Essentials of contemporary management 7th edition jones solutions manual

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Chapter 06 - Planning, Strategy, and Competitive Advantage

Chapter 06 Planning, Strategy, and Competitive Advantage CHAPTER CONTENTS Learning Objectives

6-2

Key Definitions/Terms

6-2

Chapter Overview

6-4

Lecture Outline

6-4

Lecture Enhancers

6-17

Management in Action

6-18

Building Management Skills

6-20

Managing Ethically

6-21

Small Group Breakout Exercise

6-22

Be the Manager

6-23

Case in the News

6-24

Supplemental Features

6-25

Manager’s Hot Seat

6-25

Self-Assessment(s)

6-25

Test Your Knowledge

6-25

Instructor’s PowerPoint Slides

6-26

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Chapter 06 - Planning, Strategy, and Competitive Advantage

LEARNING OBJECTIVES

LO 6-1. Identify the three main steps of the planning process and explain the relationship between planning and strategy.

LO 6-2. Differentiate between the main types of business-level strategies and explain how they give an organization a competitive advantage that may lead to superior performance.

LO 6-3. Differentiate between the main types of corporate-level strategies and explain how they are used to strengthen a company’s businesslevel strategy and competitive advantage.

LO 6-4. Describe the vital role managers play in implementing strategies to achieve an organization’s mission and goals.

KEY DEFINITIONS/TERMS business-level plan: Divisional managers’ decisions pertaining to divisions’ long-term goals, overall strategy, and structure.

differentiation strategy: Distinguishing an organization’s products from the products of competitors on dimensions such as product design, quality, or after-sales service.

business-level strategy: A plan that indicates how a division intends to compete against its rivals in an industry

diversification: Expanding a company’s business operations into a new industry in order to produce new kinds of valuable goods or services.

concentration on a single industry: Reinvesting a company’s profits to strengthen its competitive position in its current industry.

exporting: Making products at home and selling them abroad.

corporate-level plan: Top management’s decisions pertaining to the organization’s mission, overall strategy, and structure.

focused differentiation strategy: Serving only one segment of the overall market and trying to be the most differentiated organization serving that segment.

corporate-level strategy: A plan that indicates in which industries and national markets an organization intends to compete.

focused low-cost strategy: Serving only one segment of the overall market and trying to be the lowest-cost organization serving that segment.

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Chapter 06 - Planning, Strategy, and Competitive Advantage

franchising: Selling to a foreign organization the rights to use a brand name and operating know-how in return for a lump-sum payment and a share of the profits.

related diversification: Entering a new business or industry to create a competitive advantage in one or more of an organization’s existing divisions or businesses.

functional-level plan: Functional managers’ decisions pertaining to the goals that they propose to pursue to help the division attain its businesslevel goals.

strategic leadership: The ability of the CEO and top managers to convey a compelling vision of what they want the organization to achieve to their subordinates.

functional-level strategy: A plan of action to improve the ability of each of an organization’s functions to perform its task-specific activities in ways that add value to an organization’s goods and services.

strategy: A cluster of decisions about what goals to pursue, what actions to take, and how to use resources to achieve goals.

global strategy: Selling the same standardized product and using the same basic marketing approach in each national market.

strategic alliance: An agreement in which managers pool or share their organization’s resources and know-how with a foreign company, and the two organizations share the rewards and risks of starting a new venture.

hypercompetition: Permanent, ongoing, intense competition brought about in an industry by advancing technology or changing customer tastes.

strategy formulation: The development of a set of corporate, business, and functional strategies that allow an organization to accomplish its mission and achieve its goals.

importing: Selling products at home that are made abroad.

time horizon: The intended duration of a plan. joint venture: A strategic alliance among two or more companies that agree to jointly establish and share the ownership of a new business.

SWOT analysis: A planning exercise in which managers identify organizational strengths (S) and weaknesses (W) and environmental opportunities (O) and threats (T).

licensing: Allowing a foreign organization to take charge of manufacturing and distributing a product in its country or world region in return for a negotiated fee.

synergy: Performance gains that result when individuals and departments coordinate their actions.

low-cost strategy: Driving the organization’s costs down below the costs of its rivals.

unrelated diversification: Entering a new industry or buying a company in a new industry that is not related in any way to an organization’s current businesses or industries.

mission statement: A broad declaration of an organization’s purpose that identifies the organization’s products and customers and distinguishes the organization from its competitors. multidomestic strategy: Customizing products and marketing strategies to specific national conditions.

vertical integration: Expanding a company’s operations either backward into an industry that produces inputs for its products or forward into an industry that uses, distributes, or sells its products.

planning: Identifying and selecting appropriate goals and courses of action; one of the four principal tasks of management.

wholly owned foreign subsidiary: Production operations established in a foreign country independent of any local direct involvement.

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Chapter 06 - Planning, Strategy, and Competitive Advantage

CHAPTER OVERVIEW This chapter explores the manager’s role both as planner and as strategist. First, we discuss the nature and importance of planning, the kinds of plans managers develop, and the levels at which planning takes place. Second, we discuss the three major steps in the planning process: (1) determining an organization’s mission and major goals, (2) choosing or formulating strategies to realize the mission and goals, and (3) selecting the most effective ways to implement and put these strategies into action. We also examine several techniques, such as scenario planning and SWOT analysis that can help managers improve the quality of their planning. We discuss a range of strategies managers can use to give their companies a competitive advantage over their rivals. By the end of this chapter, students will understand the vital role managers carry out when they plan, develop, and implement strategies to create a high-performing organization.

LECTURE OUTLINE NOTE ABOUT INSTRUCTOR’S POWERPOINT SLIDES The Instructor PowerPoint Slides include most Student PowerPoint slides, along with additional material that can be used to expand the lecture. Images of the Instructor PowerPoint slides can be found at the end of this chapter on page 6-26.

(INSTRUCTOR’S POWERPOINT SLIDE 1) Chapter Title

Management Snapshot (pp. 193-194 of text) Toy Retailer Implements Turnaround Plan How Can Identifying Corporate Strengths and Weaknesses Lead to Better Planning and Strategy?

Despite its growth, 2013 was not a good year for Toys ―R‖ Us. Net sales were down, and the company’s net loss was $1 billion. To counteract this trend, the company announced a plan it called ―TRU Transformation.‖ The plan was grounded in consumer research and customer insights and was anchored by three guiding principles—Easy, Expert, Fair.

The plan identified four areas of weaknesses for Toys ―R‖ Us and discussed how the weaknesses could be turned into strengths. First, the retailer said that it had provided a weak customer experience both in stores and online. Toys ―R‖ Us therefore sought to make stores easy, uncluttered places with a well-trained sales staff. Second, there was a perception that prices at Toys ―R‖ Us were higher than at other retailers. The company wanted to be sure that its prices were perceived as fair by reducing the many exclusions to its price-matching policy. Third, the retailer had struggled with inventory management. Customers often

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Chapter 06 - Planning, Strategy, and Competitive Advantage

found that sought-after items were out of stock The company was expanding its ability to ship online orders from stores and distribution centers in order to get the right goods into stores at the right times, and it was increasing clearance sales to move stagnant merchandise. Finally, the company was assessing its business structure and operations to increase efficiency and effectiveness. One year into the ―TRU Transformation‖ plan, Toys ―R‖ Us saw significant progress.

PLACE SLIDE 2 HERE

I. Planning and Strategy A. Planning is a process managers use to identify and select appropriate goals and courses of action for an organization. The organizational plan that results from the planning process details how managers intend to attain those goals. The cluster of managerial decisions and actions to help an organization attain its goals is its strategy. Planning is a three-step activity:

LO 6-1: Identify the three main steps of the planning process and explain the relationship between planning and strategy.

POWERPOINT SLIDES 6-3 TO 6-6

1. The first step is determining the organization’s mission and goals. A mission statement is a broad declaration of an organization’s purpose that identifies the importance of the organization’s products to its employees and customers and distinguishes the organization from its competitors.

2. The second step is formulating strategy.

3. The third step is implementing strategy.

6-2: Differentiate between

II. The Nature of the Planning Process A. To perform the planning task, managers: 1. establish and discover where an organization is at the present time, 2. determine where it should be in the future, and 3. decide how to move it forward to reach that future state.

the main types of business-level strategies and explain how they give an organization a competitive advantage that may lead to superior performance.

POWERPOINT SLIDES 6-7 TO 6-19

B. Why Planning Is Important

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Chapter 06 - Planning, Strategy, and Competitive Advantage

1. Planning is necessary to give the organization a sense of direction and purpose.

2. Planning is a useful way of getting managers to participate in decision making about the appropriate goals and strategies for an organization.

3. Planning helps coordinate managers of the different functions and divisions of an organization to ensure that they all pull in the same direction and work to achieve its desired future state.

4. Planning can be used as a device for controlling managers within an organization.

C. Henri Fayol said that effective plans should have four qualities: 1. Unity means that at any time only one central plan is put into operation.

2. Continuity means that planning is an ongoing process.

3. Accuracy means that managers should attempt to collect and use all available information.

4. The planning process should have enough flexibility so that the plans can be altered and changed if the situation changes.

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

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

2. At the business level are the different divisions or business units that compete in distinct industries of the company, usually led by a divisional manager.

3. Each division has its own set of functions or departments, such as manufacturing, marketing,

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Chapter 06 - Planning, Strategy, and Competitive Advantage

R&D, human resources, etc.

E. Levels and Types of Planning 1. The corporate-level plan contains top management’s decisions pertaining to the organization’s mission and goals, overall strategy, and structure.

2. Corporate-level strategy indicates in which industries and national markets an organization intends to compete and why.

3. At the business level, the managers of each division create a business-level plan detailing long-term divisional goals that will allow the division to meet corporate goals and the division’s business-level strategy and structure.

4. Business-level strategy states the methods a division or business intends to use to compete against its rivals in an industry.

5. A functional-level plan states the goals that the managers of each function will pursue to help the division attain its business-level goals.

6. Functional-level strategy is a plan of action to improve the ability of each of an organization’s functions to perform its task-specific activities in ways that add value to an organization’s goods and services.

F. Time Horizons of Plans: Plans differ in their time horizon, the periods of time over which they are intended to apply.

1. Long-term plans have a horizon of five years or more.

2. Intermediate-term plans have a horizon between one and five years.

3. Short-term plans have a horizon of one year or less.

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

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Chapter 06 - Planning, Strategy, and Competitive Advantage

G. Standing Plans and Single-Use Plans 1. Standing plans are used in situations in which programmed decision making is appropriate.

Standing plans include a policy, a rule, and a standard operating procedure.

2. Single-use plans are developed to handle nonprogrammed decision making. They include: a. Programs, which are integrated sets of plans for achieving certain goals. b. Projects, which are specific action plans created to complete various aspects of a program.

III. Determining the Organization’s Mission and Goals

POWERPOINT SLIDES 6-20 TO 6-22

A. Defining the Business: To determine an organization’s mission, managers must first define its business by asking three questions: 1. Who are our customers?

2. What customer needs are being satisfied?

3. How are we satisfying customer needs?

B. Establishing Major Goals: Once the business is defined, managers must then establish a set of primary goals to which the organization is committed. These goals give the organization a sense of direction or purpose.

1. Strategic leadership, the ability of the CEO and top managers to convey a compelling vision of what they want the organization to achieve to their subordinates.

2. Goals typically possess the following characteristics: a. They are ambitious, that is, they stretch the organization, and require managers to improve its performance capabilities. b. They are challenging but realistic—a goal that is impossible to attain may prompt

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Chapter 06 - Planning, Strategy, and Competitive Advantage

managers to give up. c. The time period in which a goal is expected to be achieved should be stated. This injects a sense of urgency and acts as a motivator.

POWERPOINT SLIDES 6-23 TO 6-26

IV. Formulating Strategy A. In strategy formulation, managers work to develop the set of strategies that will allow an organization to accomplish its mission and achieve its goals.

1. A SWOT analysis is a planning exercise in which managers identify internal organizational strengths (S), weaknesses (W), opportunities (O), and threats (T). Based on a SWOT analysis, managers at each level of the organization identify strategies that will best position the organization to achieve its mission and goals. a. The first step in SWOT analysis is to identify an organization’s strengths and weaknesses that characterize the present state of the organization. b. The next step requires managers to identify potential opportunities and threats in the environment that affect the organization in the present or may affect it in the future. c. On completion of the SWOT analysis, managers can begin developing strategies that allow the organization to attain its goals by taking advantage of opportunities, countering threats, building strengths, and correcting organizational weaknesses.

2. The Five Forces Model: Michael Porter’s five forces model is another well-known model that helps managers focus on the most important competitive forces, or potential threats, in the external environment. They are: a. the level of rivalry among organizations within an industry b. the potential for entry into an industry c. the power of large suppliers

TEXT REFERENCE

Manager as a Person: GM’s Barra Confronts Challenges

When Mary Barra took over as chief executive officer of General Motors in 2014, the company had declared bankruptcy and was still on the mend. Also, within weeks of taking the CEO job, Barra began the recall of more than 2.5 million cars that General Motors had manufactured between 2003 and 2007. The cars had faulty ignition switches that would turn off the car while it was being driven, causing accidents and preventing the air bags from deploying.

Barra has taken ownership of the recall and the company’s failings, publicly stating that problems within General Motors allowed the ignition switch to reach market. She has vowed to make the development process much faster in the future and has taken steps to improve the company’s vehicle safety department.

Barra is maintaining the company’s strategy while not ignoring the company’s strengths, weaknesses, opportunities, and threats. She sees an opportunity for General

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Chapter 06 - Planning, Strategy, and Competitive Advantage

d. the power of large customers e. the threat of substitute products.

3. The term hypercompetition applies to industries that are characterized by permanent, ongoing, intense competition brought about by advancing technology or changing customer tastes, fads and fashions.

V. Formulating Business-Level Strategies A. Michael Porter formulated a theory of how managers can select a business-level strategy to give them a competitive advantage in a particular market or industry. According to Porter, to obtain higher profits, managers must choose between two basic ways of increasing the value of an organization’s products:

Motors to grow globally and to pursue technological trends, such as fuel efficiency.

Concerning threats faced by the company, she has noted the costs of materials and the competition from other brands in Europe. The ongoing investigation of the ignition switch and the timing of the recall is also a threat, but Barra has received praise for handling the threat well. (Box in text on pp. 204-205)

POWERPOINT SLIDES 6-27 TO 6-29

1. Differentiating the product to increase its value 2. Lowering the costs of making the product Porter also argues that managers must choose between serving the whole market or serving just one segment.

B. Low-Cost Strategy 1. With a low-cost strategy, managers try to gain a competitive advantage by focusing the energy of all the organization’s departments on driving the organization’s costs down below the costs of its industry rivals.

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

C. Differentiation Strategy 1. With a differentiation strategy, managers try to gain a competitive advantage by focusing all the energies of the organization’s departments on distinguishing the organization’s products from those of competitors.

2 As the process of making products unique and different is expensive, organizations that successfully pursue a differentiation strategy often

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Chapter 06 - Planning, Strategy, and Competitive Advantage

charge a premium price for their products.

D. “Stuck in the Middle” According to Porter, a company cannot pursue a lowcost and differentiation strategy simultaneously. He refers to managers and organizations that have not selected between the two as being ―stuck in the middle.‖ E. Focused Low-Cost and Focused Differentiation Strategies 1. Porter identified two other business-level strategies used by companies aiming to serve the needs of customers in one or a few segments of the market.

2. A company pursuing a focused low-cost strategy serves one or a few segments of the market and aims to be the lowest-cost company serving that segment.

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

VI. Formulating Corporate-Level Strategies A. Corporate-level strategy is a plan of action that determines the industries and countries an organization should invest its resources in to achieve its mission and goals.

B. Concentration on a Single Industry: This is a corporate-level strategy in which a company reinvests its profits to strengthen its competitive position in its current industry.

C. Vertical Integration: It is the corporate-level strategy that involves a company expanding its business operations either backward into a new industry that produces inputs for the company’s products (backward vertical integration) or forward into a new industry that uses, distributes, or sells the company’s products (forward vertical integration).

1. Managers pursue vertical integration because it allows them to either add value to their products by making them special or unique or to lower the costs of making and selling them.

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Chapter 06 - Planning, Strategy, and Competitive Advantage

2. Although vertical integration can increase an organization’s performance, it can also reduce an organization’s flexibility to respond to changing environmental conditions.

3. Vertical integration may sometimes reduce a company’s ability to create value when the environment changes. Therefore, many companies divest themselves of units that draw attention and resources away from an organization’s primary purpose.

D. Diversification: It is the strategy of expanding operations into a new business or industry in order to produce new goods or services There are two main types of diversification: related and unrelated.

1. Related Diversification: It is the strategy of entering a new business or industry to create a competitive advantage in one or more of an organization’s existing divisions or businesses. a. Synergy is obtained when the value created by two divisions cooperating is greater than the value that would be created if the two divisions operated separately. b. To pursue related diversification successfully, managers seek new businesses in which existing skills and resources can be used to create synergies.

2. Unrelated Diversification: Managers pursue unrelated diversification when they establish divisions or buy companies in new industries that are not related to their current businesses or industries. a. By pursuing unrelated diversification, managers can buy a poorly performing company and use their management skills to turn around its business, thereby increasing its performance.

LO 6-3: Differentiate between the main types of corporatelevel strategies and explain how they are used to strengthen a company’s business-level strategy and competitive advantage.

POWERPOINT SLIDES 6-30 TO 6-43

b. Unrelated diversification allows managers to engage in portfolio strategy, which is the practice of apportioning financial resources among divisions to increase financial returns and spread risks among different businesses.

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Chapter 06 - Planning, Strategy, and Competitive Advantage

E. International Expansion: Corporate-level managers must decide on the appropriate way to compete internationally.

1. If an organization needs to sell its products abroad or compete in more than one national market, managers must ask themselves to what extent should their company customize its product’s features and marketing campaign to suit different national conditions.

2. Global strategy is selling the same standardized product and using the same basic marketing approach in each national market.

3. If managers decide to customize products and marketing strategies to specific national conditions, they adopt a multidomestic strategy.

4. The major advantage of global strategy is the significant cost savings associated with not having to customize products and marketing approaches.

The major disadvantage is that by ignoring national differences, managers are vulnerable to local competitors.

5. The major advantage of multidomestic strategy is that by customizing product offerings and market approaches, managers are able to gain market share or charge higher prices. The major disadvantage is that customization raises production costs and puts the company at a price disadvantage.

F. Choosing a Way to Expand Internationally: Before setting up foreign operations, managers must analyze the forces in the environment of a particular country and choose the best method to expand and respond to those forces in the most appropriate way.

TEXT REFERENCE

MANAGEMENT INSIGHT: Revised Strategy Puts Crocs on Sound Footing Croc makes shoes from Croslite, a trademarked resin that makes their shoes comfortable, soft, and lightweight. Founded in 2002, Croc hit a popularity peak in 2007, when it sold 50 million pairs.

Yet by 2009, the company was struggling. Sales were hurt by the recession and by knockoff shoes that cut into sales of Crocs and helped saturate the market. Also, there was a backlash from consumers.

Some people hated the footwear enough to start a social media campaign against Crocs.

To recover, the company expanded its shoe line to include more fashionable—but still comfortable—shoes. In 2013, the company fired its CEO and secured a $200 million investment from the private equity firm Blackstone.

To reduce losses in 2014, the company closed stores and laid off employees in an effort to return to profitability. (pp. 210211)

1. Importing and Exporting: A company engaged in exporting makes products at home and sells them abroad. A company engaged in importing sells products at home that are made abroad (products it makes itself or buys from other companies).

2. Licensing and Franchising: a. In licensing, a company allows a foreign organization to take charge of both

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Chapter 06 - Planning, Strategy, and Competitive Advantage

manufacturing and distributing one or more of its products in the licensee’s country or region of the world in return for a negotiated fee. b. In franchising, a company sells to a foreign organization the rights to use its brand name and operating know-how in return for a lump sum payment and a share of the franchiser’s profits.

3. Strategic Alliances: In a strategic alliance, managers pool or share their organization’s resources and know-how with those of a foreign company, and the two organizations share the rewards or risks of starting a new venture in a foreign company. a. A joint venture is a strategic alliance among two or more companies that agree to jointly establish and share the ownership of a new business. b. Risk is reduced and a capital investment is generally involved.

4. Wholly Owned Foreign Subsidiaries: When managers decide to establish a wholly owned foreign subsidiary, they invest in establishing production operations in a foreign country, independent of any local direct involvement. This method is much more expensive than the others but also offers high potential returns.

VII. Planning and Implementing Strategy After identifying appropriate strategies, managers confront the challenge of putting those strategies into action. Strategy implementation is a five-step process: 1. Allocating responsibility for implementation to the appropriate individuals or groups.

2. Drafting detailed action plans that specify how a strategy is to be implemented.

3. Establishing a timetable for implementation that includes precise, measurable goals linked to the attainment of the action plan.

TEXT REFERENCE

Management Insight: Would You Like Some Fritos with That Diet Pepsi?

The history of PepsiCo tells a tale of related and unrelated diversification. Best known for the soda from which it gets its name, it merged with Frito-Lay, Inc., in 1965 to become PepsiCo.

Along the way, it has diversified into many products related and unrelated to its beverage and packaged snack– food businesses. For example, in unrelated diversification, the company once owned several restaurant chains. An example of related diversification includes the 1998 purchase of Tropicana, which enabled PepsiCo to move into juices.

Activist investor Nelson Peltz would like to see PepsiCo split its beverage and food units apart. He argues that the two units would be stronger apart than they are together by offering investors stronger growth in sales.

However, Warren Buffet disagrees, claiming that the beverage and food units are both sound and work well together. In addition, PepsiCo CEO Indra Nooyi insists that beverages and snacks go together, both for consumers and for business logistics.

For now, PepsiCo is keeping its beverage and food units

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Chapter 06 - Planning, Strategy, and Competitive Advantage

4. Allocating appropriate resources to the responsible individuals or groups.

together.(pp. 214-215)

5. Holding specific individuals or groups responsible for the attainment of corporate, divisional, and functional goals.

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Chapter 06 - Planning, Strategy, and Competitive Advantage

LO 6-4: Describe the vital

role managers play in implementing strategies to achieve an organization’s mission and goals POWERPOINT SLIDES 6-44 TO 6-45

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Chapter 06 - Planning, Strategy, and Competitive Advantage

LECTURE ENHANCERS Lecturer Enhancer 6.1 THE IMPORTANCE OF MISSION STATEMENTS Mission statements can be defined as ―enduring statements of purpose that distinguish one organization from similar enterprises.‖ A mission statement should define the exact nature of a company’s business for each of its group of stakeholders with which it is involved. Business Weeks Magazine reports that firms with well-crafted mission statements have a 30% higher return on certain financial measures than firms that lack such documents. In addition, a number of academic studies suggest there is a positive relationship between mission statements and organizational performance.

Researchers suggest that a well-crafted mission statement can insure unanimity of purpose, arouse positive feelings about the firm, provide direction, serve as a focal point, provide a basis for objectives and strategies, and resolve divergent views among managers.

In every organization, there a differing views among managers regarding direction and appropriate strategies. Discussing these issues in the course of developing a mission statement can help resolve these divergent views. This can be especially important to firms facing restructuring, downsizing, or faltering performance.

A mission statement should also be inspiring. The reader should want to be a part of an organization after reading it. It should also be enduring, project a sense of worth, intent, and effectively communicate shared organizational expectations. The intrinsic value of the firm’s product should also be clearly articulated.

Some research suggests that there is a great deal of room for improvement in the mission statements of some companies. The expected payoff from improving its mission statement is enhanced communication, understanding, and commitment among managers and employees. This translates into enhanced individual and organizational performance.

Adapted from” It’s Time to Redraft Your Mission Statement,” Journal of Business Strategy, Vol. 24, No.1, p. 11.

Lecturer Enhancer 6.2 SCENARIO PLANNING Consider the horrors of 9/11 and the anthrax scares that followed, the Enron scandal, and the economic jitters caused by heightened tensions in the Middle East. Each of these occurrences has contributed significantly to the turbulence of the current business environment. If scenario planning was unable to help managers foresee and prepare for these specific developments, does that mean that it should be discredited as a managerial activity? Not if you understand what scenario planning is designed to do, believes Paul Schoemaker, a research director at the University of Pennsylvania’s Wharton School. He says scenario planning was never intended to be substitute for crisis planning. It is, in fact, the opposite of a one-track preparation for a single event. If a company is using scenario planning to prepare for specific crises, they are missing the point. The purpose of scenario planning is to broaden the array of possible future paths that are being contemplated by an organization. Those future paths can hold either opportunities or threats. If a company sees that they are on a different path than the one they are expected to be on, scenario planning provides the option to switch.

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Chapter 06 - Planning, Strategy, and Competitive Advantage

Below are a few examples of companies that have engaged in scenario planning. Past events have taught them to prepare for the future by envisioning a variety of paths that may need to be traveled, given the uncertainty in which we all live.

WHAT IF your risk profile shifts dramatically? U.S. insurers rethought risk-sharing in the wake of 1992's Hurricane Andrew, which caused a then-record $16.8 billion in losses. Primary insurers (think Allstate) began to share risk more broadly among themselves and sell off more to reinsurers (think Lloyds of London), which provide surplus coverage for major losses. These insurers upgraded their computer models to predict payouts and avoid overextending themselves. As a result, the insurance industry expects to fare better today even though the damages from future attacks could easily surpass those of Hurricane Andrew.

WHAT IF demand suddenly falls off? How can a company quickly find allies who could help it consolidate the industry and save jobs? Arrow Electronics (Melville, N.Y.), a distributor of electronic components and computer products, faced such a dilemma when computer sales flattened in 1985. Arrow, the industry's scrappy No. 2 player, was able to acquire the No. 3 player. This swift move catapulted Arrow to the No.1 position, which it still holds. Chairman Stephen Kaufman says his company's outward focus has enabled it to react more quickly than its competitors. Companies today should take a cue from Arrow reviewing their competitive landscape and thinking through merger scenarios.

WHAT IF global events disrupt your supply chain? Compare General Motors' plight in the days after September 11th to Dell's. GM had to close down factories in Ontario due to parts delays at the Canadian border. Dell, which has built one of the world's best supply chain networks, chartered an airliner to fly parts from Taiwan to its Texas factory, ran factories day and night, and converted three 18-wheel trucks into mobile technology and support facilities in order to supply 24,000 computers to New York City and Washington, D.C. WHAT IF prices drop precipitously? The high-cost producer sets the price during boom times, and most competitors make money. In difficult times, the low-cost producer sets the price, thereby controlling the level of competitors' profit margins. Intel has cut prices on its microprocessors by 35%. Dell halved its prices and still makes money—not so for some of its competitors. The speed of the economy's decline underscores the importance of relative cost position.

Therefore, firms must scrutinize their purchasing costs and cycle times relative to their competitors, detect the inefficient processes, and fix them.

Adapted from “Five Reasons why You Still Need Scenario Planning,” Harvard Management Update, June 2002 and “How to Think Strategically in a Recession, Harvard Management Update, November 2001

MANAGEMENT IN ACTION Notes for Topics for Discussion and Action DISCUSSION 1. Describe the three steps of planning. Explain how they are related.

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Chapter 06 - Planning, Strategy, and Competitive Advantage

The first step in planning involves determining the organization’s mission and goals. The second step is formulating strategy in which managers analyze the organization’s current situation and then conceive and develop the strategies necessary to attain the organization’s mission and goals. The third step is strategy implementation, in which managers decide how to allocate the resources and responsibilities required to put those strategies into action so that change will occur within the organization. The first step, determining the organization’s mission and goals, guides the following two steps in the planning process by defining which strategies are appropriate and which are inappropriate.

2. What is the relationship among corporate-, business-, and functional-level strategies, and how do they create value for an organization?

A corporate-level strategy is a plan that indicates in which industries and national markets an organization intends to compete. A business-level strategy indicates how a division intends to compete against its rivals in an industry. A functional-level strategy is a plan of action that managers of individual functions can follow to improve the ability of each function to perform its task-specific activities. In a planning process, it is important that there is a consistency in planning across the three divisions. When consistency is achieved, the organization operates with increasing efficiency and effectiveness.

3. Pick an industry and identify four companies in the industry that pursue one of the four main businesslevel strategies (low-cost, focused low-cost, etc.).

Within the commercial airline industry, American Airlines attempts to differentiate itself by maintaining a reputation of providing superior service on a national level. Jet Blue pursues a focused differentiation strategy, since it also attempts to distinguish itself by providing superior service but only in secondary hubs. Southwest has successfully executed a low cost strategy for many years. Sprint Airlines is also pursuing a low cost strategy, but like Jet Blue, is restricted to servicing only secondary hubs.

4. What is the difference between vertical integration and related diversification?

Related diversification is a strategy that entails entering a new business or industry with the intention of creating a competitive advantage by capitalizing on a current strength or core competency. Related diversification adds values to the company when managers can find ways for its various divisions or business units to share their valuable skills or resources so that synergy is created. Vertical integration is a strategy that entails entering a new business that either produces inputs for the company’s products (backward vertical integration) or assists in the distribution or selling of the company’s products (forward vertical integration).

ACTION 6. Ask a manager about the kinds of planning exercises he or she regularly uses. What are the purposes of these exercises, and what are their advantages or disadvantages?

(Note to Instructors: Student answers will vary. The answers could include the techniques given below, or similar planning techniques.)

The text discusses two types of strategy planning, SWOT Analysis and the Five Forces Model. SWOT analysis is the process by which managers identify organizational strengths (S), weaknesses (W), environmental opportunities (O) and threats (T.) Based on the results of this analysis, managers at the different levels of the organization then select the corporate-, business-, and functional-level strategies to best position an organization to achieve its mission and goals.

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Chapter 06 - Planning, Strategy, and Competitive Advantage

Michael Porter created the Five Forces Model to help managers identify forces in the environment that are potential threats. He identified five principal factors that are major threats because they affect how much profit organizations competing with the same industry can expect to make. These five forces include: 1. The level of rivalry among organizations in an industry 2. The potential for entry into an industry 3. The power of the suppliers 4. The power of the customer 5. Substitute products.

7. Ask a manager to identify the corporate- and business-level strategies used by his or her organization.

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

A corporate-level strategy is a plan of action concerning which industries and countries an organization should invest its resources in to achieve its mission and goals. Corporate-level strategies that managers use include: (1) concentration on a single business, (2) diversification, (3) international expansion, and (4) vertical integration.

A business-level strategy is a plan to gain a competitive advantage in a particular market or industry.

Managers choose to pursue one of four basic kinds of business-level strategies: a low-cost strategy, a differentiation strategy, a focused low-cost strategy or a focused-differentiation strategy.

AACSB: Analytic

BUILDING MANAGEMENT SKILLS How to Analyze a Company’s Strategy Pick a well-known business organization that has received recent press coverage and that provides its annual reports at its Web site. From the information in the articles and annual reports, answer these questions: (Note to Instructors: Prior to assigning this activity, it would be beneficial to ensure that your institution’s library maintains ten years of stockholder reports. Otherwise, it could be an extremely time consuming process for your students to track down this information. An alternative is to reduce the length of time covered by the assignment. Students’ answers will vary based on the company that they have chosen.)

1. What is (are) the main industry(ies) in which the company competes ?

(Note to Instructors: Students’ answers may vary. The answer given below is indicative.)

Victory Suitings Inc. was a clothing line established in 1970. It was mainly aimed at businessmen and executives. Its suits and other formal wear were in great demand among the business class. The company began its production with shirts, trousers, and suits, but quickly moved onto ties and shoes. In 2004, it decided to expand its market by establishing a clothing line exclusively for children called Victory Kidswear. This establishment focused on casual and formal clothes for children. Today, it attracts many customers toward both its clothing lines.

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Chapter 06 - Planning, Strategy, and Competitive Advantage

2. What business-level strategy does the company seem to be pursuing in this industry? Why? When the company first started, it pursued a focused differentiation strategy, in which it only served the business -class. Later, it used a differentiation strategy wherein it introduced formal wear for children which were absent in most of its competitors. This allowed the company to appeal to all kinds of consumers and to establish its own brand image.

3. What corporate level strategies is the company pursuing? Why? The company is pursuing the corporate-level strategy of concentration on a single industry, wherein it has never detached itself from the clothing line. This allowed the managers to increase its efficiency as it is only focusing on a single industry. It has also used the related diversification strategy, wherein it has tried to create a competitive advantage within its own organization. Through related diversification, the company has obtained synergy, wherein the two divisions coordinate their actions to improve the performance of the company.

4. Have there been any major changes in its strategy recently? Why? The company has not made any recent changes to its strategies because focusing on a single industry has allowed the company to satisfy all the customers’ needs. If there is an indication of an increased level of competition, the company can pursue other strategies to expands its businesses.

AACSB: Analytic

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

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

Allowing a small handful of government officials to benefit at the expense of an entire nation and its economy is clearly an unethical and unbalanced situation.

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

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

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

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Chapter 06 - Planning, Strategy, and Competitive Advantage

Bribery by its competitors, according to one U.S. government study, cost American business $11 billion in a single year. In Germany, a legislator estimated that companies in his nation spend as much as $5.6 billion a year on bribes. Clearly, the diversion of such a large amount of any nation’s resources from its production efforts creates inefficiency in its economy and is therefore counterproductive to growth.

Bribery also encourages a creeping erosion of honesty, trust, and other human values that rest at the foundation of a healthy culture.

AACSB: Analytic AACSB: Reflective Thinking

SMALL GROUP BREAKOUT EXERCISE Low Cost or Differentiation?

Form groups of three or four people, and appoint one member as the spokesperson who will communicate your findings to the class when called on by the instructor.

1. Using SWOT analysis, analyze the pros and cons of each alternative.

A. Option #1: Buy abroad, lower prices, and pursue low cost strategy.

PROS: We can effectively compete with the threats of Target and Wal-Mart, focus upon attracting a larger volume of customers, and thereby increase our market share. Also, relationships we build with foreign suppliers may serve as means of allowing us to create a new opportunity by expanding our sales into foreign markets. Doing this strategy will make our low-cost clothing a strength and eliminate the potential weakness of our high-end clothing.

CONS: A great deal of time must first be devoted to research, if this strategy is to be implemented effectively. To make our low-cost clothing into a strength, we must first identify a reliable foreign manufacturer capable of producing high quality clothing at a lower cost. We must then build a relationship with them and determine a way of maintaining control over a manufacturing process that is occurring in a distant part of the world. Also, our marketing department must develop less expensive ways of effectively reaching our target audience. Sufficient resources (time, money, and knowledge) must be made available to conduct this research.

Option #2: Differentiate and concentrate on high end of market.

PROS: We can effectively compete with the threat of mall boutiques that are stealing our high-end customers.

We can charge premium prices and justify them with the superior quality of our products, thereby creating a strength for our company. By focusing on the high end of the market, we can create a new opportunity by building brand image of superiority and quality. Such a brand image can help us build a cadre of loyal consumers, which contributes greatly to long-term viability of the business.

CONS:

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Chapter 06 - Planning, Strategy, and Competitive Advantage

This strategy is expensive. To make high-end clothing into a strength, we will have to increase spending on product design or R&D to differentiate their product, forcing costs upward as a result. We must spend more money on advertising, in an attempt to create a unique image for our store. In addition, it may prove difficult to develop a competitive advantage that allows the consumer to perceive us as superior and unique, in comparison to well-established boutiques. Even if we match the high quality of their products, we may not be able to provide the individual attention that is found at smaller stores. The entrenched brand loyalty that many of these boutiques enjoy can be hard to overcome. Therefore, pursuing this strategy could develop a weakness instead of a strength for our company.

Option #3: Pursue a low cost and differentiation strategy.

PROS: The ability to pursue both strategies simultaneously will result in maximum profitability, since we can justify premium pricing while also enjoying low costs. Also, we can attract two very different categories of consumers – those seeking value and those seeking superior quality. By doing this, we can handle the threats posed by both the low-cost clothing companies and the boutique companies. The broad range of our clothing will become our strength.

CONS: We may be courting disaster, since it is very difficult to pursue both of these strategies at the same time.

Very few companies have successfully done so. Differentiation usually causes costs to rise, which makes discount pricing prohibitive. Porter refers to this as ―stuck-in-the-middle.‖ As a result, the threats posed by the low-cost clothing companies and the boutique companies will increase and the broad range of our clothing will become a major weakness.

2. Think about the various clothing retailers in your local malls and city, and analyze the choices they have made about how to compete with one another along the f low cost and differentiation dimensions.

One way high-end retailers attempt to differentiate themselves is by providing a great deal of customer service. Salespersons are always available to assist customers and answer their questions. Their return policy is usually very liberal. Other examples of personalized customer service include keeping track of customers’ birthdays and telephoning to alert them of special events or promotions related to their favorite brands. These stores also use attractive physical appearance as a means of differentiating themselves from their low cost competitors. Their stores are brightly lit and attractive, the aisles are wider and carpeted, and soft music is played. Displays are attractive and merchandise is always neatly arranged.

While both types of retailers hold sales to attract customers, low cost retailers engage in this promotional technique much more frequently. The low cost competitors usually have fewer salespersons available to assist customers and their buildings are less appealing visually.

AACSB: Reflective Thinking

BE THE MANAGER Questions 1. List the supermarket chains in your city and identify their strengths and weaknesses.

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Chapter 06 - Planning, Strategy, and Competitive Advantage

Answers to this question will vary, depending upon the area of the country in which the students reside and the size of the local shopping area. You could recommend using a SWOT approach to compare the various each of the competitors in your specific area. This industry has many different types of competitors, ranging from mass merchandisers such as Meijers and Kmart to small mom-and-pop grocers and farmers' markets. After identifying all of the competitors, students can begin analysis of each using the planning tools presented in the chapter.

2. What business-level strategies are these supermarkets currently pursuing?

Discounters such as Cub and Aldi (www.aldifoods.com) are using a low-cost strategy. Specialty retailers such as Wild Oats and Whole Foods are using a differentiation strategy.

3. What kind of supermarket would do best against the competition? What kind of business-level strategy should it pursue?

The response to this question depends upon the variety of competitors identified in the first question.

Answers should include a rationale that explains why a particular strategy would work. For example, if students feel that a new store should use a focused differentiation strategy to compete effectively, possible justifications may include demographic data that is descriptive of households in the surrounding community or awareness of a potentially lucrative market niche currently untapped by the competition.

AACSB: Analytic

BLOOMBERG BUSINESSWEEK CASE IN THE NEWS Case Synopsis: Microsoft CEO Satya Nadella Looks to Future Beyond Windows Microsoft had come to be perceived as an out-of-touch behemoth that relied too much on its Windows operating system and failed to move into new markets, like mobile. The company’s new CEO, Satya Nadella, has aggressively looked outside of Windows to develop new business models. Since December, Microsoft has bought two small companies that focus on mobile productivity apps. In Nadella’s first year, Microsoft stock rose 14 percent, and sales increased 12 percent. Also, the new CEO, unlike his predecessor Steve Ballmer, is popular with investors, venture capitalists, and startups.

The big issue Nadella faces is how to generate more revenue with new software and features, such as cloud subscriptions and free apps that replace pricey Windows and Office licenses.

Windows, which once dominated computing and ran on more than 90 percent of computing devices, now runs on 11 percent of computers and gadgets.

Nadella uses the Power BI dashboard to track and compile huge amounts of information on product usage and financial performance to see what works and what doesn’t. Nadella also measures and coordinates executive performance with metrics from the dashboard. Nadella has also changed the way engineering teams are structured, eliminating testers to speed up software releases and adding data scientists and designers to the teams.

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Chapter 06 - Planning, Strategy, and Competitive Advantage

Questions 1. What kind of planning missteps helped cause Microsoft’s decline over the past few years?

Microsoft relied too much on its Windows operating system and failed to move into new markets, like mobile. Key products such as Microsoft Office—the suite of applications that includes Word and Excel—had been designed around Windows, with only parts converted to work on Apple’s iOS and Google’s Android systems.

2. How is Nadella trying to eliminate some of the bureaucracy that has hurt the company’s ability to innovate?

Nadella told employees at a town hall that they should skip meetings if they don’t really need to be there. And he’s advised workers to come to him directly if they feel the bureaucracy is stifling.

Nadella also changed the way engineering teams are structured, eliminating testers to speed up software releases and adding data scientists and designers to the teams. He’s looking at cutting some middle managers to make decisions faster and to eliminate layers of bureaucracy.

3. What business strategies has Nadella implemented that will help revitalize the technology giant?

Microsoft bought two small companies that focus on mobile productivity apps and released a new dashboard for data analysis. Nadella uses the Power BI dashboard to track and compile huge amounts of information on product usage and financial performance to see what works and what doesn’t. Nadella also measures and coordinates executive performance with metrics from the dashboard.

AACSB: Analytic

SUPPLEMENTAL FEATURES

MANAGER’S HOT SEAT (MHS) Project Management: Steering the Committee

SELF-ASSESSMENT(S) There is no self-assessment for this chapter

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Chapter 06 - Planning, Strategy, and Competitive Advantage

Elements of Planning Process SWOT Analysis Porter’s Five Forces

INSTRUCTOR’S POWERPOINT SLIDES These Instructor’s PowerPoint slides can be used to supplement the lecture material.

INSTRUCTOR’S POWERPOINT SLIDE 1 Chapter Title

INSTRUCTOR’S POWERPOINT SLIDE 2 Learning Objectives

INSTRUCTOR’S POWERPOINT SLIDE 3 Planning and Strategy

INSTRUCTOR’S POWERPOINT SLIDE 4 Question?

INSTRUCTOR’S POWERPOINT SLIDE 5 Mission Statement

INSTRUCTOR’S POWERPOINT SLIDE 6 Figure 6.1 - Three Steps in Planning

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Chapter 06 - Planning, Strategy, and Competitive Advantage

INSTRUCTOR’S POWERPOINT SLIDE 7 Why Planning is Important

INSTRUCTOR’S POWERPOINT SLIDE 8 Why Planning is Important

INSTRUCTOR’S POWERPOINT SLIDE 9 Why Planning is Important

INSTRUCTOR’S POWERPOINT SLIDE 10 Figure 6.2 - Levels of Planning at General Electric

INSTRUCTOR’S POWERPOINT SLIDE 11 Levels and Types of Planning

INSTRUCTOR’S POWERPOINT SLIDE 12 Figure 6.3 - Levels and Types of Planning

INSTRUCTOR’S POWERPOINT SLIDE 13 Levels and Types of Planning: Business-Level

INSTRUCTOR’S POWERPOINT SLIDE 14 Levels and Types of Planning: Functional Level

INSTRUCTOR’S POWERPOINT SLIDE 15 Time Horizons of Plans

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Chapter 06 - Planning, Strategy, and Competitive Advantage

INSTRUCTOR’S POWERPOINT SLIDE 16 Types of Plans

INSTRUCTOR’S POWERPOINT SLIDE 17 Standing Plans

INSTRUCTOR’S POWERPOINT SLIDE 18 Single-use Plans

INSTRUCTOR’S POWERPOINT SLIDE 19 Figure 6.4 - Three Mission Statements

INSTRUCTOR’S POWERPOINT SLIDE 20 Defining the Business

INSTRUCTOR’S POWERPOINT SLIDE 21 Establishing Major Goals

INSTRUCTOR’S POWERPOINT SLIDE 22 Strategic Leadership

INSTRUCTOR’S POWERPOINT SLIDE 23 Figure 6.5 - Planning and Strategy Formulation

INSTRUCTOR’S POWERPOINT SLIDE 24 Formulating Strategy: SWOT Analysis Low-cost and Differentiation

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Chapter 06 - Planning, Strategy, and Competitive Advantage

INSTRUCTOR’S POWERPOINT SLIDE 25 The Five Forces Model

INSTRUCTOR’S POWERPOINT SLIDE 26 The Five Forces Model: Hypercompetition

INSTRUCTOR’S POWERPOINT SLIDE 27 Formulating BusinessLevel Strategies

INSTRUCTOR’S POWERPOINT SLIDE 28 “Stuck in the Middle”

INSTRUCTOR’S POWERPOINT SLIDE 29 Focused Low-cost and Focused Differentiation Strategy

INSTRUCTOR’S POWERPOINT SLIDE 30 Formulating CorporateLevel Strategies

INSTRUCTOR’S POWERPOINT SLIDE 31 Vertical Integration

INSTRUCTOR’S POWERPOINT SLIDE 32 Figure 6.6 - Stages in a Vertical Value Chain

INSTRUCTOR’S POWERPOINT SLIDE 33 Question?Global Strategy

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Chapter 06 - Planning, Strategy, and Competitive Advantage

INSTRUCTOR’S POWERPOINT SLIDE 34 Diversification

INSTRUCTOR’S POWERPOINT SLIDE 35 Related Diversification

INSTRUCTOR’S POWERPOINT SLIDE 36 Unrelated Diversification

INSTRUCTOR’S POWERPOINT SLIDE 37 International Expansion

INSTRUCTOR’S POWERPOINT SLIDE 38 Multidomestic Strategy

INSTRUCTOR’S POWERPOINT SLIDE 39 Figure 6.7 - Four Ways of Expanding Internationally

INSTRUCTOR’S POWERPOINT SLIDE 40 Exporting and Importing

INSTRUCTOR’S POWERPOINT SLIDE 41 Licensing and Franchising

INSTRUCTOR’S POWERPOINT SLIDE 42 Strategic Alliance and Joint Venture

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Chapter 06 - Planning, Strategy, and Competitive Advantage

INSTRUCTOR’S POWERPOINT SLIDE 43 Wholly Owned Foreign Subsidiary

INSTRUCTOR’S POWERPOINT SLIDE 44 Planning and Implementing Strategy

INSTRUCTOR’S POWERPOINT SLIDE 45 Planning and Implementing Strategy

INSTRUCTOR’S POWERPOINT SLIDE 46 Be the Manager

INSTRUCTOR’S POWERPOINT SLIDE 47 Topics for Discussion

INSTRUCTOR’S POWERPOINT SLIDE 48 Topics for Discussion

INSTRUCTOR’S POWERPOINT SLIDE 49 Topics for Discussion

INSTRUCTOR’S POWERPOINT SLIDE 50 Topics for Discussion

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