Chapter 06 im

CHAPTER SIX PLANNING, STRATEGY, AND COMPETITIVE ADVANTAGE

OVERVIEW OF THE CHAPTER

In an uncertain competitive environment, managers must engage in thorough planning to find strategies that will help their organization to compete effectively. This chapter explores the manager’s role as both planner and as strategist. It discusses various elements of the planning process, different kinds of plans, strategy formulation, and the challenge of strategy implementation. This chapter also contains a detailed explanation of SWOT analysis and Michael Porter’s business level strategies.

LEARNING OBJECTIVES

1. Identify the three main steps of the planning process and the relationship between planning and strategy. (LO1)

2. Describe the different levels and types of planning and how they lead to competitive advantage. (LO2)

3. Differentiate between the main types of business-level strategy and explain how they lead to competitive advantage. (LO3)

4. Differentiate between the main types of corporate-level strategies and explain how they are used to strengthen a company’s business-level strategy and competitive advantage. (LO4)

MANAGERMENT SNAPSHOT: Different Ways to Compete in the Soft Drink Business

To compete in the soft drink industry, both Pepsi and Coke decided to build global brands by manufacturing soft-drink concentrate and selling it in a syrup form to bottlers throughout the world. Pepsi and Coke charge a premium price for the syrup and invest part of the proceeds into advertising to build and maintain brand awareness. The bottlers, who are responsible for producing and distributing the cola, must sign an exclusive agreement that prohibits them from distributing competing brands.

Gerald Pencer, CEO of Cott Corporation, used a different strategy to achieve success in this intensely competitive market. His company manufactured and bottled a low cost cola and sold it directly to major retail establishments as a private-label “house-brand”. He initiated his strategy in Canada and quickly expanded to the U.S. Retailers are attracted to Cott’s brand because it allows them to make 15 percent more profit than they receive from selling Coke or Pepsi. Pencer spends no money on advertising and takes advantage of the efficient distribution systems of national retailers such as Wal-Mart. So successful has Cott been in capturing the low price end of the market that his product has squeezed the profit margins of its giant rivals. Pepsi and Coke find it difficult to raise prices and often offer their products at sale prices, for fear that customers will switch to lower cost private label colas.

Jones and George, Essentials of Contemporary Management, Third Edition 6-1


LECTURE OUTLINE

I. PLANNING AND STRATEGY

Planning is a process that 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 decisions and actions that managers take to help an organization attain its goals is its strategy.

. Planning is a three-step activity.

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 organization’s products and customers and distinguishes the organization from its competitors.

The second step is formulating strategy. The third step is implementing strategy.

The Nature of the Planning Process (LO1) To perform the planning task, managers:

1. establish and discover when an organization is at the present time’2. determine where it should be in the future, and3. decide how to move it forward to rech that future state.

Why Planning Is Important

Planning is the activity of determining where an organization is at the present time and deciding where it should be in the future. Managers must consider the future and forecast what may happen in order to deal with future opportunities and threats. Planning is often difficult because managers must often deal with a complex and uncertain external environment, incomplete information, and bounded rationality.

Planning is important for four main reasons: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 to ensure that

they all are pulling the same direction.4. A plan can be used as a device for controlling managers within an organization.



Henri Fayol, the originator of the model of management discussed in Chapter One, said that effective plans should have four qualities: unity, continuity, accuracy, and flexibility.

Unity means that at any one time only one central plan is put into operation. Continuity means that planning is an ongoing process. Accuracy means that managers should attempt to collect all available information. The planning process should have enough flexibility so that plans can be altered and

changed if the situation changes.

Levels of PlanningIn large organizations, planning usually takes place at three levels of management: corporate, business or division, and department or functional.

At the corporate level are the CEO, other top managers, and their support staff.

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. Each division or business unit has its own set of divisional managers who control planning strategy for their particular division of unit.

Each division has its own set of functions or departments, such as manufacturing, marketing, R&D, human resources, etc.

Levels and Types of Planning (LO2) The corporate-level plan contains top management’s decisions pertaining to the

organization’s mission and goals, overall strategy, and structure. Corporate-level strategy indicates in which industries and national markets an organization intends to compete and why.

At the business level, the managers of each division create a business-level plan detailing long-term divisional goals that will allow the division to meet corporate goals and the division’s business-level strategy and structure. Business-level strategy states the methods a division or business intends to use to compete against its rivals in an industry.

Time Horizons of Plans



Plans differ in their time horizon, or intended duration.

Long-term plans have a horizon of five years or more. Intermediate-term plans have a horizon between one and five years. Short-term plans have a horizon of one year or less.

A corporate-level or business-level plan that extends over five years is typically treated as a rolling plan, a plan that is updated and amended every year to take account of changing in the external environment.

Most organizations have an annual planning cycle, linked to their annual financial budget.

Standing Plans and Single-Use Plans

Standing plans are used in situations in which programmed decision-making is appropriate. Standing plans include:

Standing operating procedures, which are used when the same situations occur repeatedly. In such situations, managers develop policies, rules and to control the way in which employees perform their tasks.

A policy is a general guide to action and a rule is a formal, written guide to action. A standard operating procedure is a written instruction describing the exact series of

actions that should be followed in a specific situation.

Single-use plans are developed to handle nonprogrammed decision-making. Single use plans include:

Programs, which are integrated sets of plans for achieving certain goals. Projects, which are specific action plans created to complete various aspects of a

program.

II. DETERMINING THE ORGANIZATION’S MISSION AND GOALS

Defining the BusinessTo determine an organization’s mission, managers must first define its business by asking three questions:

Who are our customers? What customer needs are being satisfied? How are we satisfying customer needs?



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 company a sense of direction and commitment. Strategic leadership, the ability of the CEO and top managers to convey a compelling vision of what they want subordinates to achieve is an important part of the process.

Goals typically possess the following characteristics: They are ambitious, stretch the organization, and require managers to improve its

performance capabilities. They are challenging but realistic—a goal that is impossible to attain may prompt

managers to give up. 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

In strategy formulation, managers work to develop the set of strategies that will allow an organization to accomplish its mission and achieve its goals. It begins with managers systematically analyzing an organization’s current situation and then developing strategies to accomplish its mission and achieve its goals.

SWOT analysis is a planning exercise in which managers identify organizational strengths, weaknesses, opportunities, and threats. Based upon a SWOT analysis, managers at each level of the organization identify strategies that will best position the company to achieve its mission and goals.

The first step in SWOT analysis is to identify an organization’s strengths and weaknesses that characterize the present state of the organization.

The next step requires managers to identify potential opportunities and threats in the environment that affect the organization at the present or may affect it in the future.

When SWOT analysis is completed, managers can begin developing strategies. These strategies should allow the organization to attain its goals by taking advantage of opportunities, countering threats, building strengths, and correcting organizational weaknesses.



Manager as a Person: Douglas Conant Reheats Campbell Soup

Campbell’s Soup is one of the oldest and best known companies in the world. However, as consumers sought healthier food choices, the condensed soup market declined by 20%, leading to a decline in market share and profits for Campbell’s. To turn the company around, Douglas Conant, the company’s CEO, initiated a thorough SWOT analysis. This analysis identified three growth opportunities: health and sports drinks, salsas, and chocolate products. Conant then assessed the internal capabilities of the company and found both strengths and weaknesses. Strengths included a first rate R & D department and huge economies of scales, while weaknesses included a conservative, risk adverse culture, outdated machinery, and employee levels that were too high.

Based on this analysis, Conant and his management team implemented several new strategies designed to turn around and revitalize the company. By 2004, analysts acknowledged improvement in Campbell’s performance but additional work was needed because operating margins were still shrinking. So the decision was made to introduce “low carb” products and to lower costs by further shrinking company operations. Conant’s goal is to raise profit margins to the level of his major competitors by 2007.

The Five Forces Model

Michael Porter’s Five Forces Model is another well known tool that helps managers focus on the most important external environmental forces that are potential threats. They are:

the level of rivalry among organizations within an industry, the potential for entry into a industry, the power of suppliers, the power of customers, and the threat of substitute products.

The term hypercompetition has be coined to describe those 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 (LO3)

Michael Porter also 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, managers must choose between two basic ways of increasing the value of an organization’s products: differentiating the product to add value or lowering the costs of value creation.Porter also argues that managers must choose between serving the whole market or serving just one segment. Based upon those choices, one of the four following strategies must be selected

Low-Cost Strategy 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.

Organizations pursuing a low-cost strategy can sell a product for less than their rivals and still make a profit.

Differentiation Strategy 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. Because 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.

“Stuck in the Middle” According to Porter, a company cannot pursue a low-cost and differentiation strategy

at the same time. He refers to managers who have selected between the two as being “stuck in the middle”. Exceptions to this rule exist.

Focused Low-Cost and Focused Differentiation StrategiesPorter identified two other strategies used by companies wishing to specialize by serving the needs of customers in only one or a few segments of the market.

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.

A company pursuing a focused differentiation strategy serves just a few segments and aims to be the most differentiated firm serving that market segment.



V. FORMULATING CORPORATE-LEVEL STRATEGIES (LO4)

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. Managers of effective organizations actively seek out new opportunities to use organizational resources to satisfy customer needs. Also, some managers must help their organizations respond to threats due to changing forces in the task or general environment.

The principal corporate-level strategies that managers use are: 1) concentration on a single industry, 2) vertical integration, 3) diversification and 4) international expansion. An organization benefits from pursuing any of these only when the strategy helps increase the value of the organization’s goods for customers

Concentration on a Single Industry

A corporate-level strategy aimed at concentrating resources in one business or industry is used by most organizations as they are beginning to grow and develop. Also, concentration on a single industry can be an appropriate strategy when managers see the need to reduce the size of their organization, in order to improve performance.Vertical Integration

Vertical integration 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).

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 associated with the creation of value creation.

Vertical integration can help an organization to grow rapidly, but it can be a problem because it can reduce an organization’s flexibility to respond to changing environmental conditions.

Some companies have exited the components industry, thus vertically disintegrating, by outsourcing the production of component parts to other companies.



Diversification

Diversification is the strategy of expanding operations into a new business or industry and producing new goods or services. There are two main types of diversification: related and unrelated.

Related Diversification

Related diversification is the strategy of entering a new business or industry to create a competitive advantage in one or more of an organization’s existing divisions or businesses.

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. In pursuing related diversification, managers seek new businesses in which existing skills and resources can be used to create synergies.

Unrelated Diversification

Managers pursue unrelated diversification when they enter new industries or buy companies in new industries that are not related to their current businesses or industries.

By pursuing unrelated diversification, managers can buy a poorly performing company and use their management skills to turn the business around, thereby increasing its performance.

Managers also engage in unrelated diversification to pursue portfolio strategy, which is the practice of apportioning financial resources among divisions in order to increase and financial returns and decrease risks.

Too much diversification can cause managers to lose control of their organization’s core business, according to research.

International Expansion

Corporate-level managers must decide on the appropriate way to compete internationally. If competing in more than one national market, managers must ask themselves to what extent their company should customize its product’s features and marketing plans to suit differing national conditions.



Global strategy is selling the same standardized product and using the same basic marketing approach in each national market. If managers decide to customize products to specific national conditions, they adopt a multidomestic strategy.

Both strategies have their advantages and disadvantages. The major advantage of a global strategy is the significant cost savings associated with not having to customize products and marketing approaches to differing national conditions. Its disadvantage is that by ignoring national differences, managers may leave themselves vulnerable to local competitors that do differentiate their products.

The advantages and disadvantages of a multidomestic strategy are the opposite of those of a global strategy.

Choosing a Way to Expand Internationally

A more competitive global environment has proven to be both an opportunity and threat to organizations. 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.

There are four basic ways of operating in the global environment:

Importing and Exporting : This method is least complex, has fewer risks, and has been made easier by the Internet.

Licensing and Franchising: 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. 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. Primarily manufacturers pursue licensing, whereas franchising is used primarily by service organizations.

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 and risks of starting a new venture in a foreign company. 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. Risk is reduced and a capital investment is generally involved.



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 investments. This method is much more expensive than others but also offers the highest potential returns.

VI. SUMMARY AND REVIEW

LECTURE ENHANCERS

Lecture Enhancer 6.1THE 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 such 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” Its Time to Redraft Your Mission Statement”, Journal of Business Strategy, Vol. 24, No.1, p. 11.



Lecture Enhancer 6.2CEOS, GOALS, AND STRATEGY

To say that CEOs are goal-oriented is an understatement. The best CEOs are driven. Because they are relentless in their pursuit of higher levels of excellence for their companies, they function in a goal-setting cycle. CEOs set aggressive goals, develop strategies that ensure their accomplishment, focus upon achievement until it happens, and then start the process all over again. Each year, Business Week Magazine compiles a list of the year’s top CEOs. Proven ability to meet the aggressive goals set for their organization is what qualifies a CEO for inclusion on this list. Below are the some of the CEOs who made Business Week’s list in 2002 and the lofty goals they achieved that landed them there.

Robert Tillman : In his six years as CEO of Lowe’s, Tillman has transformed this fast-growing hardware retail chain. The value of Lowe’s shares has climbed by more than 80% over the past two years, while rival Home Depot’s shares plummeted by 40% during the same period of time. What strategies did Tillman and his management team employ to achieve these financial goals? Because market research indicated that women initiated 80% of home improvement projects, he targeted women while Home Depot continued to focus upon men and building professionals. And because Lowe’s also has one of the industry’s best inventory systems, it is able to manage its costs effectively.

Michael O’Leary : When Europe’s airline industry deregulated several years ago, Michael O’Leary interpreted this change in the external environment as an opportunity and seized it. O’Leary started Ryanair Holdings, the first airline to offer discount airfares throughout Europe. His company is now the most profitable of its competitors and is expected to post a 49% profit increase in year 2002. What strategies did O’Leary and his management team employ to achieve these financial goals? He offers fares that are half of his rivals, uses small airports that allow planes to get in and out within 20 minutes, does not offer free meals, and even charges customers for a bottle of water.

John Thompson : While many of his competitors have either retrenched or closed their doors, the CEO of Symantec, a manufacturer of corporate software security systems, has been expanding his organization’s operations by acquiring other companies. What strategies has Thompson and his management team employed that allows his company to enjoy consistent growth in the wake of the recent tech crash? He improved his company’s retail channels to better exploit the increasing consumer demand for personal computer anti-virus software, while waiting for demand among corporate IT professionals to rebound.

Adapted from Business Week Magazine, January 13, 2003, pp. 62-72.



Lecture Enhancer 6.3SCENARIO 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 panning 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 that the one they expected to be one, scenario planning provides the option to switch.

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 just 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 chainnetworks, 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 cutprices 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



MANAGEMENT IN ACTIONNotes for Topics for Discussion and Action

Discussion1. Describe the three steps of planning. Explain how they are related. (LO1)

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 role of divisional and functional managers in the formulation of strategy? (LO2)

While ultimate responsibility for planning may rest with the top managers within an organization, all managers and many non-managers typically participate in the planning process.

4. Pick an industry and identify four companies in the industry that pursue one of the four main business-level strategies. (LO3)

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 also is pursuing a low cost strategy, but like Jet Blue, is restricted to servicing only secondary hubs.

5. What is the difference between vertical integration and related diversification? (LO4)

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).



Action6. 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? (LO2)

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), and weaknesses (W), and environmental opportunities (O) and threats (T.) Based upon 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 Force 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 industry2. the potential for entry into an industry3. the power of the suppliers4. the power of the customer 5. substitute products.

Porter emphasizes that managers should pay particular attention to these forces because they are the major threats that an organization will encounter and must quickly respond to in order to perform and generate high profits.

7. Ask a manager to identify the corporate-level, business-level, and functional-level strategies used by their organization.

(Note to Instructors: Students’ answers should include the following information.)

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.

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.



A functional-level strategy involves developing a plan of action to improve an organization’s departments’ ability to create value. It is concerned with the actions that managers of individual departments (such as manufacturing or marketing) can take to add value to an organization’s goods and services, which will then increase the value customers receive. Departments can either lower the costs of creating value to attract customers or add value to a product by finding ways to differentiate it from the products of other companies.

AACSB standards: 1, 3, 6, 9

NOTES FOR BUILDING MANAGEMENT SKILLS (LO 3, 4)How to Analyze a Company’s Strategy

(Note to Instructors: Prior to assigning this activity, it would be beneficial to ensure that your institution’s library maintains ten years of stockholder reports. Otherwise, it could be an extremely time consuming process for your students to track down this information. An alternative is to reduce the length of time covered by the assignment. Students’ answers will vary based on the company that they have chosen.)

1. What is the main industry that the company competes in?

2. What business-level strategy does the company seem to be pursuing in this industry? Why?

3. What corporate level strategies is the company pursuing? Why?

4. Have there been any major changes in its strategy recently? Why?


Managing Ethically 1. Either by yourself or in a group, decide if this business practice of paying bribes is ethical or unethical.

In a market economy, it is assumed that an organization’s ability to generate revenue is the result of its ability to develop a quality product with an attractive price and successfully market it. By distorting free market mechanisms, bribery, over the long run, can impede the ability of a nation’s economy to grow. Bribery also impedes economic growth by discouraging foreign direct investment from investors who are unwilling to incur the additional cost of paying a bribe to a middleman who adds no value to the end product. Allowing a small handful of government officials to benefit at the expense of an entire nation and its economy is clearly an unethical and unbalanced situation.



2. Should IBM allow its foreign divisions to pay bribes if all other companies are doing so?

The payment of bribes violates the U.S. Foreign Corruption Practices Act, which forbids payment of bribes by U.S. companies to secure contracts abroad. Companies in violation of this law can be prosecuted in the U.S. Also, IBM takes a rigorous stance toward ethical issues. Allowing the practice of bribery would send the wrong message to its employees. Mature ethical development requires that managers remain committed to their organization’s values, regardless of what is going on around them.

3. If bribery is common in a particular country, what effect would this likely have on its economy and culture?

Bribe-giving 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 away from 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.

AACSB standards: 1, 2, 3, 5, 7, 9

NOTES FOR SMALL GROUP BREAKOUT EXERCISE (LO3)Low Cost or Differentiation?

1. Analyze the pros and cons of each of these alternatives.

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.



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 concerning how to compete with one another along the dimensions of low cost and differentiation.



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 usually visually less appealing.


Notes for Be the Manager (LO2, 3)

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 you reside and the size of your 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 (www.kmart.com) to small mom-and-pop 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 (www.cub.com) and Aldi (www.aldifoods.com) are using a low-cost strategy. Specialty retailers such as Wild Oats(www.wildoats.com) and Whole Foods Market (www.wholefoods.com) 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?


http://www.wholefoods.com/

http://www.wildoats.com/

http://www.aldifoods.com/

http://www.cub.com/

http://www.kmart.com/


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.


BUSINESS WEEK CASES FOR DISCUSSION

Case Synopsis: Lily’s Labs Go Global

Eli Lily is moving much of its research and development work, including clinical trials, to China, India, and the former Soviet Bloc because it is cheaper. Lily has found the quality of the work in those nations to be as good as that in the U.S. or western Europe. Like other drug makers, Lily is getting squeezed by the rising cost of developing drugs. To address this problem, the company helped start a lab in Shanghai in 2003 that works exclusively for it and has a staff of 230 chemists. According to the company’s CEO, “The research is less expensive per patient outside of the U.S., but at the same high quality. It also helps speed up the development process. In our business, time is money”. There are concerns that the company’s experimental drugs could be ripped off in countries where intellectual property isn’t always respected and counterfeit drugs are common. According to the CEO, this has not been a problem.

Questions:1. Why is Lilly moving some of its value-creation operations overseas?

The cost of developing drugs is rising. Lilly has found that it can reduce costs by moving some of its operations overseas. According to the company’s CEO, research is less expensive per patient outside of the United States.

2. How is this changing its corporate level strategy?

Lilly has sold its products around the globe for several decades. However, by also moving some components of its operations abroad, it is expanding the breadth of its global operations.

3. How is this changing its business level strategy?Moving research activities abroad will help Lilly carve and then strengthen a position for itself in its industry as a low cost competitor.



Case Synopsis: Toyota: Way, Way Off-Road

While Detroit carmakers have shed almost all of their non-core business assets, Toyota is doing the opposite. It owns dozens of businesses that have nothing to do with automobile manufacturing. Examples of unrelated businesses owned by Toyota include a resort development company (77% interest), its financial services arm (100% interest), a company that provides consulting services for hotels, wedding halls, and restaurants (100% interest), a company that offers support services to medical institutions (51% interest), a roof garden company (70% interest), and a grower and processor of sweet potatoes (90%interest). Toyota says it has found many synergies among its unrelated businesses, and when possible, it uses components and processes developed for auto making in its out businesses.

Questions:1. In owning these different businesses Toyota is pursuing the three kinds of corporate

level strategies discussed in the chapter. What are the strategies? Why is it pursuing each of them?

Toyota’s 100% ownership of a financial services company and advertising agency are examples of forward vertical integration. Its 60% ownership in Panasonic EV Energy, which develops batteries for hybrids, is an example of backward vertical integration. Its partial ownership of a roof garden company, a resort development company, and manufacturer of prefab housing are examples of unrelated diversification.

Toyota, a leader in its industry, saw an opportunity to create additional value by producing some of its inputs (hybrid batteries for its Prius) as well as the marketing and selling of its outputs (advertising and financing the sale of its autos.) Toyota realizes that few of its non-auto businesses are huge contributors to its bottom line. The company says the aim of such sidelines is to use its technology and intellectual assets to enrich society.

2. In what ways could Toyota use its skills to enter new businesses and industries to create a significant amount of value for the company?

Toyota could consider purchasing a controlling interest in additional companies that provide it with the inputs needed to manufacture autos (backward vertical integration). Increased control over such companies might help Toyota drive down costs of some of its component parts, thereby contributing to value creation. It should also pursue opportunities for related diversification by entering new businesses that would take advantage of current manufacturing and/or marketing strengths.




Chapter 6 Video Case Teaching Note

Has the U.S. Auto Industry Lost Its Way?

Teaching Objective: Illustrate the difficulty of remaining a strong contender in a highly competitive industry. Also, illustrate the significance of effective strategic planning.

Video Summary: This video focuses upon General Motors, the tremendous losses it has sustained, and the impact on various stakeholder groups as the company tries to deal with those losses. How foreign automakers, especially Toyota, have influenced the industry is emphasized. The role of the UAW and what U.S. automakers need to do to regain competitiveness is also explored. Questions:

1. Why is planning important at American auto manufacturing companies? What role will planning play in efforts to turn these firms around?

. Essentially, planning is ascertaining where an organization is at present, determining where it should be in the future, and then deciding how to move it forward. The absence of a plan often results in hesitations, false steps, and mistaken changes of direction that can hurt an organization or even lead to disaster. Planning that emphasizes innovation and keen market assessment is a critical component of any effort to turn American auto manufacturers around.

2. Could SWOT analysis be used by Ford or GM? How? Should they diversify?

Because SWOT analysis is the first step in strategy formation, both Ford and GM should use it. Both companies are painfully aware of their weaknesses and threats. Perhaps a SWOT analysis would help executives focus more closely on strengths and opportunities that could be further exploited for gain. Because both companies are engaged in a struggle to regain a position of strength in their existing business and may need to downsize their organizations to do so, a diversification strategy is inappropriate at the present time. Both Ford and GM should continue to concentrate on strengthening their core business of automobile manufacturing.

3. Why is it important for the firms to differentiate themselves from competition?

Managers use a differentiation strategy as a means of establishing and maintaining a competitive advantage. Differentiating their vehicles from those of competitors like Toyota and Honda could help U.S. automakers regain sales.


Chapter 06 im

Business

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