kin20555_ch06_158-187.indd Page 158 25/09/14 9:00 PM f-500 6 /202/MH02260/kin20555_disk1of1/0077720555/kin20555_pagefiles Strategic Management How Exceptional Managers Realize a Grand Design V Major Questions You I Should Be Able to Answer C 6.1 What Is Effective Strategy? K Major Question: What is strategic positioning, and what are the E that underlie it? three principles R 6.2 The Strategic-Management Process S Major Question: What’s the five-step recipe for the strategicmanagement ,process? 6.3 Establishing the Mission & the Vision T Major Question: What are the characteristics of good mission E and vision statements? 6.4 Assessing the Current Reality R Major Question: What tools can help me describe where the D from a competitive point of view? organization stands 6.5 Formulating the Grand Strategy A Major Question: How can three techniques—Porter’s four competitive strategies, diversification and synergy, and the BCG matrix—help 1 me formulate strategy? 6.6 A R 1 & Controlling Strategy: Execution Implementing 9 How does effective execution help managers Major Question: during the strategic-management process? 1 T S kin20555_ch06_158-187.indd Page 159 25/09/14 9:00 PM f-500 /202/MH02260/kin20555_disk1of1/0077720555/kin20555_pagefiles the manager’s toolbox Being a Successful Manager: Look beyond the Fads, Be Willing to Make Painful Decisions “How can we build organizations that are as nimble as change itself—not only operationally, but strategically?” asks management professor Gary Hamel.1 Many people deal with uncertainty by succumbing to fads, or short-lived enthusiasms, suggests the author of a book on why smart people fall for fads.2 A fad, he says, “is seen as the way of the future, a genuine innovation that will help solve a big problem. . . . V A lot of the attraction of a fad is that if you embrace it I early, then you feel that you’re ahead of other people, 3 that you’re hipper and maybe smarter than they are.” C Fads are evident in the stream of business books K touting the newest cure-all. Still, some ideas that started E out as management fads survive. Why? Because they’ve been found to actually work. One of these is R strategic planning, as we describe in this chapter. S Two lessons of successful managers: Lesson 1—In an Era of Management Fads, Strategic Planning Is Still Tops , also continued to be popular, also favored by about 80%.4 Strategic planning is concerned with developing a comprehensive program for long-term success. Mission statements describe the organization’s purpose and vision statements describe its intended long-term goal. Successful managers know how to use all of them. Lesson 2—Managers Must Be Willing to Make Painful Decisions to Suddenly Alter Strategy Another lesson is that in a world of discontinuous change, managers must always be prepared to make large, painful decisions and radically alter their business design—“exiting businesses, firing people, admitting you were wrong (or at least not omniscient),” as writer Geoffrey Colvin puts it. “So the future will demand ever more people with the golden trait, the fortitude to accept and even seek psychic pain.”5 For Discussion Earlier we described the impor- Business consultant Bain & Company annually con- T ducts a survey on the most popular management tools. The 2013 survey found that the most widely E used management tool in 2012 was used 12 or even A 14 years earlier—namely, strategic planning, thought to be effective by about 80% of the senior managers R surveyed. The use of mission and vision statements D tance of practicing evidence-based management, with managers “seeing the truth as a moving target, always facing the hard facts, avoiding falling prey to half-truths, and being willing to admit when they’re wrong and change their ways.”6 Do you think you would have this mind-set when thinking about the overall direction of your organization or work unit? R A 1 1 What’s Ahead in This Chapter 9 1 T We begin by discussing strategic positioning and the five steps in the strategicS management process. We then describe competitive intelligence, SWOT analysis, fore- fore ecasst casting, benchmarking, and Porter’s model for industry analysis. We next consider Porter’s four competitive strategies, single-product versus diversification strategies, and the BCG matrix. Finally, we discuss execution. kin20555_ch06_158-187.indd Page 160 25/09/14 9:00 PM f-500 160 PART 3 6.1 MAJOR QUESTION ? /202/MH02260/kin20555_disk1of1/0077720555/kin20555_pagefiles Planning What Is Effective Strategy? What is strategic positioning, and what are the three principles underlying it? THE BIG PICTURE Strategic positioning attempts to achieve sustainable competitive advantage by preserving what is distinctive about a company. It is based on the principles that strategy is the creation of a unique and valuable position, requires trade-offs in competing, and involves creating a “fit” among activities. Harvard Business School professor Michael Porter “is the single most V important strategist working today, and maybe of all time,” raved Kevin I firm McKinsey & Co.7 He is “the most famous and Coyne of consulting influential business Cprofessor who has ever lived,” says Fortune writer Geoffrey Colvin. “He is widely and rightly regarded as the all-time K 8 greatest strategy guru.” Is this high praise E deserved? Certainly Porter’s status as a leading authority on competitive strategy is unchallenged. The Strategic Management Society, R for instance, voted Porter the most influential living strategist. We referSto him repeatedly in this chapter. , Strategic Positioning & Its Principles Strategy guru. Harvard Business School professor Michael Porter suggests that every company is subject to five forces: its current competitors, possible new competitors, the threat of substitutes for its products or services, the bargaining power of its suppliers, and the bargaining power of its customers. Operating within that five-forces framework, a company must choose the right strategy—or be beaten by competitors. Do you think there are other forces that are equally important in forming strategy? According to Porter, T strategic positioning attempts to achieve sustainable competitive advantage by preserving what is distinctive about E “performing different activities from rivals, or a company. “It means,” he says, performing similar activities in different ways.”9 A Three key principles underlie strategic positioning:10 R D 1. Strategy Is the Creation of a Unique & Valuable Position Strategic R position emerges from three sources: A Strategic position can be derived from serving ■ Few needs, many customers. ■ ■ the few needs of many customers. Example: Jiffy Lube provides only lubricants, but it provides them to all kinds of people with all kinds of motor 1 vehicles. Broad needs, few customers. A strategic position may be based on serving 1 the broad needs of just a few customers. Example: Wealth management and 9 investment advisory firm Bessemer Trust focuses exclusively on high–net 1 worth clients. Broad needs, many customers. Strategy may be oriented toward serving the T broad needs of many customers. Example: National movie theater operator S only in cities with populations of fewer than Carmike Cinemas operates 200,000 people. 2. Strategy Requires Trade-offs in Competing As a glance at the preceding choices shows, some strategies are incompatible. Thus, a company has to choose not only what strategy to follow but what strategy not to follow. Example: Neutrogena soap, points out Porter, is positioned more as a medicinal product than as a cleansing agent. In achieving this narrow positioning, the company gives up sales based on deodorizing, gives up large volume, and accordingly gives up some manufacturing efficiencies. kin20555_ch06_158-187.indd Page 161 25/09/14 9:00 PM f-500 /202/MH02260/kin20555_disk1of1/0077720555/kin20555_pagefiles Strategic Management CHAPTER 6 161 3. Strategy Involves Creating a “Fit” among Activities “Fit” has to do with the ways a company’s activities interact and reinforce one another. Example: A mutual fund such as Vanguard Group follows a low-cost strategy and aligns all its activities accordingly, distributing funds directly to consumers and minimizing portfolio turnover. However, when the short-lived (1993–1995) Continental Lite airline tried to match some but not all of Southwest Airlines’ activities, it was not successful because it didn’t apply Southwest’s entire interlocking system. Does Strategic Management Work for Small as Well as Large Firms? You would expect that a large organization, with its thousands of employees and even V larger realm of “stakeholders,” would benefit from strategic management and planning. After all, how can a huge company such as Bank of America run without some I sort of grand design? C But what about smaller companies (under 500 employees), which account for about half of private-sector employment and two-thirds K of net new jobs in recent years?11 One analysis of several studies found that strategic planning was appropriate E not just for large firms—indeed, companies with fewer than 100 employees could benefit as well, although the improvement in financialR performance was small. Nevertheless, the researchers concluded, “it may be that the Ssmall improvement in performance is not worth the effort involved in strategic planning unless a firm is in a very , competitive industry where small differences in performance may affect the firm’s survival potential.”12 ● T E A RConsumer a Captive” EXAMPLE Comparing Strategies: Big-Company “Make the versus Small-Firm “Offer Personal Connections” D R Small-Company Ways. “I don’t feel they behave in a way that I Big companies—especially big-tech companies such as Amazon, Google, or Apple—“are no longer content simply to enhance A want to support with my consumer dollars,” says Chicago profes16 part of your life,” says one report. “The new strategy is to build a device, sell it to consumers, and then sell them the content to play on it. And maybe some ads too.”13 1 1 Big-Company Ways. That is, the idea is to get consumers tied not just to a brand or device or platform but to make them captive 9 of the company’s ecosystem—and to get them connected “as 1 tightly as possible so they and their content are locked into one system,” says analyst Michael Gartenberg.14 Thus, Amazon, for T example, sells the Kindle e-book readers at a low price so that it S can then sell e-books. “Amazon is in a race to embed itself into the fabric of world-wide commerce in a way that would make it indispensable to everyone’s shopping habits,” says one columnist, “and to do so before its rivals wise up.”15 Similarly, Apple enables users to easily create book content on its iBook Authors book-creation tool, but authors will only be able to sell the results through Apple. Google attempted to promote its Google Nexus smartphone as a platform for selling Google Wallet, a cell-phone payment system. sor Harold Pollack about big Internet retailers like Amazon. So instead, Pollack started buying from small online retailers. Their prices are often higher, but he says he now has a clear conscience. Whereas the strategy of big e-commerce companies is to try to tightly connect consumers with discounted prices, free shipping, and easy-to-use apps, the strategy of small retailers—like Hello Hello Books in Maine—is to discourage price comparisons (as in creating “buy it where you try it” campaigns or refusing to carry popular items carried by big retailers), offer freebies, and attempt to establish a personal or emotional connection with customers. They also try to exploit the sympathies of shoppers to “support the little guy,” as Pollack is doing. YOUR CALL Considering the proliferation of price comparison sites (Pricegrabber.com, Bizrate.com, FreePriceAlerts.com) that will usually direct consumers to big e-commerce retailers, do you think low prices will always win in the end? Is there any strategy a small retailer can take to maintain an advantage?17 kin20555_ch06_158-187.indd Page 162 25/09/14 9:00 PM f-500 162 PART 3 6.2 MAJOR QUESTION ? /202/MH02260/kin20555_disk1of1/0077720555/kin20555_pagefiles Planning The Strategic-Management Process What’s the five-step recipe for the strategic-management process? THE BIG PICTURE The strategic-management process has five steps: Establish the mission and the vision. Assess the current reality. Formulate the grand strategy. Implement the strategy. Maintain strategic control. All the steps may be affected by feedback that enables the taking of constructive action. When is a good time to begin the strategic-management process? Often it’s touched off by some crisis. V Back before General Motors recalled 25.69 million vehicles (in the first six months I of 2014 alone) with defective ignition switches, Toyota went through its own recall crisis. In 2009 and 2010 the Japanese automaker encountered severe quality problems C involving what seemed to be uncontrollable acceleration in its automobiles. Toyota Motor’s President Akio Toyoda K concluded that these problems were partly due to the company’s “excessive focus on market share and profits,” requiring that the company E reorient its strategy toward quality and innovation.18 For Edward Lampert, who in R megaretailer Sears Holdings, the pressure was felt 2005 merged Kmart and Sears into in years of underperforming returns S despite cost cutting and store closures.19 , EXAMPLE T Crisis Leading to the Strategic-Management Process: E Starbucks Reclaims Its Soul A Among the many things that Starbucks has going for it is this: it survived a near-death experience.20 Today’s CEO, Howard Schultz, joined the Seattle-based company as marketing director in 1982, when it was only a small chain selling coffee equipment. Over nearly two decades, he gained control and, inspired by the coffee houses of Europe, transformed the company into a comfortable “third place” between home and work, a place with a neighborhood feel selling fresh-brewed by-the-cup lattes and cappuccinos. By 2000, Starbucks (named for the first mate of the whaling ship in Herman Melville’s Moby Dick) had become the world’s largest specialty coffee retailer, with 3,501 stores, 78% of them in the United States.21 “Starbucks became, for many of us, what we talk about when we talk about coffee,” wrote one reporter. “It changed how we drink it (on a sofa, with Wi-Fi, or on the subway), how we order it (‘for here, grande, two-pump vanilla, skinny extra hot latte’), and what we are willing to pay for it,” such as $4.99 for a Frappuccino.”22 Schultz Steps Down. Schultz stepped down as CEO in 2000 (remaining as chairman), and for a while the business continued to thrive. Then two things happened that provoked a crisis. First, the company “lost a certain soul,” says Schultz, as the management became more concerned with profits than store atmosphere and company values and extended existing product lines rather than R creating new ones. Second, as the Great Recession took hold in 2007, D tight-fisted consumers abandoned specialty coffees, causing the stock price to nosedive. In January 2008, after an eightR year absence, Schultz returned as CEO. A The Reinvention Begins. “I didn’t come back to save the company—I hate that description,” Schultz told an interviewer. “I 1 back to rekindle the emotion that built it.”23 came 1Among the risks he took to restore the company’s luster, he closed 800 U.S. stores, laid off 4,000 employees, and let go 9 top executives. As a morale booster, he flew 10,000 store most managers to New Orleans, recently destroyed by Hurricane 1 Katrina. Along with attending strategy sessions, they bonded in T community-service activities, contributing thousands of volunteer hours to helping to restore parts of the city. “We wanted to S give back to that community post-Katrina,” says Schultz, “and remind and rekindle the organization with the values and guiding principles of our company before we did a stitch of business.” Later he closed all U.S. stores for half a day so baristas could be retrained in how to make espresso. The Payoff. After a couple of years, the company turned around, the result of better operations, modernized technology, a reinvigorated staff, and innovations such as Via premium instant kin20555_ch06_158-187.indd Page 163 25/09/14 9:00 PM f-500 /202/MH02260/kin20555_disk1of1/0077720555/kin20555_pagefiles Strategic Management CHAPTER 6 163 chain; enabled customers to pay for coffee via a mobile-payment app; and even launched alcohol sales.)24 In mid-2014, it was serving more than 70 million customers face to face, in 20,200 stores in 64 countries, and its stock price was nine times what it had been in 2008.25 Schultz feels strongly that “there’s an opportunity for businesses to demonstrate a role in society that’s beyond profitability,” providing health insurance even for temps, creating tuition reimbursement, helping to raise loans for small businesses. V Starbucks in China. This coffee cafe is located in Chengdu in Sichuan I province. C K coffee. (Since then it has acquired its own Costa Rican farm to E develop proprietary coffee varieties; teamed with Oprah Winfrey to introduce Oprah Chai tea; acquired the La Boulange bakery R S , YOUR CALL Some critics feel Starbucks is the symbol of “affordable luxury.” If we can’t afford a McMansion or a Lexus, says one observer, we may be “willing to make that $5 splurge at Starbucks simply because it makes us feel a bit better about ourselves.”26 Thus, despite the innovation in products, attempts to rekindle the cozy neighborhood café, and emphasis on positive social values, do you think another economic downturn could alter Starbucks’s fortunes? The Five Steps of the Strategic-Management Process The strategic-management process has five steps, plusTa feedback loop, as shown below. (See Figure 6.1.) Let’s consider these five steps. E FIGURE 6.1 A R D 3. Formulate R the grand strategy A The strategic-management process The process has five steps. 1. Establish the mission and the vision 2. Assess the current reality 4. Implement the strategy 1 1 9 1 if necessary, based on feedback Feedback: Revise actions, T Step 1: Establish the Mission & the Vision We S discussed mission and vision in Chapter 5 and explain them further in the next section. The mission, you’ll recall, is the organization’s purpose or reason for being, and it is expressed in a mission statement. An organization’s vision is its long-term goal describing what it wants to become, and it is expressed in a vision statement, which describes its long-term direction and strategic intent. Step 2: Assess the Current Reality The second step is to do a current reality assessment, or organizational assessment—to look at where the organization stands and see what is working and what could be different so as to maximize efficiency and effectiveness in achieving the organization’s mission.27 Among the tools for assessing 5. Maintain strategic control kin20555_ch06_158-187.indd Page 164 25/09/14 9:00 PM f-500 164 PART 3 /202/MH02260/kin20555_disk1of1/0077720555/kin20555_pagefiles Planning the current reality are SWOT analysis, forecasting, benchmarking, and Porter’s model for industry analysis, all of which we discuss in Section 6.4. Step 3: Formulate the Grand Strategy The next step is to translate the broad mission and vision statements into a grand strategy, which, after the assessment of the current reality, explains how the organization’s mission is to be accomplished. Three common grand strategies are growth, stability, and defensive, as we’ll describe. Strategy formulation is the process of choosing among different strategies and altering them to best fit the organization’s needs. Formulating strategy is a time-consum- ing process both because it is important and because the strategy must be translated into more specific strategic plans, which determine what the organization’s long-term goals should be for the next 1–5 years. In Section 6.5, we consider the three common grand strategies (growth, stability, V and defensive); Porter’s four competitive strategies, single-product strategy versus diversification strategy, and the BCG matrix. I C Step 4: Implement the Strategy Putting strategic plans into effect is strategy implementation. Strategic planning K isn’t effective, of course, unless it can be trans- lated into lower-level plans. This means that top managers need to check on possible E roadblocks within the organization’s structure and culture and see if the right people and control systems are availableRto execute the plans.28 S Strategic control , of strategy and making adjustments, if necessary. consists of monitoring the execution Step 5: Maintain Strategic Control: The Feedback Loop To keep strategic plans on track, managers need control systems to monitor progress and take corrective action—early and rapidly—when things start to go awry. Corrective action constitutes a feedbackTloop in which a problem requires that managers return to an earlier step to rethink E policies, redo budgets, or revise personnel arrangements. A We describe strategic implementation and strategic control in Section 6.6. We discuss the details of the steps R in the strategic-management process in the rest of this chapter. ● D R A A public library’s new strategy. As Americans spend more time online, public libraries are having to find new strategies for remaining relevant. After the Skokie Public Library near Chicago put its reference collection online, it turned the newly freed-up space into a “fully functioning, Wi-Fi equipped office suite, capable of accommodating more than 50 people,” according to one report. “Users who can’t afford their own office space reserve it by the hour.”29 Can you think of other public or nonprofit institutions that need to reinvent themselves because information technology has altered their original purpose? 1 1 9 1 T S kin20555_ch06_158-187.indd Page 165 26/09/14 9:14 AM f-479 /202/MH02260/kin20555_disk1of1/0077720555/kin20555_pagefiles Strategic Management 6.3 MAJOR QUESTION ? CHAPTER 6 Establishing the Mission & the Vision What are the characteristics of good mission and vision statements? THE BIG PICTURE A mission statement should express the organization’s purpose or reason for being. A vision statement should be positive and inspiring, and it should stretch the organization and its employees to achieve a desired future state that appears beyond its reach. Why am I here? What am I trying to do? What do I want to become? V These are bedrock questions that you should ask about your education. They are also the kind that top managers should ask about theirIorganizations, whether profit or not-for-profit, as expressed in the mission statement and vision statement. C If you were called on to write a mission statement and a vision statement, how K would you go about it? E Characteristics of a Good MissionRStatement The mission, we said, is the organization’s purpose or S reason for being; it is expressed in a mission statement. For example, the mission statement of McGraw-Hill, publisher , of this book, is as follows: To serve the worldwide need for knowledge at a fair profit by gathering, evaluT ating, producing, and distributing valuable information in a way that benefits our customers, employees, authors, investors, and our E society. A R business. Do small, familyD Family owned businesses need a mission and a vision statement? R statement If no, why not? How many smallA business owners with firms of, say, 1 1 9 1 T S five employees or fewer, would you guess have taken the time to compose such statements? 165 kin20555_ch06_158-187.indd Page 166 25/09/14 9:00 PM f-500 166 PART 3 /202/MH02260/kin20555_disk1of1/0077720555/kin20555_pagefiles Planning Characteristics of a Good Vision Statement An organization’s vision, its long-term goal of what it wants to become, is expressed in a vision statement, which describes its long-term direction and strategic intent. For example, Walt Disney’s original vision for Disneyland went in part like this: Disneyland will be something of a fair, an exhibition, a playground, a community center, a museum of living facts, and a showplace of beauty and magic. It will be filled with the accomplishments, the joys and hopes of the world we live in. And it will remind us and show us how to make those wonders part of our own lives.30 Although a vision statement can be short, it should be positive and inspiring, and it V its employees to achieve a desired future state that should stretch the organization and appears beyond its reach. Google’s I vision, for example, is “to organize the world’s information and make it universally accessible and useful.” Former Google CEO Eric C 300 years to achieve the company’s vision, which Schmidt estimated that it might take would require Google to have strategic K patience and to develop a grand strategy that is broad in focus.31 E Guidelines for constructing powerful mission statements and vision statements are shown below. (See Table 6.1.) “Visions R that have these properties challenge and inspire people in the organization and help align their energies in a common direction,” says S Burt Nanus of the University of Southern California’s School of Business Administration. “They prevent people from,being overwhelmed by immediate problems because they help distinguish what is truly important from what is merely interesting.”32 ● T E ASTATEMENT ANSWER THESE QUESTIONS? MISSION STATEMENTS: DOES YOUR COMPANY’S MISSION 1. Who are our customers? R 2. What are our major products or services? D 3. In what geographical areas do we compete? 4. What is our basic technology? R 5. What is our commitment to economic objectives? A TABLE 6.1 6. 7. 8. 9. Mission Statements and Vision Statements What are our basic beliefs, values, aspirations, and philosophical priorities? What are our major strengths and competitive advantages? What are our public responsibilities, and what image do we wish to project? 1 What is our attitude toward our employees? 1 9 VISION STATEMENTS: DOES YOUR COMPANY’S VISION STATEMENT ANSWER “YES” TO THESE QUESTIONS? 1. Is it appropriate for the organization and for the times? 1 2. Does it set standards of excellence and reflect high ideals? T 3. Does it clarify purpose and direction? S 4. Does it inspire enthusiasm and encourage commitment? 5. Is it well articulated and easily understood? 6. Does it reflect the uniqueness of the organization, its distinctive competence, what it stands for, what it’s able to achieve? 7. Is it ambitious? Sources: F. R. David, “How Companies Define Their Mission,” Long Range Planning, February 1989, pp. 90–97; and B. Nanus, Visionary Leadership: Creating a Compelling Sense of Direction for Your Organization (San Francisco: Jossey-Bass, 1992), pp. 28–29. kin20555_ch06_158-187.indd Page 167 25/09/14 9:00 PM f-500 /202/MH02260/kin20555_disk1of1/0077720555/kin20555_pagefiles Strategic Management 6.4 MAJOR QUESTION ? CHAPTER 6 167 Assessing the Current Reality What tools can help me describe where the organization stands from a competitive point of view? THE BIG PICTURE To develop a grand strategy, you need to gather data and make projections, using the tools of competitive intelligence, SWOT analysis, forecasting, benchmarking, and Porter’s five competitive forces. The second step in the strategic-management process, assess the current reality, looks at where the organization stands internally and externally—to determine what’s working and what’s not, to see what can be changed so as to increase V efficiency and effectiveness in achieving the organization’s vision. An assessment helps to create an objective view of everything the organization does: its sources of revenue orI funding, its work-flow processes, its organizational structure, client satisfaction, employee turnover, and other matters.33 C Among the tools for assessing the current reality are competitive intelligence, SWOT K for industry analysis. analysis, forecasting, benchmarking, and Porter’s model E R Competitive Intelligence S Practicing competitive intelligence means gaining information about one’s competitors’ activities so that you can anticipate their moves and react appropriately. If you are , a manager, one of your worst nightmares is that a competitor will surprise you with a service or product—as boutique beers did major brewers and mountain bikes did major bicycle makers—that will revolutionize the market T and force you to try to play catch-up. Successful companies make it a point to conduct competitive intelligence. E A R D R A 1 1 9 1 T S Competitive intelligence venue. Since 1967, the International Consumer Electronics Show (CES) in Las Vegas has traditionally been a place where blockbuster products were introduced. Recently, however, the hottest gadgets from Apple, Amazon, and Microsoft have been unveiled in other, more exclusive venues. Still, CES remains the world’s largest consumer technology convention. kin20555_ch06_158-187.indd Page 168 25/09/14 9:00 PM f-500 168 PART 3 /202/MH02260/kin20555_disk1of1/0077720555/kin20555_pagefiles Planning Gaining competitive intelligence isn’t always easy, but there are several avenues— and, surprisingly, most of them are public sources—including the following: ■ ■ ■ The public prints and advertising. A product may be worked on in secret for several years, but at some point it becomes subject to announcement— through a press release, advertising piece, news leak, or the like. Much of this is available free through the Internet or by subscription to certain specialized databases, such as Nexus, which contains hundreds of thousands of news stories. Investor information. Information about new products and services may also be available through the reports filed with the Securities and Exchange Commission and through corporate annual reports. Informal sources. People in the consumer electronics industry every year look forward to major trade V shows, such as the International Consumer Electronics Show in Las Vegas, when companies roll out their new products.34 At I such times, people also engage in industry-gossip conversation to find out about future directions. C Finally, salespeople and marketers, who are out calling on corporate clients, Kmay return with tidbits of information about what competitors are doing. E R SWOT Analysis S After competitive intelligence, the next point in establishing a grand strategy is , environmental scanning, careful monitoring of an organization’s internal and exter- nal environments to detect early signs of opportunities and threats that may influence the firm’s plans. The process for doing such scanning is SWOT analysis—also T known as a situational analysis—which is a search for the Strengths, Weaknesses, E the organization. A SWOT analysis should proOpportunities, and Threats affecting vide you with a realistic understanding of your organization in relation to its interA nal and external environments so you can better formulate strategy in pursuit of its R mission. (See Figure 6.2.) D FIGURE 6.2 Swot Analysis R SWOT stands for Strengths, Weaknesses,A Opportunities, Threats. INSIDE MATTERS—Analysis of Internal Strengths & Weaknesses 1 1 S—Strengths: inside matters Strengths could be work processes, 9 organization, culture, staff, product quality, 1 production capacity, image, financial resources & requirements, service levels,T other internal matters. S O—Opportunities: outside matters Opportunities could be market segment analysis, industry & competition analysis, impact of technology on organization, product analysis, governmental impacts, other external matters. W—Weaknesses: inside matters Weaknesses could be in the same categories as stated for Strengths: work processes, organization, culture, etc. T—Threats: outside matters Threats could be in the same categories as stated for Opportunities: market segment analysis, etc. OUTSIDE MATTERS—Analysis of External Opportunities & Threats kin20555_ch06_158-187.indd Page 169 25/09/14 9:00 PM f-500 /202/MH02260/kin20555_disk1of1/0077720555/kin20555_pagefiles Strategic Management CHAPTER 6 169 The SWOT analysis is divided into two parts: inside matters and outside matters— that is, an analysis of internal strengths and weaknesses and an analysis of external opportunities and threats. The following table gives examples of SWOT characteristics that might apply to a college. (See Table. 6.2.) TABLE 6.2 SWOT Characteristics That Might Apply to a College S—STRENGTHS (INTERNAL STRENGTHS) • • • • Faculty teaching and research abilities High-ability students Loyal alumni Strong interdisciplinary programs O—OPPORTUNITIES (EXTERNAL OPPORTUNITIES) • • • • Growth in many local skilled jobs Many firms give equipment to college Local minority population increasing High school students take college classes W—WEAKNESSES (INTERNAL WEAKNESSES) V I C K E R S , • • • • Limited programs in business High teaching loads Insufficient racial diversity Lack of high-technology infrastructure T—THREATS (EXTERNAL THREATS) • • • • Depressed state and national economy High schools enrollments in decline Increased competition from other colleges Funding from all sources at risk T Inside Matters: Analysis of Internal StrengthsE& Weaknesses Does your organization have a skilled workforce? a superior reputation? strong financing? These A capabilities that give the orare examples of organizational strengths—the skills and ganization special competencies and competitive advantages in executing strategies in R pursuit of its vision. D outdated facilities? a shaky Or does your organization have obsolete technology? weaknesses—the drawmarketing operation? These are examples of organizational R backs that hinder an organization in executing strategies in pursuit of its vision. A Outside Matters: Analysis of External Opportunities & Threats Is your organization fortunate to have weak rivals? emerging markets? a booming economy? 1 These are instances of organizational opportunities—environmental factors that the organization may exploit for competitive advantage. 1 Alternatively, is your organization having to deal with 9 new regulations? a shortage of resources? substitute products? These are some possible organizational threats— 1 a competitive advantage. environmental factors that hinder an organization’s achieving T S SWOT Analysis: How Would You Analyze Toyota? “I fear the pace at which we have grown may have been too quick,” said Akio Toyoda, the grandson of Toyota Motor’s founder, in 2010 testimony before a U.S. congressional committee looking into sudden acceleration problems. “Priorities became confused, and we were not able to stop, think, and make improvements as much as we were able to before.”35 EXAMPLE Toyota’s U.S. sales fell 9% that month because of safetyrelated recalls of millions of vehicles, and by late 2010 journalists were writing that the company had lost its edge.36 By the end of 2011, Toyota Motor, formerly the world’s largest automaker, had slipped to third place in production behind General Motors and Volkswagen. kin20555_ch06_158-187.indd Page 170 25/09/14 9:00 PM f-500 170 PART 3 /202/MH02260/kin20555_disk1of1/0077720555/kin20555_pagefiles Planning Toyota’s new young president, Akio Toyoda, whose motto is “be fast, be flexible,” energetically took on the automaker’s problems, traveling to the United States to fire up dealers, personally taking charge of the sagging Lexus brand, and redesigning the firm’s reporting system and flattening the management hierarchy.37 In late 2013, profits were up 70%, close to their previous record high, and the company had displaced General Motors as the world’s largest automaker; by the following year, net profit was up more than fivefold.38 Still, the challenges have kept on coming. If you were a top Toyota manager, what would be the kinds of things you would identify in a SWOT analysis? The Internal Strengths. Originally the “Toyota Way,” as practiced from assembly line to boardroom, stressed the values of continuous improvement (“kaizen”) and eliminating waste (“muda”). The Toyota Way, says one report, “mandates planning for the long term; highlighting problems instead of hiding them; encouraging teamwork with colleagues and suppliers; and, perhaps most important, instilling a self-critical culture that fosters continuous and unrelenting improvement.”39 Developed in the 1950s, these precepts later became the basis for such concepts as lean manufacturing and just-in-time Toyota. How fast, how flexible? inventory management (discussed in Chapter 2). “At their core,” says one analysis, “was an attention to detail and a noble frugality that shunned waste of every kind.”40 Said its top engineer, “Basically, Toyota’s growth has been underpinned by QDR [quality, dependability, reliability] that was very high compared with competitors’.”41 As of 2014, Toyota continues to lead most other car companies in quality rankings: All three of its 2011 brands appeared in the top 10 J.D. Power 2014 rankings for reliability, with 15 Toyota, Lexus, and Scion models winning or tied for first place in their vehicle categories.42 The Internal Weaknesses. In the 1990s, Toyota launched an effort to become the world’s largest automaker, embarking on aggressive overseas expansion and doubling its plants in North America, Asia, and Europe. During this time, the focus on cost reduction intensified to the point that the virtue became a vice. Suppliers were continually pushed to design parts that were 10% cheaper and 10% lighter. Common parts were used in most Toyota models, acquired from outside companies instead of trusted traditional suppliers.43 Toyota also began to treat its cars like “transportation appliances,” causing it to fall behind in design leadership, making buyers feel less of an emotional connection with Toyota products. The company was said to have succumbed to “big-company disease,” becoming ponderous and bureaucratic, with every decision tightly controlled in Japan, to the detriment of its managers in the United States.44 Then suddenly, from 2000 to 2010, driver complaints to the National Highway Traffic and Safety Administration about “vehicle speed control” issues soared, with 11.7% of faulty vehicle components identified as Toyota’s.45 Next came widely publicized problems with sticking accelerators, prompting two huge recalls of 10 million vehicles and suspension of the sales and production of eight models in the American market.46 Later it developed that the “unintended acceleration” was probably caused V by sticky pedals or floor mats rather than Toyota electronics (although some critics thought it traced to driver error).47 I By then, however, the damage to Toyota’s vaunted reputation for C quality was severe. “When your whole deal was quality, every K mistake is a big deal,” said a E manufacturing expert.48 In 2014, Toyota agreed to a R $1.2 billion penalty to end a S U.S. criminal probe into the sudden-acceleration prob, lems.49 No sooner had it done so, however, than the company’s reputation for reliability T and assembly-line mastery E took another massive hit, when Toyota was forced to recall 6.4 A million vehicles for five potenR tial hazards, including faulty D power-window switches, possibly unstable steering column brackets, and potential hinR drances to deployment of driver’s-side airbags.50 A The External Opportunities. Although slow to awaken to its quality problems in 2009–2010, the company went into full PR 1 mode, moving to discredit critics who blamed accelerator battle problems on faulty electronics and stressing its commitment to its 1 millions of U.S. customers.51 Today, under the new president’s di9 the 1950s-style traditional organization has been modrection, ernized, 1 with layers of management removed and with Akio meeting weekly with five top advisors to make on-the-spot deciT The company has also reorganized its vehicle-development sions. system S to speed decision making, cut costs, and generate more world-wide appeal.52 In addition, Toyota moved to give its cars more exciting designs, taking initiatives to “improve upon the emotion of cars” with better styling and high-quality interiors.53 It joined forces with Ford to develop a gas-electric hybrid fuel system for trucks and sport utility vehicles and has continued to push green technology, as with the plug-in Prius and a new concept car powered by hydrogen fuel cells.54 It launched the sporty $375,000 Lexus LFA, a carbon fiber supercar. kin20555_ch06_158-187.indd Page 171 25/09/14 9:00 PM f-500 /202/MH02260/kin20555_disk1of1/0077720555/kin20555_pagefiles Strategic Management General Motors’s fatal ignition switch mistakes, described by GM’s own CEO, Mary Barra, as representing “a pattern of incompetence and neglect,” and the recall of 2.6 million 2000–2011 small cars worldwide (for a total of 11.2 million vehicles in 2014) presents Toyota with an unprecedented opportunity to grab its rival’s customers.55 Will Toyota benefit from this development— especially in light of its own 2014 recall announcement? The External Threats. Toyota was able to work past its accelerator-sticking troubles of 2009–2010, which presented its American and European rivals with a chance to cut into the Japanese automaker’s market share.56 Toyota also faced the worldwide Great Recession, which damaged auto spending. In addition, V Toyota had to face setbacks brought about by the 2011 deadly I earthquake and tsunami, which devastated plants in the north of Japan and disrupted the supply of over 500 parts; flooding in C Thailand, which led to new supply difficulties; and currency probK lems of a strong yen against a weak U.S. dollar, which further re57 duced revenues. Finally, Toyota competitors began to close the E CHAPTER 6 171 quality gap, with the Ford Fusion, Hyundai Sonata, Volkswagen Passat, and other midsize vehicles severely impacting sales of the Toyota Camry.58 By 2011, Toyota’s market share in the United States had fallen all the way from 18.3% to 12.9%, recovering to 14.3% in 2013, putting it in third place behind General Motors at 17.9% and Ford at 15.9% (Chrysler had 11.5%).59 According to one source, Toyota was predicted to achieve an American market share of 14.6% in 2015.60 YOUR CALL “Comfortably preoccupied with rooting out internal weakness,” said one writer in 2010, “the Toyota Way is lost when it comes to contending with outside threats. . . . If a flaw does get through, the company as a whole is loath to admit that the system broke down.”61 Do you agree? How well do you think Akio Toyoda is doing in dealing with Toyota’s threats and opportunities, both internal and external? R S Forecasting: Predicting the Future, Once they’ve analyzed their organization’s Strengths, Weaknesses, Opportunities, and Threats, planners need to do forecasting for making long-term strategy. A forecast is a T E they are wrong. In the 1950s, Lots of people make predictions, of course—and often the head of IBM, Thomas J. Watson, estimated that the A demand for computers would never exceed more than five for the entire world. In the late 1990s, many computer R experts predicted power outages, water problems, transportation disruptions, bank shutdowns, and far worse because of computer glitches (the “Y2K bug”) associated D with the change from year 1999 to 2000. R Of course, the farther into the future one makes a prediction, the more difficult it is to be accurate, especially in matters of technology. YetAforecasting is a necessary part vision or projection of the future. of planning. Two types of forecasting are trend analysis and contingency planning. 1 1 extension of a past series of Trend Analysis A trend analysis is a hypothetical events into the future. The basic assumption is that the picture of the present can be 9 projected into the future. This is not a bad assumption, if you have enough historical 1 data are unreliable, they will data, but it is always subject to surprises. And if your produce erroneous trend projections. T An example of trend analysis is a time-series forecast, which predicts future data S are used to predict long-term based on patterns of historical data. Time-series forecasts trends, cyclic patterns (as in the up-and-down nature of the business cycle), and seasonal variations (as in Christmas sales versus summer sales). Contingency Planning: Predicting Alternative Futures Contingency planning—also known as scenario planning and scenario analysis—is the creation of alternative hypothetical but equally likely future conditions. For example, scenarios may be created with spreadsheet software such as Microsoft Excel to present alternative combinations of different factors—different economic pictures, different strategies by competitors, different budgets, and so on. kin20555_ch06_158-187.indd Page 172 25/09/14 9:00 PM f-500 172 PART 3 /202/MH02260/kin20555_disk1of1/0077720555/kin20555_pagefiles Planning Climate change damage? With so much storm damage, such as that in 2012 when Hurricane Sandy hit the New Jersey coast, what kind of contingency planning should insurance companies do? V I C K E R S , EXAMPLE Contingency Planning for Climate Change: Drought, Rain, & Fire T Several U.S. government agencies have launched contingency planning to prepare for the effects of climate change—from the Navy studying the threat of rising seas to naval operations to the Department of Agriculture’s planning for possible effects of drought and wildfire on agriculture and livestock to the Department of Transportation’s exploration of risk of high temperatures on highways and bridges. Even some governments of coastal cities, such as those in Florida and Virginia, are trying to make plans to anticipate the effect of rising oceans on their infrastructures.62 But what kinds of contingency planning is being done in private industry for the impact of climate change? Many CEOs of energy, food, and food distribution companies, for example, are reportedly not unduly concerned about the effect of global warming on their businesses.63 But shouldn’t the top managers of insurance companies be? The Evidence of the Present. “Climate change, once considered an issue for a distant future, has moved firmly into the present,” says the 2014 National Climate Assessment.64 “From Hurricane Sandy’s devastating blow to the Northeast to the protracted drought that hit the Midwest Corn Belt,” pointed out economic writer Eduardo Porter, “natural catastrophes pounded insurers [in 2012], generating $35 billion in privately insured property damage, $11 billion more than the average over the last decade.”65 The insurance industry, he reported, expected the situation to get worse, a view reinforced by a 2014 report by the Intergovernmental Panel on Climate Change, a United Nations group.66 Anticipating the Worst? Despite the mounting weatherE related claims, which included damage by floods and wildfires, a A by Ceres, a Boston-based nonprofit promoting eco-minded report business R practices, said most U.S. insurance companies, large and small, did not have comprehensive strategies to cope with D change.67 “Of 184 companies surveyed,” says one climate account, R “only 23 had such strategies, and 13 of those were foreign-owned.”68 AHowever, research by a scientist at the federally funded Lawrence Berkeley National Laboratory, which studied large global insurers, said the industry was stepping up to the chal1 lenge, having made 1,148 efforts to adapt and mitigate climate change. 1 69 9Whatever the past behavior, the Geneva Association, an international think tank for strategically important insurance and 1 management issues, called on insurers to start setting risk rates T “based on climate-modeling scenarios rather than historic trends traditionally employed.”70 S YOUR CALL Based on contingency planning for climate variability and volatility in every part of the globe, what is the responsibility of insurance companies? Just try to avoid catastrophic losses by raising premiums, adding exclusions, and refusing to cover high-risk communities? Or try to educate consumers about building more resilient structures in less risky areas? kin20555_ch06_158-187.indd Page 173 25/09/14 9:00 PM f-500 /202/MH02260/kin20555_disk1of1/0077720555/kin20555_pagefiles Strategic Management Because the scenarios try to peer far into the future—perhaps five or more years— they are necessarily written in rather general terms. Nevertheless, the great value of contingency planning is that it not only equips an organization to prepare for emergencies and uncertainty, it also gets managers thinking strategically. Benchmarking: Comparing with the Best Benchmarking is a process by which a company compares its performance with that of high-performing organizations.71 Professional sports teams do this all the time, but so do other kinds of organizations, including nonprofit ones. Example: Airlines use such benchmarks as average turnaround time, on-time arrivals, cost per seat per passenger mile, fuel cost, numbers of lost bags, and so on. At Xerox Corp., generally thought to be the first American company to use benchmarking,V it is defined as, in one description, “the continuous process of measuring products, services, and practices against I as industry leaders.”72 the toughest competitors or those companies recognized C Porter’s Five Competitive Forces K E What determines competitiveness within a particular industry? After studying several R kinds of businesses, strategic-management expert Michael Porter suggested in his Porter’s model for industry analysis that business-level strategies originate in five S primary competitive forces in the firm’s environment: (1) threats of new entrants, , buyers, (4) threats of substitute (2) bargaining power of suppliers, (3) bargaining power of products or services, and (5) rivalry among competitors.73 Taffect an industry almost overNew competitors can night, taking away customers from existing organizations. E Example: Kraft Macaroni & Cheese is a venerable, well-known brand but is threatened from the low end by store Aby Annie’s Organic & Natural brands, such as Walmart’s brand, and from the high end Mac and Cheese. R 1. Threats of New Entrants D Threat of new entrants. McDonald’s Ris being threatened by new so-called restaurants such as Afast-casual Chipotle and Five Guys, which attract customers in their 20s and 30s, who are seeking fresher, healthier food and customizable menu options. What’s your opinion of these new chains compared to the older ones? 1 1 9 1 T S CHAPTER 6 173 kin20555_ch06_158-187.indd Page 174 25/09/14 9:00 PM f-500 174 PART 3 /202/MH02260/kin20555_disk1of1/0077720555/kin20555_pagefiles Planning 2. Bargaining Power of Suppliers Some companies are readily able to switch suppliers in order to get components or services, but others are not. Example: Clark Foam of Laguna Niguel, California, supplied nearly 90% of the foam cores used domestically to make custom surfboards. When it suddenly closed shop in late 2005, blaming government agencies for trying to shut it down, many independent board shapers and small retailers found they couldn’t afford to get foam from outside the country. On the other hand, Surftech in Santa Cruz, California, was one of the few board manufacturers to use resin instead of foam, and so it saw a spike in sales.74 3. Bargaining Power of Buyers Customers who buy a lot of products or services from an organization have more bargaining power than those who don’t. Customers who use the Internet to shop around are also better able to negotiate a better price. Example: Buying a car used to be pretty much a local activity, but now potential car buyers V of offerings within a 100-mile or larger radius, can use the Internet to scout a range giving them the power to force down I the asking price of any one particular seller. C Again, particularly because of Ka better position to switch to other products or serthe Internet, an organization is in vices when circumstances threaten E their usual channels. Example: Oil companies worried when Brazil achieved energy self-sufficiency in 2006, able to meet its growing R demand for vehicle fuel by substituting ethanol derived from sugar cane for petroleum—until 2007, when population and economic growth forced the country to S start importing oil again.75 , 4. Threats of Substitute Products or Services 5. Rivalry among Competitors The preceding four forces influence the fifth force, rivalry among competitors. Think of the wild competition among makers T and sellers of portable electronics, ranging from smartphones to tablets to videogame E systems. Once again, the Internet has intensified rivalries among all kinds of organizations. A R SWOT analysis that examines these five competiAn organization should do a good tive forces, Porter felt. Then it was D in a position to formulate effective strategy, using what he identified as four competitive strategies, as we discuss in the next section. R To what extent do you think A that a current or past employer was good at strategic thinking? Based on past research, firms that are better at strategic thinking should outperform those that are not. You can assess the strategic thinking of a current or past employer by taking Self-Assessment 1 6.1. ● SELF-ASSESSMENT 6.1 Assessing Strategic Thinking This survey is designed to assess an organization’s level of strategic thinking. Go to connect.mheducation.com and take Self-Assessment 6.1. When you’re done, answer the following questions: 1. What is the level of strategic thinking? Are you surprised by the results? ® 1 9 1 T 2. If you were meeting with an executive from the company S you evaluated, what advice would you provide based on the survey results and what you learned about assessing current reality? kin20555_ch06_158-187.indd Page 175 25/09/14 9:00 PM f-500 /202/MH02260/kin20555_disk1of1/0077720555/kin20555_pagefiles Strategic Management 6.5 MAJOR QUESTION ? CHAPTER 6 175 Formulating the Grand Strategy How can three techniques—Porter’s four competitive strategies, diversification and synergy, and the BCG matrix—help me formulate strategy? THE BIG PICTURE Strategies may be growth, stability, or defensive strategies. Strategy formulation makes use of several concepts, including Porter’s four competitive strategies, diversification and synergy, and the BCG matrix. After assessing the current reality (Step 2 in the strategic-management process), it’s V strategy (Step 3). Examples time to turn to strategy formulation—developing a grand of techniques that can be used to formulate strategy areI Porter’s four competitive strategies, diversification and synergy, and the BCG matrix. Cspecific strategic plans, which The grand strategy must then be translated into more determine what the organization’s long-term goals should K be for the next 1–5 years. These should communicate not only the organization’s general goals about growth and profits but also information about how these goals willEbe achieved. Moreover, like all goals, they should be SMART—Specific, Measurable, R Attainable, Results-oriented, and specifying Target dates (Chapter 5). Three Common Grand Strategies S , The three common grand strategies are growth, stability, and defensive. T 1. The Growth Strategy A growth strategy isEa grand strategy that involves expansion—as in sales revenues, market share, number of employees, or number of cusA tomers or (for nonprofits) clients served. Example: IBM under its previous CEO, Samuel R that were fading, such as the J. Palmisano, decided to get out of low-profit businesses personal computer business, and shift to services and software, often delivered over the D Internet from data centers connecting all kinds of devices—the growth business of cloud R a “rocky time,” says present computing.76 (Since then, however, the company has had CEO Virginia Rometty, as IBM found itself lagging inAcloud computing sales, having 77 lost important business to Amazon, and is now attempting to refocus its business.) 2. The Stability Strategy A stability strategy is1a grand strategy that involves little or no significant change. Example: Without much changing their product, the 1 makers of Timex watches decided to stress the theme of authenticity (“Wear it well”) 9 keeps on ticking”). In an age over durability (the old slogan was “It takes a licking and of smartphones and other gadgets, when people don’t 1 need a watch to tell the time, the new theme of authenticity makes sense, according to The New York Times, “as consumers watching what they spend seek out products T with longevity whose ability to stand the test of time implies they are worth buying.”78S 3. The Defensive Strategy A defensive strategy, or a retrenchment strategy, is a grand strategy that involves reduction in the organization’s efforts. Example: Redbox, which installed more than 40,000 DVD movie-rental kiosks in groceries, 7-Elevens, and Walmart stores during a seven-year growth period, in 2014 began uninstalling kiosks (more than 500 in the United States) and switching to a defensive strategy. Not only had the company run out of good locations in which to place its machines, it was also contending with challenges from online streaming and more original television programs.79 Variations of the three strategies are shown on the next page. (See Table 6.3.) kin20555_ch06_158-187.indd Page 176 25/09/14 9:00 PM f-500 176 PART 3 Planning TABLE 6.3 How a Company Can Implement a Grand Strategy • • • • • • • • • • • • • • GROWTH STRATEGY It can improve an existing product or service to attract more buyers. It can increase its promotion and marketing efforts to try to expand its market share. It can expand its operations, as in taking over distribution or manufacturing previously handled by someone else. It can expand into new products or services. It can acquire similar or complementary businesses. It can merge with another company to form a larger company. STABILITY STRATEGY It can go for a no-change strategy (if, for example, it has found that too-fast growth leads to foul-ups with orders and customer complaints). V (if, for example, the company has been growing at breakneck It can go for a little-change strategy speed and feels it needs a period of consolidation). I C DEFENSIVE STRATEGY It can reduce costs, as by freezingK hiring or tightening expenses. It can sell off (liquidate) assets—land, buildings, inventories, and the like. E It can gradually phase out product lines or services. Rin selling off entire divisions or subsidiaries. It can divest part of its business, as It can declare bankruptcy. S It can attempt a turnaround—do some retrenching, with a view toward restoring profitability. , FIGURE 6.3 Porter’s four competitive strategies Type of market targeted Strategy 1. Cost-leadership 2. Differentiation 3. Cost-focus 4. Focused-differentiation /202/MH02260/kin20555_disk1of1/0077720555/kin20555_pagefiles Wide Narrow T E Porter’s four competitive strategies (also called four generic strategies)Aare (1) cost-leadership, (2) differentiation, (3) costfocus, and R(4) focused-differentiation.80 The first two strategies focus on wide markets, the last two on narrow markets. D 6.3.) Time Warner, which produces lots of media (See Figure and publications, serves wide markets around the world. Your R neighborhood video store (if one still exists) serves a narrow A market of just local customers. Porter’s Four Competitive Strategies Let’s look at these four strategies. 1 1. Cost-Leadership Strategy: Keeping Costs & Prices Low for a1Wide Market The cost-leadership strategy is to keep the costs, and hence prices, 9 of a product or service below those of competitors and to target a wide market. 1 This puts the pressure on R&D managers to develop products or services that can T be created cheaply, production managers to reduce production costs, and marketing managers to reach a wide varietySof customers as inexpensively as possible. Firms implementing the cost-leadership strategy include Timex, computer maker Acer, hardware retailer Home Depot, and pen maker Bic. 2. Differentiation Strategy: Offering Unique & Superior Value for a Wide Market The differentiation strategy is to offer products or services that are of unique and superior value compared with those of competitors but to target a wide market. Because products are expensive, managers may have to spend more on R&D, marketing, and customer service. This is the strategy followed by Ritz-Carlton hotels and the makers of Lexus automobiles. kin20555_ch06_158-187.indd Page 177 25/09/14 9:00 PM f-500 /202/MH02260/kin20555_disk1of1/0077720555/kin20555_pagefiles Strategic Management CHAPTER 6 177 The strategy is also pursued by companies trying to create brands to differentiate themselves from competitors. Although Coca-Cola may cost only cents more than a supermarket’s own house brand of cola, Coke spends millions on ads. 3. Cost-Focus Strategy: Keeping Costs & Prices Low for a Narrow Market The cost-focus strategy is to keep the costs, and hence prices, of a product or service below those of competitors and to target a narrow market. This is a strategy you often see executed with lowend products sold in discount stores, such as low-cost beer or cigarettes, or with regional gas stations, such as the Terrible Herbst, Rotten Robbie, and Maverik chains in parts of the West. Needless to say, the pressure on managers to keep costs down is even more intense than it is with those inV cost-leadership companies. I 4. Focused-Differentiation Strategy: OfferingC Unique & Superior Value for a Narrow MarketK The focused-differentiation strategy is to offer prod-E ucts or services that are of unique and superior value compared to those of competitors and to target aR narrow market. S Some luxury cars are so expensive—Rolls-Royce, Ferrari, Lamborghini—that only , a few car buyers can afford them. Other companies following the strategy are jeweler Cartier and shirtmaker Turnbull & Asser. Yet focused-differentiation products need not be expensive. The publisher Chelsea Green has found success with niche books, such T as The Straw Bale House. E Single-Product Strategy versus A R Diversification Strategy Da single-product strategy or a A company also needs to think about whether to have diversification strategy. After all, if you have only oneR product to sell, what do you do if that product fails? A The Single-Product Strategy: Focused but Vulnerable In a single-product strategy, a company makes and sells only one product within its market. This is the 1 kind of strategy you see all the time as you drive past the small retail businesses in a 1 one that sells only security small town: There may be one shop that sells only flowers, systems, and so on. 9 The single-product strategy has both positives and negatives: ■ 1 The benefit—focus. Making just one product allows you to focus your manufacturing and marketing efforts justTon that product. This means that your company can become savvy about Srepairing defects, upgrading production lines, scouting the competition, and doing highly focused advertising and sales. A small-business example: Green Toys of Mill Valley, California, makes all its toddler tea sets, toy trucks, and building blocks out of plastic recycled from milk jugs and, in a strategy called “reverse globalization,” carries out all its operations in California, a push back against offshoring and outsourcing.81 Another example: See’s Candies, a chain of 200 stores throughout the West, specializes in making boxed chocolates—something it does so well that when See’s was acquired by Berkshire Hathaway, its corporate owner chose not to tamper with success and runs it with a “hands-off” policy. Focused differentiation. The world’s largest cruise ship, the 1,181-foot-long, 16-deck MS Allure of the Seas, features such amenities as four swimming pools, a skating rink, a small golf course, volleyball and basketball courts, a multi-deck dining room that can seat 3,000, and lavish lodging quarters. Clearly, there’s something here for everyone— if you can afford it. kin20555_ch06_158-187.indd Page 178 25/09/14 9:00 PM f-500 178 PART 3 /202/MH02260/kin20555_disk1of1/0077720555/kin20555_pagefiles Planning ■ The risk—vulnerability. The risk, of course, is that if you do not focus on all aspects of the business, if a rival gets the jump on you, or if an act of God intervenes (for a florist, roses suffer a blight right before Mother’s Day), your entire business may go under. Example: Indian Motorcycle Company, once a worthy rival to HarleyDavidson, sold only motorcycles. It went bankrupt twice, the second time because of quality problems, notably an overheating engine. (Purchased by Polaris Industries in 2011, it is presently being manufactured in Spirit Lake, Iowa.)82 The Diversification Strategy: Operating Different Businesses to Spread the Risk The obvious answer to the risks of a single-product strategy is diversification, operating several businesses in order to spread the risk. You see this at the small retailer level when you drive past a store that sells gas and food and souvenirs and V rents DVD movies. There are two kinds of diversification—unrelated and related. I C Unrelated Diversification: Independent Business Lines If you operate a small shop that sells flowers on K one side and computers on the other, you are exercising a strategy of unrelated diversification—operating several businesses under one E ownership that are not related to one another. This has been a common big-company R strategy. General Electric, for instance, which began by making lighting products, diversified into such unrelated areas as plastics, broadcasting, and financial services. S Disney, Time Warner, and Sony run different divisions specializing in television, mu, sic, publishing, and the like. Related Diversification: Related Business Lines In some parts of the T world you have to do all your grocery shopping in separate stores—the butcher, the baker, the greengrocer, and so on. EIn most U.S. grocery stores, all these businesses appear under the same roof, an example of the strategy of related diversification, in which A an organization under one ownership operates separate businesses that are related to one another. A big-company example: The famous British raincoat maker Burberry R started by making and marketing outerwear clothing but since then has expanded into D related business lines, including accessories such as umbrellas, children’s clothing, R in its own stores. and even fragrances, which it sells Related diversification has three A advantages: ■ ■ ■ Reduced risk—because more than one product. If one product is weak, others may take up the slack. Example: When rainwear sales are slow, Burberry’s economic risk is1reduced by sales of its other product lines, such as children’s clothes. 1 Management efficiencies—administration spread over several businesses. 9 Whatever the business, it usually has certain obligatory administrative costs— accounting, legal, taxes,1and so on. Example: Burberry need not have separate versions of these for each T business line. Rather, it can actually save money by using the same administrative services for all its businesses. S Synergy—the sum is greater than the parts. When a company has special strengths in one business, it can apply those to its other related businesses. Example: PepsiCo can apply its marketing muscle not only to Pepsi Cola but also to 7-Up and Mountain Dew, which it also owns. This is an example of synergy—the economic value of separate, related businesses under one ownership and management is greater together than the businesses are worth separately. An example of a company that went from a single-product strategy to a diversification strategy is Skilled Manufacturing Inc. of Traverse City, Michigan, which used to supply power-train components to the auto industry, but shuttered one of its two Michigan kin20555_ch06_158-187.indd Page 179 25/09/14 9:00 PM f-500 /202/MH02260/kin20555_disk1of1/0077720555/kin20555_pagefiles Strategic Management CHAPTER 6 179 plants in 2005 after one of its automotive clients moved the work to Mexico. Now it has reopened the factory because it has branched out to other sectors, such as aerospace, in addition to continuing to serve the auto industry.83 The BCG Matrix Developed by the Boston Consulting Group, the BCG matrix is a means of evaluating strategic business units on the basis of (1) their business growth rates and (2) their share of the market. Business growth rate is concerned with how fast the entire industry is increasing. Market share is concerned with the business unit’s share of the market in relation to competitors. In general, the BCG matrix suggests that an organization will do better in fast-growing markets in which it has a high market share rather than V in slow-growing markets in which it has a low market share. These concepts are illustrated below. (See Figure 6.4.) High Market growth rate Stars Have high growth, high market share—definite keepers Cash cows Have slow growth but high market share— income finances stars and question marks Low High I C K Question marks E new ventures— Risky some will become stars, R some dogs S , Dogs T low growth, low Have market E share—should be gotten rid of A R D R A Market share FIGURE 6.4 The BCG matrix Market growth is divided into two categories, low and high. Market share is also divided into low and high. Thus, in this matrix, “Stars” are business units that are highly desirable (high growth, high market share), compared to “Dogs,” which are not so desirable (low growth, low market share). Low 1 Now that you have learned about the tools companies use to create their grand strategies, what type of skills do you think managers 1 need to use these tools? Do you think you possess those skills? If you are curious, then we encourage you to take 9 Self-Assessment 6.2. ● SELF-ASSESSMENT 6.2 1 T S Core Skills Required for Strategic Planning This survey is designed to assess the skills needed in strategic planning. Go to connect.mheducation.com and take SelfAssessment 6.2. When you’re done, answer the following questions: 1. Do you have what it takes? Are you surprised by the results? ® 2. 3. Based on the results, what are your top two strengths and deficiencies when it comes to strategic planning? Assuming you wanted to do strategic planning at some point in your career, what can you do to improve your skills associated with strategic planning? Be specific. kin20555_ch06_158-187.indd Page 180 25/09/14 9:00 PM f-500 180 PART 3 6.6 MAJOR QUESTION ? /202/MH02260/kin20555_disk1of1/0077720555/kin20555_pagefiles Planning Implementing & Controlling Strategy: Execution How does effective execution help managers during the strategic-management process? THE BIG PICTURE Strategic implementation is closely aligned with strategic control. Execution is a process that helps align these two phases of the strategic-management process. Stage 1 of the strategic-management process was establishing the mission and the vision. Stage 2 was assessing the V current reality. Stage 3 was formulating the grand strategy. Now we come to the last two stages—4, strategic implementation, and 5, I strategic control. C K Implementing the Strategy E strategic plans into effect. As we said, this means Strategy implementation is putting dealing with roadblocks within R the organization’s structure and culture and seeing if the right people and control systems are available to execute the plans. Often implementation meansS overcoming resistance by people who feel the plans threaten their influence or livelihood. , This is particularly the case when the plans must be implemented rapidly, since delay is the easiest kind of resistance there is (all kinds of excuses are usually available to justify delays). Thus, top managers can’t just announce the plans; they have to actively sell them to middle and supervisory managers. T Execution. Occupying a sprawling campus in Cary, North Carolina, software maker SAS has always been ranked in the top three positions on Fortune’s lists of “100 Best Companies to Work For” (No. 1 in 2010 and 2011, No. 2 in 2013 and 2014, and No. 3 in 2012). Its ability to execute effectively has also made it highly profitable and the world’s largest privately owned software company. E Maintaining Strategic A Control Strategic control consists of monitoring the execution of strategy and taking corrective R action, if necessary. To keep a strategic plan on track, suggests Bryan Barry, you need D to do the following:84 R to actively engage people in clarifying what your ■ Engage people. You need group hopes to accomplish A and how you will accomplish it. ■ ■ ■ Keep it simple. Keep your planning simple, unless there’s a good reason to make it more complex. 1 Stay focused. Stay focused on the important things. 1 toward your vision of the future, adjusting your Keep moving. Keep moving plans as you learn what 9 works. 1 Execution: Getting Things Done T InSimplementing strategy and maintaining strategic control, what we are talking about is effective execution. Larry Bossidy, former CEO of AlliedSignal (later Honeywell), and Ram Charan, a business adviser to senior executives, are authors of Execution: The Discipline of Getting Things Done.85 Execution, they say, is not simply tactics, it is a central part of any company’s strategy. It consists of using questioning, analysis, and follow-through to mesh strategy with reality, align people with goals, and achieve results promised. kin20555_ch06_158-187.indd Page 181 25/09/14 9:00 PM f-500 /202/MH02260/kin20555_disk1of1/0077720555/kin20555_pagefiles Strategic Management CHAPTER 6 181 How important is execution to organizational success in today’s global economy? A survey of 769 global CEOs from 40 countries revealed that “excellence in execution” was their most important concern—more important than “profit growth,” “customer loyalty,” “stimulating innovation,” and “finding qualified employees.”86 Bossidy and Charan outline how organizations and managers can improve the ability to execute. Effective execution requires managers to build a foundation for execution within three core processes found in any business: people, strategy, and operations.87 The Three Core Processes of Business: People, Strategy, & Operations A company’s overall ability to execute is a function of effectively executing according to three processes: people, strategy, and operations. Because all work ultimately enV tails some human interaction, effort, or involvement, Bossidy and Charan believe that I the people process is the most important. C The First Core Process—People: “You Need toKConsider Who Will Benefit You in the Future” “If you don’t get the people process right,” say Bossidy and E Charan, “you will never fulfill the potential of your business.” But today most organizations focus on evaluating the jobs people are doing R at present, rather than considering which individuals can handle the jobs of the future. An effective leader tries to S milestones, developing future evaluate talent by linking people to particular strategic leaders, dealing with nonperformers, and transforming , the mission and operations of the human resource department. The Second Core Process—Strategy: “You Need T to Consider How Sucthe strategies developed cess Will Be Accomplished” In most organizations, E fail to consider the “how” of execution. According to the authors, a good strategic plan A whether the organization can addresses nine questions. (See Table 6.4.) In considering execute the strategy, a leader must take a realistic and critical R view of its capabilities and competencies. If it does not have TABLE 6.4 Necessary Answers: What Questions Should a Strong Strategic Plan Address? D the talent in finance, sales, and manufacturing to accomplish the vision, the chances of success are drastically reduced. R A to The Third Core Process—Operations: “You Need 1. What is the assessment of the external environment? The strategy process defines where an organization wants to go, and 1 the people process defines who’s going to get it done. The third 1 the core process, operations, or the operating plan, provides path for people to follow. The operating plan, as we 9 described in Chapter 5, should address all the major activities 1 in which the company will engage—marketing, production, sales, revenue, and so on—and then define short-term T objectives for these activities, to provide targets for people to aim at. We also discuss operations management in ChapterS16. 2. How well do you understand the existing customers and markets? How Execution Helps Implement & Control Strategy 7. What are the important milestones for executing the plan? Consider What Path Will Be Followed” Many executives appear to have an aversion to execution, which they associate with boring tactics—with the tedium of doing, as opposed to the excitement of visioning—and which they hand off to subordinates. Further, there are many organizational obstacles to effective execution, and many of these 3. What is the best way to grow the business profitably, and what are the obstacles to growth? 4. Who is the competition? 5. Can the business execute the strategy? 6. Are the short term and long term balanced? 8. What are the critical issues facing the business? 9. How will the business make money on a sustainable basis? Source: From Execution by Larry Bossidy and Ram Charan, Copyright © 2002 by Larry Bossidy and Ram Charan. Used by permission of Crown Business, a division of Random House, Inc. kin20555_ch06_158-187.indd Page 182 25/09/14 9:00 PM f-500 182 PART 3 /202/MH02260/kin20555_disk1of1/0077720555/kin20555_pagefiles Planning are associated with organizational culture. Organizational culture is a system of shared beliefs and values within an organization that guides the behavior of its members. In this context, effective execution will not occur unless the culture supports an emphasis on getting quality work done in a timely manner. Chapter 8 presents 11 ways managers can attempt to create an execution-oriented culture.88 PRACTICAL ACTION Building a Foundation of Execution Follow Through: “Establish Accountability & Check on Results” Failing to follow through is a major cause of poor execution. “How many meetings have you attended where V left without firm conclusions about who would do what people and I when?” Bossidy and Charan ask. Accountability and follow-up are important. The foundation of execution is based on leadership (as we discuss in Chapter 14) and organizational culture (discussed in Chapter 8). Bossidy and Charan suggest that there are seven essential types of leader behaviors that are needed to fuel the engine of execution. Managers are advised to engage in seven kinds of behaviors, as follows: C Reward K the Doers: “Show Top Performers That They Matter” If people are to produce specific results, they must be reE warded accordingly, making sure that top performers are rewarded R far better than ordinary performers. S Expand People’s Capabilities: “Develop the Talent” Coaching , is an important part of the executive’s job, providing useful Know Your People & Your Business: “Engage Intensely with Your Employees” In companies that don’t execute, leaders are usually out of touch with the day-to-day realities. Bossidy and Charan insist leaders must engage intensely and personally with their organization’s people and its businesses. They cannot rely on secondhand knowledge through other people’s observations, assessments, and recommendations. and specific feedback that can improve performance. Insist on Realism: “Don’t Let Others Avoid Reality” Many people want to avoid or shade reality, hiding mistakes or avoiding confrontations. Making realism a priority begins with the leaders being realistic themselves, and making sure realism is the goal of all dialogues in the organization. Know T Yourself: “Do the Hard Work of Understanding Who You Are” Leaders must develop “emotional fortitude” based on E honest self-assessments. Four core qualities are authenticity, A self-awareness, self-mastery, and humility. R D R A Set Clear Priorities: “Focus on a Few Rather Than Many Goals” Leaders who execute focus on a very few clear priorities that everyone can grasp. Do you think your current or a past employer was good at execution? What obstacles may have impaired the company’s ability to execute? You can answer these questions by taking Self-Assessment16.3. SELF-ASSESSMENT 6.3 Assessing the Obstacles to Strategic Execution This survey is designed to assess the obstacles to strategic execution that may be impacting an organization’s ability to execute. Go to connect.mheducation.com and take Self-Assessment 6.3. When you’re done, answer the following questions: 1. How does the company stand with respect to execution? ® 1 9 1 2.T Based on the results, what are the company’s strengths S and weaknesses when it comes to execution? 3. What advice would you give to senior management about improving the company’s ability to execute based on the results? Be specific. In conclusion, by linking people, strategy, and operating plans, execution allows executives to direct and control the three core processes that will advance their strategic vision. ● kin20555_ch06_158-187.indd Page 183 25/09/14 9:00 PM f-500 /202/MH02260/kin20555_disk1of1/0077720555/kin20555_pagefiles Key Terms Used in This Chapter BCG matrix 179 benchmarking 173 competitive intelligence 167 contingency planning 171 cost-focus strategy 177 cost-leadership strategy 176 current reality assessment 163 defensive strategy 175 differentiation strategy 176 diversification 178 environmental scanning 168 execution 180 focused-differentiation strategy 177 forecast 171 grand strategy 164 growth strategy 175 organizational opportunities 169 organizational strengths 169 organizational threats 169 organizational weaknesses 169 Porter’s four competitive strategies 176 Porter’s modelV for industry analysis 173 Key Points 6.1 What Is Effective Strategy? I C K E R S , • Strategic positioning attempts to achieve sustainable competitive advantage by preserving what is distinctive about a company. • Strategic positioning is based on the T principles that strategy is the creation of a unique and valuable position, requires trade- E offs in competing, and involves creating a “fit” A among activities, so that they interact and reinforce each other. R • Strategic management works best for large firms, but can also be effective for small firms.D • Every organization needs to have a “big picture”R about where it’s going and how to get there, which involves strategy, strategic management, A and strategic planning. A strategy is a largescale action plan that sets the direction for an organization. Strategic management involves 1 managers from all parts of the organization in 1 the formulation and implementation of strategies and strategic goals. Strategic 9 planning determines the organization’s long1 term goals and ways to achieve them. • Three reasons why an organization should adoptT strategic management and strategic planning: They can (1) provide direction and momentum, S (2) encourage new ideas, and (3) develop a sustainable competitive advantage. Sustainable competitive advantage occurs when an organization is able to get and stay ahead in four areas: (1) in being responsive to customers, (2) in innovating, (3) in quality, and (4) in effectiveness. 6.2 The Strategic-Management Process • The strategic-management process has five steps plus a feedback loop. related diversification 178 scenario analysis 171 single-product strategy 177 stability strategy 175 strategic control 164 strategic positioning 160 strategy formulation 164 strategy implementation 164 SWOT analysis 168 synergy 178 trend analysis 171 unrelated diversification 178 • Step 1 is to establish the mission statement and the vision statement. The mission statement expresses the organization’s purpose. The vision statement describes the organization’s long-term direction and strategic intent. • Step 2 is to do a current reality assessment, to look at where the organization stands and see what is working and what could be different so as to maximize efficiency and effectiveness in achieving the organization’s mission. Among the tools for assessing the current reality are SWOT analysis, forecasting, benchmarking, and Porter’s model for industry analysis (described below). • Step 3 is strategy formulation, to translate the broad mission and vision statements into a grand strategy that explains how the organization’s mission is to be accomplished. Strategy formulation is the translation of the grand strategy into more specific strategic plans, choosing among different strategies and altering them to best fit the organization’s needs. • Step 4 is strategy implementation—putting strategic plans into effect. • Step 5 is strategic control, monitoring the execution of strategy and making adjustments. • Corrective action constitutes a feedback loop in which a problem requires that managers return to an earlier step to rethink policies, budgets, or personnel arrangements. 6.3 Establishing the Mission & the Vision • A mission statement should express the organization’s purpose or reason for being. Strategic Management CHAPTER 6 183 kin20555_ch06_158-187.indd Page 184 25/09/14 9:00 PM f-500 /202/MH02260/kin20555_disk1of1/0077720555/kin20555_pagefiles • A vision statement should be positive and inspiring, and it should stretch the organization and its employees to achieve a desired future state that appears beyond its reach. competitive forces in the firm’s environment: (1) threats of new entrants, (2) bargaining power of suppliers, (3) bargaining power of buyers, (4) threats of substitute products or services, and (5) rivalry among competitors. 6.4 Assessing the Current Reality • Step 2 in the strategic-management process, assess the current reality, looks at where the organization stands internally and externally— to determine what’s working and what’s not, to see what can be changed so as to increase efficiency and effectiveness in achieving the organization’s vision. • An assessment helps to create an objective view of everything the organization does: its sources of revenue or funding, its work-flow processes, its organizational structure, client satisfaction, employee turnover, and other matters. • Among the tools for assessing the current reality are competitive intelligence, SWOT analysis, forecasting, benchmarking, and Porter’s model for industry analysis. • Practicing competitive intelligence means gaining information about one’s competitors’ activities, through public news sources, investor information, and informal sources, so that you can anticipate their moves and react appropriately. • The next point in establishing a grand strategy is environmental scanning, careful monitoring of an organization’s internal and external environments to detect early signs of opportunities and threats that may influence the firm’s plans. The process for doing such scanning is called SWOT analysis, a search for the Strengths, Weaknesses, Opportunities, and Threats affecting the organization. • Organizational strengths are the skills and capabilities that give the organization special competencies and competitive advantages. Organizational weaknesses are the drawbacks that hinder an organization in executing strategies. Organizational opportunities are environmental factors that the organization may exploit for competitive advantage. Organizational threats are environmental factors that hinder an organization’s achieving a competitive advantage. • Another tool for developing a grand strategy is forecasting—creating a vision or projection of the future. Two types of forecasting are (1) trend analysis, a hypothetical extension of a past series of events into the future; and (2) contingency planning, the creation of alternative hypothetical but equally likely future conditions. • Benchmarking is a process by which a company compares its performance with that of high-performing organizations. • Porter’s model for industry analysis suggests that business-level strategies originate in five primary 184 PART 3 Planning 6.5 Formulating the Grand Strategy V I C K E R S , T E A R D R A 1 1 9 1 T S • Three common grand strategies are (1) a growth strategy, which involves expansion— as in sales revenues; (2) a stability strategy, which involves little or no significant change; and (3) a defensive strategy, which involves reduction in the organization’s efforts. • Strategy formulation (Step 3 in the strategicmanagement process) makes use of several concepts, including (1) Porter’s four competitive strategies, (2) diversification and synergy, and (3) the BCG matrix. • Porter’s four competitive strategies are as follows: (1) The cost-leadership strategy is to keep the costs, and hence the prices, of a product or service below those of competitors and to target a wide market. (2) The differentiation strategy is to offer products or services that are of unique and superior value compared with those of competitors but to target a wide market. (3) The cost-focus strategy is to keep the costs and hence prices of a product or service below those of competitors and to target a narrow market. (4) The focused-differentiation strategy is to offer products or services that are of unique and superior value compared with those of competitors and to target a narrow market. • Companies need to choose whether to have a single-product strategy, making and selling only one product within their market, or a diversification strategy, operating several businesses to spread the risk. • There are two kinds of diversification: unrelated diversification consists of operating several businesses that are not related to each other; related diversification consists of operating separate businesses that are related to each other, which may reduce risk, produce management efficiencies, and produce synergy or the sum being greater than the parts. • The BCG matrix is a means of evaluating strategic business units on the basis of (1) their business growth rates and (2) their share of the market. In general, organizations do better in fast-growing markets in which they have a high market share rather than slow-growing markets in which they have low market shares. 6.6 Implementing & Controlling Strategy: Execution • The last two steps of the strategicmanagement process are strategy implementation and strategic control. kin20555_ch06_158-187.indd Page 185 26/09/14 9:14 AM f-479 /202/MH02260/kin20555_disk1of1/0077720555/kin20555_pagefiles have to evaluate talent by linking people to particular strategic milestones, developing future leaders, dealing with nonperformers, and transforming the mission and operations of the human resource department. (2) In considering whether the organization can execute the strategy, a leader must take a realistic and critical view of its capabilities and competencies. (3) The third core process, operations, or the operating plan, provides the path for people to follow. The operating plan should address all the major activities in which the company will engage and then define short-term objectives for these activities, to provide targets for people to aim at. By linking people, strategy, and operating plans, execution allows executives to direct and control the three core processes that will advance their strategic vision. • Strategy implementation is putting strategic plans into effect, dealing with roadblocks within the organization’s structure and culture, and seeing if the right people and control systems are available to execute the plans. • Strategic control consists of monitoring the execution of strategy and taking corrective action, if necessary. To keep a strategic plan on track, you should engage people, keep your planning simple, stay focused, and keep moving. • Implementing strategy and maintaining strategic control require effective execution. Execution is not simply tactics, it is a central part of any company’s strategy; it consists of V using questioning, analysis, and follow-through to mesh strategy with reality, align people with I goals, and achieve results promised. C • Three core processes of execution are K people, strategy, and operations. (1) You E R S , Understanding 1. What is strategic positioning, and what are the threeT principles that underlie it? E 2. What are the five steps in the strategic management A process? R 3. Name some characteristics of good mission and vision statements. D 4. What is competitive intelligence? R 5. What are the tools that can help you assess the A current reality? the Chapter: What Do I Know? 6. Explain what SWOT is. 7. Describe three techniques that can help you formulate a grand strategy. 8. What are three common grand strategies? 9. Explain Porter’s four competitive strategies. 10. In execution, what are the three core processes of business? 1 1 Management in Action 9 1 ran it. From the time I was 4 or 5, my grandfather Putting AutoZone into Drive T would take me to visit the stores, and my father always Joseph “Pitt” Hyde III, 70, knew nothing about cars. discussed the big decisions being made with me. I was But after turning his grandfather’s company, MaloneS & Hyde, into the nation’s third-largest wholesale food distributor, he figured there was money to be made under the hood. Touting low everyday prices (a strategy he learned from serving on the board of Walmart), he founded AutoZone, which is now the nation’s largest retail auto parts chain. . . . I was born in Memphis, and grew up here. My grandfather started Malone & Hyde, a wholesale food distributor, in 1907. He ran it, my father ran it, and I always told that I had the opportunity to run Malone & Hyde, and the obligation to do it better than my grandfather and father did. I never knew I had a choice. . . . After I graduated from the University of North Carolina with an economics degree, my father grew ill. So in 1968, at 26, I had to take over. It was the ultimate baptism by fire. Most of the people reporting to me were twice my age. That year, we had $240 million in sales. Fortunately, I was able to continue to grow the company. Strategic Management CHAPTER 6 185 kin20555_ch06_158-187.indd Page 186 25/09/14 9:00 PM f-500 In the mid-1970s I had concerns about the longterm outlook, and looked for areas to diversify into. We had a successful drug chain [called Super D] and felt comfortable with specialty retailing. So when this small company, Checker Auto Parts in Phoenix, came up for sale, I checked it out. I saw how it was growing with auto parts geared to the do-it-yourself market. We passed, and Lucky Supermarkets bought it. We started looking at chains like Pep Boys. I could see the auto parts business was growing rapidly and wasn’t as price-sensitive as food. I didn’t see anyone doing a superior job of customer service, and most were not well kept. I thought we could bring a lot to the table. We decided to start a company from scratch. We opened our first store in Forrest City, Arkansas, on July 4, 1979, and called it Auto Shack. We changed the name after we were sued by RadioShack [for trademark infringement]. Auto Shack initially won the lawsuit, but RadioShack successfully appealed. Rather than fight it, we changed the name to AutoZone. In 1988 we sold Malone & Hyde, which by then had $3.3 billion in sales. We had set up AutoZone in its own corporate structure, so when we sold the base business, I kept AutoZone. I’d never been a do-it-yourselfer and didn’t know the auto parts business, but I knew there was an opportunity. We worked on small margins and were very tight operators, so that discipline helped us through as we learned the business. We started with four stores and were the first auto parts store with electronic catalogues, so customers could instantly look up parts and warranty information. Our objective was to build a culture around Should Companies Be Pressured to Recruit Females for Boards of Directors? A company’s board of directors plays a role in the strategic management process. Not only can a board provide input into the planning process, but it ultimately signs off on the intended strategies. Interestingly, a 2011 study by Catalyst, a nonprofit organization, compared financial performance of companies with zero female board members versus those with three or more female members. Results indicated that female representation was associated with (1) 84% higher return on sales, (2) 60% higher return 186 PART 3 Planning /202/MH02260/kin20555_disk1of1/0077720555/kin20555_pagefiles superior customer service, and to have everyday low prices in good-looking stores. In 1991 we went public, and the competition saw how well we were doing. They started copying our store layout and pricing. But none of them could copy our culture. Today we have 5,000 stores. . . . When you’re running a big business, you spend 80% of the time addressing small things and 20% on the big things that really make a difference. It took me 35 years to figure out if you spend 80% of the time on the big things, and 20% on the small things, life will be much more meaningful. Money is a small part of the equation for success. Sweat equity is what makes things V work. I C K DISCUSSION FOR E1. Using no more than two sentences, describe AutoR Zone’s strategy. 2. Based on Michael Porter’s discussion of the characS teristics of an effective strategy, does AutoZone have , a good strategy for growth? Explain. Source: Excerpted from an Interview by D. Eng, “Putting AutoZone into Drive,” Fortune, August 12, 2013, pp. 17–18. 3. To what extent is AutoZone following the five steps of the strategic-management process? T4. Conduct an environmental scan or SWOT analysis of E AutoZone’s current reality and recommend whether A the company’s current strategy is poised to suc...
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