers and adding
new ones, as clients refer friends and relatives. A unique bank with tremendous resources, State Farm
Bank sees excellent opportunities to expand business beyond retail customers.
Questions
1. Why is planning important for organizations like State Farm?
2. What kind of diversification took place when State Farm entered the banking field?
3. How does State Farm differentiate its banking services from those of its competitors?
Teaching Objective: To emphasize the importance of planning and understand the value of diversity
and differentiation strategy.
Summary: State Farm Bank resulted from the insurance company’s plan to diversify into the financial
services sector. With more than 16,000 agents selling insurance products nationwide, moving into
banking services was a natural fit, though not a simple transition. Now when State Farm agents talk to
customers about homeowner or auto insurance, they can also discuss financing options. State Farm
Bank presents tremendous growth opportunities for State Farm.
Questions:
1. Why is planning important for organizations like State Farm?
Planning is important to set a company’s goals and the future direction. Without planning, strategies
are haphazard and subject to changes in the environment. Organizations that don’t adequately plan
miss opportunities for growth.
2. What kind of diversification took place when State Farm entered the banking field?
Since State Farm sold insurance products, the company diversified into a related field. State Farm was
able to use its existing network of agents and its skills and resources to create a synergy with financial
services.
3. How does State Farm differentiate its banking services from those of its competitors?
State Farm does not sell its financial services via the traditional banking venue. Rather, services are
sold through agents, the 24/7 call center, and the Internet, and at a lower fee than competitors.
TEST YOUR KNOWLEDGE
Elements of Planning Process
SWOT Analysis
Porter’s Five Forces
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