D3: Generic business strategy
Strategic Management: Theory and Practice
Functional Strategies
Contributors: By: John A. Parnell
Book Title: Strategic Management: Theory and Practice
Chapter Title: "Functional Strategies"
Pub. Date: 2014
Access Date: March 29, 2018
Publishing Company: SAGE Publications, Ltd
City: 55 City Road
Print ISBN: 9781452234984
Online ISBN: 9781506374598
DOI: http://dx.doi.org/10.4135/9781506374598.n8
Print pages: 218-245
©2014 SAGE Publications, Ltd. All Rights Reserved.
This PDF has been generated from SAGE Knowledge. Please note that the pagination of
the online version will vary from the pagination of the print book.
Functional Strategies
Chapter Outline
Marketing Pricing Strategies
Promotion Strategies
Product/Service Strategies
Place (Distribution) Strategies
Finance
Production Quality Considerations
Research and Development
Purchasing
Human Resources Human Capital and Knowledge Management
Knowledge and Competitive Advantage
Information Systems Management
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Functional Strategies and Industry Life Cycle
Summary
Key Terms
Review Questions and Exercises
Practice Quiz
Student Study Site
Notes
Corporate- and business-level strategies can only be successful if they are supported by strategies at the business unit's functional levels, such as marketing, finance, production, purchasing, human resources (HR), and information systems (IS). Each functional area should integrate its activities with those of the other functional departments because a change in one department can affect both the manner in which other departments operate and the overall performance of the business unit. The extent to which all of the business unit's functional strategies integrate can determine the effectiveness of the unit's business- and firm-level strategies. Although it has more of a day-to-day, practical connotation, the term tactics is often used to refer to strategic considerations at the functional level.
Functional and business strategies can overlap in terms of emphasis, but there are several key distinctions between the two levels. Functional strategies address a shorter time span and are much more specific than business strategies because they focus on strategy execution. For example, if a business strategy has a 3-year horizon, functional strategies or tactics may be developed on a quarterly or semiannual basis. Moreover, business strategies are usually developed by top executives in the business unit while functional strategies are typically crafted by departmental managers who are responsible for implementing them.
Functional or tactical strategies are formulated after the corporate and business strategies have already been established. However, considering the capabilities of functional areas while higher level strategies are being debated is a good idea. For example, an airline considering expansion through additional international routes should consider factors such as the need for additional personnel and the organization's ability to finance additional airplanes before settling on the expansion plan as the preferred strategic option.
U n f o r t u n a t e l y , m a n a g e r s i n e a c h f u n c t i o n a l a r e a m a y n o t f u l l y a p p r e c i a t e t h e interrelationships among the functions. Marketers who do not understand production may promise customers product features that the production department cannot readily or economically integrate into the product's design. Production managers who do not understand marketing may insist on production changes that result in relatively minor cost changes but fail to satisfy customer needs. For this reason, managers in all functional areas
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should understand how the areas should integrate, and they should work together to formulate functional strategies that fit together and support the corporate- and business-level strategies.
This chapter examines functional strategies in the areas of marketing, finance, production, purchasing, HR, and IS. Although the relationships among functional strategies are not always clear, Table 8.1 summarizes the way functional strategies typically integrate with the business strategy using Porter's cost leadership and differentiation strategies discussed in the previous chapter.
Table 8.1 Integrating Business and Functional Strategies1.
This chapter is organized along functions. In practice, however, many of the issues discussed herein are cross-functional and therefore concern more than one functional area. Production warranties, for example, are a key concern for both the production and marketing
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departments.
Marketing
The competitive strategy and the marketing functional strategy are tightly intertwined. Traditionally, marketing has been dissected into four dimensions or “four Ps”: (1) price, (2) promotion, (3) product/service, and (4) place (i.e., channels of distribution). The particular generic strategy adopted by the business unit influences how these various dimensions are planned and executed. The emphasis on marketing—most notably the notion of customer orientation—continues to gain prominence and places a high level of importance on marketing
strategies that support the firm and business strategies.2. From a competitive standpoint, marketing is arguably the most critical of the functional strategies and should be considered early in the development of the business strategy.
Pricing Strategies
Business units that compete with the low-cost generic strategy produce basic, relatively undifferentiated outputs and often offer low prices. Wal-Mart, for example, is known for its highly effective high-volume, low-cost strategy. Even Internet powerhouse Amazon.com has sought to follow the Wal-Mart model, cutting prices whenever possible in an effort to gain economies of scale (introduced in Chapter 4 and discussed in greater detail later in the
chapter) through high volume.3.
Motel 6 also incorporates such a strategy, offering clean and comfortable, low-priced rooms. Founded more than 40 years ago, Motel 6 minimizes costs by offering few services, such as restaurants or conference rooms. Its simple brand name, Motel 6, even conveys the impression of economy services. Consistent with its no-frills outputs, each Motel 6 offers rooms at daily rates at or below other nearby chain motels. Promotional efforts—primarily radio spots with limited television and billboards—are relatively limited and attempt to convey
to the traveling public that Motel 6 offers satisfactory economy lodging.4.
Businesses that use the generic strategy of low-cost differentiation must market quality
products and services that are distinguishable from the outputs of their competitors.5. For example, Hampton Inn offers larger rooms with better-quality furnishings than Motel 6, along with amenities such as a free breakfast buffet, a swimming pool, and conference rooms. The brand name Hampton Inn is intended to convey the impression of quality and value. Average to slightly above average prices are charged for rooms, depending on the competitive situation, and promotional efforts connote a differentiated quality image.
Businesses emphasizing low prices, however, often find it difficult to raise prices if it becomes necessary. Fast-food restaurants with “dollar menus” in the United States have experienced declines in sales when they attempted to wean consumers from low prices. Automakers rely heavily on rebates to sell cars during economic downturns and often experience similar
difficulties.6.
Business units that combine the focus strategy with the differentiation or low-cost- differentiation generic strategy tend to emphasize other factors in their marketing strategies. These businesses offer unique, high-quality products and services to meet the specialized needs of a relatively small market. Most bed-and-breakfast establishments offer a limited
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number of rooms to discriminating travelers who seek accommodations with a local, home- oriented flavor.
Pricing strategies can involve more than simply a price point relative to the competition. Health clubs, for example, typically promote memberships by the month and offer discounts for commitments of 1 or 2 years. Research suggests that many consumers would actually save money if they chose to pay on a per-visit basis or make a higher monthly payment without a long-term commitment because they never actually use the facilities as much as they project when they join. By offering unlimited usage for a period of time, health clubs are perceived to
be more price competitive by consumers who may or may not attain their fitness goals.7.
Promotion Strategies
From a marketing perspective, the Internet presently offers opportunities for integration among various media. Since the 2000s, Procter & Gamble (P&G) has sponsored news stories on topics such as health care, parenting, and nutrition, ending each 90-second segment with a referral to its website via the television station's site. For example, a story on diaper rash
might conclude with a referral to the Pampers page.8.
The Internet enables many businesses to target potential customers in an efficient manner. For this reason, Internet-based and traditional businesses have begun to use the Internet as a significant part of their promotional campaigns. Following an initial boom in Internet advertising in the late 1990s, interest in web advertising waned for several years. By the mid- to late 2000s, however, the advent of broadband and new advertising formats, including more sophisticated animation, sparked a resurgence. Search-related advertisements—those that
appear alongside search results at popular search sites—remain quite popular.9.
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Product/Service Strategies
Product decisions are a key part of the marketing mix and can be quite interesting. Consider the following examples. Honda, Nissan, and other carmakers began adding safety features in many of their 2004 models to provide sport utility vehicle (SUV) drivers, who place a high
value on safety, with alternatives in smaller vehicles.10. In the early 2000s, restaurants such as McDonald's and Starbucks had begun providing wireless Internet access in many of their restaurants to provide online access for customers with laptops. Initially, 1 hour of access at McDonald's was offered as an add-on to a value meal, but it is now free and unrestricted at
most locations.11.
In the early 2000s, PepsiCo controlled three of the top five soft drinks in the United States. Market shares of two of the three—Pepsi and Mountain Dew—declined, however, while Diet Pepsi increased during this time. Although Diet Pepsi remained third in revenues behind its two siblings, PepsiCo announced in early 2005 that Diet Pepsi would replace Pepsi as its new
flagship, a major shift in its marketing efforts.12. Since the introduction of Coke Zero in 2005, Coca-Cola has also shifted much of its attention away from its flagship—Coca-Cola Classic—
to its low-calorie alternative.13. This heightened emphasis on low-calorie beverages over the past decade coincides with the increased concern for healthy eating addressed in Chapter 4.
Minor shifts in the product/service strategy can augment a business strategy. In 2012, Dollar General launched about 40 Dollar General Market stores, larger outlets that also include various fresh and frozen foods. Although twice the size of a traditional Dollar General, the markets (about 16,000 square feet) are still much smaller than typical supercenters (150,000 square feet or more), making them much easier for customers to navigate. As chief executive
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officer (CEO) Rick Dreiling put it, successful small grocery stores do not offer everything but concentrate on the essentials that comprise the majority of larger supermarket sales. By modifying its array of merchandise, Dollar General can be positioned more effectively against
supercenters like Target and Wal-Mart.14.
Branding is a key part of the product strategy, especially in product or service domains where differentiation is difficult to establish. In 2011, Quill.com—an online outlet owned by office superstore Staples—struck a licensing deal with NBC's parent company to launch the Dunder Mifflin brand of paper, a takeoff on the hit television comedy series The Office. With paper sales declining by an estimated 3% each year, Quill is searching for innovative branding approaches to secure as much of the estimated $3 billion North American copy paper market. According to Quill's chief marketing officer, Sergio Pereira, the Dunder Mifflin brand reflects an effort to combat a “race to the bottom in the paper business.” The move is an example of reverse product placement; instead of placing branded products in movies and situational
comedies, companies bring fictional but often well-known brands to life.15.
Product design is also critical to all firms, regardless of the strategies they employ. Although design was traditionally associated with appearance, the concept also includes such features as designing a product for easy manufacturability so that fewer parts have to be purchased or
improving the product's ability to perform its purpose.16. Effective design now addresses aesthetics as well as other consumer concerns, including such factors as how a product works, how it feels in the hand, how easy it is to assemble and fix, and even what its prospects are for recycling. Gaining a competitive advantage through superior product design involves all functional areas. A well-designed product is attractive and easy to build, market, use, and maintain; it is also driven by simplicity.
Customer service is also a critical marketing concern. Developing and maintaining the quality of customer service can be more challenging than enhancing product quality because the consumer perceives service value primarily at the time the service is rendered (or not
rendered).17. All functional areas must work together to provide the customer with product
and service value.18. For example, an online retailer must fulfill several customer needs. First, it must offer value to customers in their shopping. Carrying the products that customers desire at competitive prices means that the various functions must communicate with one another and cooperate closely. Next, it must make certain that its employees are able to respond to customer inquiries, either electronically or by telephone. This capability requires effective human resource management (HRM) training as well as IS management. The e-tailer must also ensure that it stocks sufficient quantities of the items that it promotes, a common problem for start-ups in the 1990s. This requires interaction among the purchasing, inventory, IS, and marketing functions. Finally, the company must provide the clear, efficient, and secure means for customers to complete the purchase process accurately and quickly, requiring the close cooperation of IS and HRM.
Product/service decisions are often difficult. Responding to market share gains by discounters such as Target, Federated Department Stores recently redesigned its stores to promote self- service while reducing the number of sales clerks. The large retailer hopes that consumers will perceive the more efficient layout as more convenient, while enabling Federated to cut
costs.19. At the same time, Sak's Fifth Avenue, Macy's, and Federated have introduced a number of upscale private label products in an attempt to lower prices while maintaining a
quality image.20.
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The importance of service cannot be overemphasized. Southwest Airlines’ frequent fliers appreciate that company's commitment to superior service in a friendly and professional but
sometimes comical, environment.21. Interestingly, surveys typically suggest that more than one-third of consumers choose businesses that charge high prices but provide excellent
service over companies that offer low prices but mediocre service.22.
Lackluster service is still a problem in certain industries, however. Rising labor costs have prompted a number of companies to integrate automated telephone customer service systems designed to answer questions and provide information without the assistance of service associates. The incessant reminders that “your call is very important to us” and callers must “press 9 for more options” have become a common irritant to customers who expect a higher level of service. Some websites even publish the sequence of numbers necessary to navigate
each system and reach a real person without waiting to hear all of the menu options.23.
Personal attention can be a key source of differentiation, however. Personal attention involves paying heed to details, addressing customers’ concerns, answering technical questions, and providing service after the sale. It can play an important psychological role as well because
customers see how important quality is to the organization.24. Balancing the needs for economies of scale and personal service is a challenge as elaborated in the discussion on mass customization in Chapter 4.
Place (Distribution) Strategies
Low-cost businesses typically seek distribution channels that meet the basic needs of the target market while minimizing costs. In contrast, differentiated businesses often select the most appropriate means of distribution regardless of cost and may even use the means of distribution as a way of differentiating the business (see Strategy at Work 8.1). For example, cost leader Cici's distributes its pizza through low-priced buffets and customer pickup at the restaurant. Domino's has used “free” delivery—the cost of which is built into the price—as an effective means of differentiation over the years, although some now add a small charge for delivery.
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Strategy at Work 8.1. The Importance of Distribution and Production Capacity in E-Commerce
Success25.
Despite the early failures of many dot-com startups, some Internet companies continue to grow. These e-tailers understand that they are facing an unprecedented challenge- how to create an infrastructure that cost-effectively meets the needs and complex demands of today's sophisticated customer. To respond, many are designing and implementing multichannel distribution models to enhance distribution and improve
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customer service.
Customers who shop on the Internet typically check their order several times before they receive it. This means that the distribution system should be able to confirm order receipt, notify the customer of shipping details, and provide immediate notice of any problems that may occur in the process.
For example, JCPenney.com has implemented a very effective distribution system. Of course, JCPenney.com does not depend solely on e-commerce for its retail sales. Other clothing merchants that have followed suit include Gap.com, EddieBauer.com, and BananaRepublic.com. BarnesandNoble.com has also successfully integrated its product inventories and distribution channels. Shipping costs have been slashed, and customers now have more options for pickups, purchases, and returns.
A firm's distribution strategy can vary across locations because of cultural, economic, or other considerations and should be analyzed accordingly (see Case Analysis 8.1). In large cities— particularly those outside of the United States—even fast-food giants like McDonald's and KFC offer free or low-cost delivery. In places like Cairo and Beijing, high real-estate prices, crowded conditions, and fewer cars make large restaurants with drive-thru service less feasible. McDonald's first offered delivery in 1994 in Egypt; today, delivery accounts for more than 30% of total sales in that country. By 2012, 1,500 out of 8,800 restaurants in the McDonald's Asia/ Pacific, Middle East, and Africa division offered delivery as did more than one-half of Yum's 3,500 KFC restaurants in China. As one McDonald's executive put it, “If you
can't come to us, we'll come to you.”26.
Case Analysis 8.1 Step 12: What is the Organization's Marketing Strategy?
Given the strong link between a business’ competitive strategy and its marketing functional strategy, this step can require a lot of research and depth. What marketing efforts are underway to support the current business-level strategy? Are these efforts successful? Why or why not? Provide examples of recent promotional or public relations campaigns that support your assessment.
An effective means of assessing the marketing strategy is to analyze each of the four Ps individually. Company websites and trade journals are excellent sources for the type of information that should be included in this section.
Finance
The financial strategy addresses factors related to managing cash, raising capital, and making investments. Because few businesses internally generate the amount of cash necessary to grow, most resort to other means of securing financial resources. Different means of securing funds will likely be considered and prioritized depending on the corporate
and business strategies selected.27.
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Low-cost businesses pursue financial strategies that are intended to minimize their financial costs. They place a great emphasis on keeping costs within the limits of the funds they are able to generate from operations. When borrowing becomes necessary, they usually try to do so when credit costs are relatively low even if they must defer expansion plans.
In contrast, differentiated businesses are more likely to pursue financial strategies that fund initiatives such as quality improvements and product research and development (R & D) even when the cost of securing funds is relatively high. They may sell common stock, incur debt, or even seek venture capital regardless of the costs of doing so. The greatest strategic priorities are maintaining quality and enhancing differentiation, not minimizing the cost of funds.
One can assess a firm's financial strategy, as well as its performance, by examining its financial ratios and comparing them to those of key competitors or industry averages. Comparing current ratios to those in the past is also relevant. Table 8.2 provides a list of key financial ratios that can help evaluate the financial position of the organization (see Case Analysis 8.2). Some additional ratios are industry specific, however, and can be very insightful. For example, many retailers calculate maintenance expenditures per square foot of floor space. Expenditures at Macy's, Wal-Mart, and others chains are typically between $6 and $8 per square foot. When stores spend much less—Sears spent less than $2 per square foot between 2005 and 2011—it is often a reflection of a cash shortage, deteriorating stores,
or both.28.
Table 8.2 Primer on Essential Financial Ratios
Ratio Formula What the Ratios Represent
Liquidity Ratios
Current Ratio Indicates how much of the current liabilities the current assets can cover; ordinarily 2:1 or better is desirable
Quick Ratio or Acid Test or Liquidity Test
Indicates how rapidly a business can come up with cash on short notice. Not relevant for firms where inventory is almost immediately convertible to cash (e.g., McDonald's)
Activity Ratios
Asset Turnover Measures how efficiently the company's total assets are being used to generate sales
Inventory Turnover
Indicates how many times inventory of finished goods is sold per year
Sales-to- Working Capital
Measures how efficiently net working capital (current assets - current liabilities) is used to generate sales
Leverage Ratios
Debt-to-Asset Indicates the percentage that borrowed funds are utilized to finance the assets of the firm
Debt-to-Equity Indicates the percentage of funds provided by creditors as compared with owners
Long-Term Debt-to-Equity
Indicates the percentage of funds provided by long-term creditors as compared with owners
Performance Ratios
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Gross Profit Margin
Measures company's efficiency during the production process. Substantial variations over time could suggest financial difficulties or possibly fraud.
Return on Assets
Measures the return on total assets employed
Return on Equity
Measures a firm's profitability in comparison to the total amount of shareholder equity
Return on Sales Indicates ratio of return on net sales
Strategic decisions should not be based on financial ratios alone. While ratios can provide valuable insight, their usefulness is limited because the accounting data on which they are based do not always provide a complete picture of the firm's financial position.
Case Analysis 8.2 Step 13: What is the Organization's Financial Position and Financial Strategy?
What is the organization's financial strategy? Is the organization financially sound? Ratio analysis is a systematic means for analyzing the financial condition of the organization. The purpose of financial ratio analysis is to determine the financial effects on a business based on current, past, and possible future managerial business decisions. Financial ratios-expressed either as a times multiple (x) or a percentage (%)- are computed by taking numbers from a business's financial statements and converting them into meaningful relationships and indicators of the firm's financial performance. Calculating financial ratios covering the current and past fiscal years or periods of a business and then comparing them to each other and to comparable industry averages for the same time period will provide an insight into the business's financial condition and operational performance.
Calculating only the ratios of the firm being analyzed is not sufficient. Industry norms must also be considered. Because of structural and competitive factors, a ratio that may appear normal in one industry may signal cause for concern in another. Therefore, each ratio should be compared to the industry norm (when available) and augmented by some analysis of its note-worthiness. For example, it is not sufficient to note that the Days of Inventory is 47.5 without also identifying the industry norm and addressing why an organization is above or below that norm. A thorough ratio presentation is appropriate, while focusing on the most critical ratios-those that differ significantly from years past or from the industry norm.
If the company competes in multiple industries, comparisons should be made to the averages for industries in which the firm operates. Alternatively, when another company or a set of companies with similar characteristics exists (e.g., PepsiCo and Coca-Cola), direct company comparisons can also be made. The key is that a company's performance is compared to the most valid and reliable set(s) of standards available although comparing is easier with some firms than with others.
Sometimes unique characteristics of the company do not permit the calculation of all of the relevant ratios. For example, inventory turnover is irrelevant for corporations that do
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not hold inventory. Such abnormalities should be clarified in the report. A number of websites provide detailed financial statements and ratios for many traded companies.
Production
Similar in some respects to the product dimension of the marketing strategy, the production or operations strategy outlines how a business generates its goods and services. Production/
operations management (POM) is crucial to both manufacturing and service organizations.29.
In general, the production strategy difference between low-cost businesses and differentiated businesses is straightforward. Low-cost businesses develop production systems that minimize production costs—often by limiting customer options and product features. In contrast, differentiated businesses tend to develop systems that emphasize product and service quality and distinctiveness, even if production costs rise as a result.
Organizational size is also a key factor in production strategy decisions. Generally speaking, the range of production strategies at its disposal increases as an organization grows. Large business units can capitalize on a number of factors that accompany their larger size. Each of these factors is associated with the experience curve, the reduction in per-unit costs that
occurs as an organization gains experience producing a product or service.30.
Interestingly, each time a company's output doubles, production costs decline by a specific percentage, depending on the industry. The greater the percentage, the greater the role size plays in performance. For instance, with a sales volume of 1 million units, per-unit costs may be $200 in a particular industry. With a doubling of volume to 2 million units, per-unit costs may decline by 20%. Another doubling of volume to 4 million units may lower per-unit costs another 20%. The experience curve can be observed in a wide range of manufacturing and service industries, including automobiles, personal computers, and airlines. Although the precise percentages are not always known, the principle of the curve can be accurately applied to most production environments.
The experience curve is based on three underlying concepts: (1) learning, (2) economies of
scale, and (3) capital-labor substitution possibilities.31. Learning refers to the idea that employees become more efficient when they perform the same task many times. An increase in volume fuels this process—also increasing expertise. This reasoning can be applied to all jobs— line and staff, managerial and nonmanagerial—at the corporate, business unit, and functional levels. Economies of scale—the reductions in per-unit costs as volume increases— can be great for businesses such as automobile manufacturers or Internet service providers (ISPs). Capital-labor substitution refers to an organization's ability to substitute labor for capital or vice versa as volume increases, depending on which combination minimizes costs and/or maximizes effectiveness. A number of American manufacturers, for example, have shifted their assembly operations across the Mexican border where labor costs are much lower.
Recent developments in production technology have modified the traditional capital versus labor dichotomy. A number of facilities have advanced to the point that products are manufactured while no workers are present—often during the night. The role of the workers in
such facilities is not to produce the products but to prepare them for delivery.32.
Low-cost businesses with large market shares tend to benefit the most from the experience
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curve. Differentiated businesses often attempt to gain a similar advantage by charging higher than average prices, seeking to gain market share and ultimately lower costs by offering higher quality outputs. However, differentiators do not actively capitalize on the opportunities presented by low costs whereas managers of businesses that compete with low-cost-
differentiation do.33.
Regardless of strategy, seeking to exploit the experience curve can be risky. Increases in volume often involve substantial investments in plant and equipment and a commitment to the prevailing technology. However, as technology changes and renders the plant's production processes obsolete, outdated capital equipment may have to be discarded. Balancing current investments in plant and equipment with the risk that current technology may become dated prompts a number of firms to invest in flexible manufacturing systems that can be retooled quickly to respond to market changes.
Enhancing efficiency in production is a key issue in restaurants, textile plants, and even airplane factories. In the mid-2000s, airplane producers Airbus and Boeing launched concerted efforts to simplify their production procedures and reduce assembly time. Airplane
parts are now designed with a greater emphasis on how fast they can be assembled.34.
Speed in developing, making, and distributing products and services can be the source of a
significant competitive advantage.35. In fact, an application of speed known as “time-based
strategy” is a top priority in many organizations.36. Companies that can deliver quality products in a timely fashion become problem-solvers for their customers and are more likely to prosper. Motorola, for instance, cut the time needed to produce a cellular telephone from 14 hours to less than 2, while retail prices have fallen dramatically. Speed is equally important in customer service.
Quality Considerations
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1. 2. 3.
4.
5.
In the late 1970s and early 1980s, strategic managers became interested in a concept borrowed from the Japanese known as quality circles, whereby managers and workers would meet to discuss and implement production changes that improved quality and efficiency. This interest evolved in the late 1980s and early 1990s into a heightening of interest in quality,
broadly known as total quality management (TQM).37. Developed by W. Edwards Deming, TQM refers to the totality of features and characteristics of a product or service that bear on its ability to satisfy customer needs. Historically, quality has been viewed largely as a controlling activity that takes place at or near the end of the production process—an after-the-fact measurement of production success that occurs in the “quality control” department. However, the notion that quality is measured after an output is produced has eroded, and quality is now seen as an essential ingredient of the product or service being provided and a concern of all members of the organization. Hence, from a production standpoint, producing a quality product lowers defects and minimizes rework time, thereby increasing productivity. In addition,
making the operative employees responsible for quality eliminates the need for inspection.38.
As an extension of the TQM philosophy, Six Sigma seeks to increase profits by eliminating variability in production, defects, and waste that undermine customer loyalty. Six Sigma is a systematic process that utilizes information and sophisticated statistical tools to improve production efficiency and quality. Practitioners receive training and advance to various levels of certification in Six Sigma concepts. Many companies began adopting the approach in the
late 1990s and early 2000s and have reported substantial savings.39.
Problems resulting in poor product or service quality can arise even in the best-managed businesses. Companies must guarantee an acceptable level of quality to instill confidence among buyers and avoid loss of business when such problems occur. The concept of the guarantee is both a quality and a marketing concern. Some companies even offer unlimited money-back guarantees.
In an effort to minimize short-term costs, however, many companies ignore this competitive advantage. Often, guarantees lapse after a very short period of time or contain too many exceptional conditions to be effective competitive weapons. Managers must balance the costs associated with a superior guarantee with its benefits and tailor the package to the organization's strategy. Nonetheless, it has been suggested that the following five desirable
characteristics be included in service guarantees:40.
The guarantee should be unconditional with no exceptions. It should be easily understood and written in simple language. The guarantee should be meaningful by guaranteeing what is important to the customer and making it worth the customer's time and effort to invoke the guarantee should he or she be dissatisfied. The guarantee should be convenient to invoke and not require the customer to appeal to several layers of bureaucracy. The customer should be satisfied promptly without a lengthy waiting period.
Changes in the competitive environment can even spark quality decisions from competitors within a given industry. For example, following the 9/11 terrorist attacks, many airlines engaged in vigorous cost-cutting to help stop losses that were to follow. Although a number of airlines eliminated meals on domestic flights, Continental actually took steps to improve cabin comfort and retain quality meals on its flights. Hence, whereas most airlines moved to address critical short-term financial concerns, Continental perceived an opportunity to emphasize
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quality and seek to develop long-term competitive advantage.41. Since that time, however, Continental has followed the lead of other airlines, eliminating all complimentary food on domestic flights in 2010.
Research and Development
Another function closely related to production is R & D. Differentiated businesses often—but not always—spend more on R & D than low-cost businesses. However, differentiated and low- cost businesses tend to pursue different types of R & D. Product/service R&D refers to efforts directed toward improvements or innovations in the quality or uniqueness of a company's outputs. For example, a number of carmakers are competing vigorously in the 2000s to develop high-performing and cost-competitive vehicles utilizing power sources other
than gasoline.42.
In contrast, process R&D seeks to reduce operational costs and make them more efficient. R & D is most important in rapidly changing industries where production modifications are most often required to remain competitive. Low-cost business units tend to emphasize process R&D to reduce their operations costs whereas differentiators tend to place more importance on product/service R & D to produce improved and innovative outputs.
Product/service innovations can be risky. Once introduced, new products or services may not generate a level of demand sufficient to justify the R&D investment. RJR Nabisco, for example, has spent millions of dollars to develop and produce a smokeless cigarette. Although the new brands such as Premier and Eclipse were introduced with considerable
fanfare, demand never materialized, and the product was canceled after a short time.43.
Interestingly, Japanese companies often abandon their new products as soon as they are
introduced to force themselves to develop new replacement products immediately.44. U.S. companies have responded by increasingly forming direct research links with their domestic competitors, asking their suppliers to participate in new-product design programs, and taking
ownership positions in small start-up companies that have promising technologies.45.
Purchasing
All organizations have a purchasing function. In manufacturing firms, the purchasing department procures raw materials and parts so that the production department may process them into finished products. At the retail level, company buyers purchase items from manufacturers for resale to the consumer. Buyers must identify potential suppliers, evaluate them, solicit bids and price quotes, negotiate prices and terms of payment, place orders, manage the order process, inspect incoming shipments, and pay suppliers.
A business unit's purchasing strategy should be integrated with its competitive strategy. Generally speaking, low-cost businesses seek to purchase materials and supplies of basic quality at the lowest costs possible. Large organizations are able to lower costs further through their ability to demand quantity discounts. In addition, buyers that are larger than their suppliers and whose purchases represent a significant percentage of their suppliers’ revenues may also possess considerable negotiating clout.
Small companies, however, can often attain low-cost purchasing through other means, such
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as working with other small businesses in the same industry to pool their purchasing requirements. Because of large quantities, industry networks are often able to wield as much power as a single large business in demanding quantity discounts and negotiating terms.
Low costs are not the only consideration in purchasing activities. Rather, low-cost businesses should seek the “best cost,” one that is as low as possible consistent with basic quality standards of the purchased good or service. A low price is useless if the item breaks down in the production process or fails to meet customer demands. On the other hand, excessive quality unnecessarily raises costs and prices. Because their customers are willing to pay higher prices, differentiators tend to emphasize the procurement of high-quality inputs, even if they cost more than alternative offerings. In these cases, the quality of the parts or products takes precedence over cost considerations although cost minimization is always desirable.
Purchasing is the first step in the materials management process. Indeed, purchasing also i n c l u d e s t h e o p e r a t i o n o f s t o r a g e a n d w a r e h o u s e f a c i l i t i e s a n d t h e c o n t r o l o f
inventory.46.Consequently, these related tasks can be efficiently and effectively conducted only if they are viewed as parts of a single operation, regardless of the business strategy
employed.47. The just-in-time (JIT) inventory system demonstrates the interrelationships. JIT was popularized by Japanese manufacturers to reduce logistics costs. Using this technique, the purchasing manager asks suppliers to ship parts at the precise time they are needed in production to hold inventory, storage, and warehousing costs to a minimum. As such, JIT has reduced costs for a number of large firms.
Although American manufacturers have moved in the direction of JIT, this approach has worked particularly well in Japan where large manufacturers wield considerable bargaining power over their much smaller suppliers. Because JIT places great delivery demands on suppliers, it does not tend to work well when manufacturers do not possess great bargaining power, as is often the case in the United States. In addition, an occasional late supplier can
cripple a firm's production process.48.
A JIT system also makes a company highly vulnerable to labor strikes49. and ecological disasters. Japanese manufacturing was crippled when a major earthquake and tsunami hit the island in 2011. While many of the problems in this particular instance would have occurred without a JIT system, a lack of inventory causes production to cease immediately when any supplier experiences difficulty.
Many large U.S. manufacturers seek a middle ground between traditional inventory systems and JIT. Most have reduced their number of suppliers from a dozen or more to two or three to
control delivery times and quality.50. Companies are also strengthening their relationships with their suppliers and providing them with detailed knowledge of their requirements and specifications. By working together, buyers and suppliers can improve the quality and lower
the costs of the purchased items51. (see Case Analysis 8.3).
Case Analysis 8.3 Step 14: What are the Organization's Production and Purchasing Strategies?
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What approaches to production that support the current business-level strategy are in effect? Are these efforts successful? Why or why not? How does the firm's approach to production and purchasing differ from that of its competitors?
Human Resources
The HRM functions include such activities as planning for future HR needs, recruitment, placement, compensation, evaluation, and employee development. Strategic HRM seeks to
build a workforce that enables the organization to achieve its goals.52. One of the major detriments to effective HRM practices over the past two decades was an unprecedented wave of mergers and acquisitions. This massive restructuring of American business has resulted in widespread layoffs and disillusioned, formerly loyal employees. Today, many workers no longer anticipate or even desire lifelong employment with a single firm.
Ineffective HR policies can be detrimental to a firm, not only from a strategic perspective but also from a cost standpoint. As part of a labor agreement negotiated with the United Auto Workers, General Motors (GM) maintains a “Jobs Bank” where up to 400 employees show up to work each day, do nothing, and earn wages and benefits that often exceed $100,000 annually. Collective costs of such programs to GM, Ford, and other manufacturers may be as
high as $2 billion each year.53. Such policies stifle productivity in an era when global competition demands that all of a firm's HR are working efficiently.
Strategy aside, all organizations are challenged to develop employee commitment to the company and to the job. Fostering commitment and developing a strong, competitive workforce require the creation and maintenance of attractive working conditions for employees that may include providing customized benefits, child day care, parental leave, and flexible working hours, as well as such traditional needs as training and development, job enrichment, and promotional opportunities for advancement.
In response to the 9/11 terrorist attacks, a number of companies have heightened efforts to screen employees more closely. Many argue that such efforts improve security at company facilities whereas others cite examples of employees allegedly losing jobs over traffic violations or bounced checks. Nonetheless, today more than ever, security is a key strategy
concern.54.
An organization's strategy may be affected by the increasing diversity of the modern workforce. Women, African Americans, Hispanic Americans, Asian Americans, and persons with disabilities have already transformed the traditional white, male image of many American corporations. As a result, managers must learn to help persons from diverse backgrounds and functional areas work effectively as team members. The success of such cooperative endeavors as cross-functional teams, quality circles, and JIT systems requires a unity of action that can be achieved only through the mutual respect and understanding of one's coworkers.
While one might expect low-cost businesses to spend less on HR activities than their differentiated counterparts, this is not always the case because attracting the best from the new workforce can support both strategies. Valuable HR may enhance efficiency by lowering absenteeism and turnover and/or promote differentiation via their innovative ideas and excellence in job performance.
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The role played by HR in an organization's strategic success is difficult to understate— especially in industries where turnover is historically high. Consider the U.S. fast-food industry, where it is not uncommon to experience turnover rates as high as 200%, compared to 10% to 15% at typical midsize and large organizations. Starting wages at fast-food companies generally hover around minimum wage. Some organizations have attempted to combat this problem by offering wages significantly higher than the minimum, while others, like Domino's Pizza, have taken a more comprehensive approach. Domino's renamed its HR department PeopleFirst and started focusing more on attracting, training, and retaining exceptional store managers. The firm estimates HR costs of departing employees to be about $2,500 for hourly workers and $20,000 for managers. Domino's has experienced success with
the program, reducing turnover significantly in the mid-2000s.55.
Another key dimension of the HR strategy is that of benefits—specifically health care. Most organizations are struggling with the desire to provide health care as part of the compensation package while minimizing employment costs. Some firms have even resorted to terminating
disabled workers to cut costs.56. Needless to say, such decisions have strategic, legal, and ethical ramifications.
In a more narrow sense, a business unit's generic strategy can also influence specific components of its HR program. For example, a company's reward system should be tied to employee behavior that helps the business attain its goals. Hence, low-cost business units
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should reward employees who help reduce operating costs, differentiators should establish reward systems that encourage output improvements or innovations, and all businesses should reward excellent customer service.
Human Capital and Knowledge Management
When organizations see their employees as expenses, they tend to minimize the cost. However, when they see their employees as investments, they tend to maximize the value by managing them more strategically. Following this logic, strategic managers have recently begun to assess the value of human capital—the sum of the capabilities of individuals in an
organization—as a source of competitive advantage.57. A c c o r d i n g t o t h e knowledge management perspective, people and their skills and abilities represent the only resource that cannot readily be reproduced by a firm's competitors if it is deemed to be a source of
competitive advantage.58. As such, high-performing firms must leverage their human capital if
they are to remain successful over the long term.59. Human capital can be developed through
organizational learning.60.
Table 8.3 identifies 10 factors that can promote the development of learning capabilities in an organization. Collectively, these factors underscore the importance of innovation, hands-on leadership, and performance measurement.
Table 8.3 Factors That Facilitate Organizational Learning61.
1. Scannin g Imperativ e
Interest in external happenings and in the nature of one's environment. Valuing the processes of awareness and data generation. Curious about what is “out there” as opposed to “in here.”
2. Performa nce Gap
Shared perception of a gap between actual and desired state of performance. Disconfirming feedback interrupts a string of successes. Performance shortfalls are seen as opportunities for learning.
3. Concern for Measure ment
Spend considerable effort in defining and measuring key factors when venturing into new areas; strive for specific, quantifiable measures; discourse over metrics is seen as a learning activity.
4. Experime ntal Mind-Set
Support for trying new things: curiosity about how things work; ability to “play” with things. Small failures are encouraged, not punished. See changes in work processes, policies, and structures as a continuous series of graded tryouts.
5. Climate of Opennes s
Accessibility of information, relatively open boundaries. Opportunities to observe others; problems/errors are shared, not hidden; debate and conflict are acceptable.
6.
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1.
2.
3.
4.
Continuo us Educatio n
Ongoing commitment to education at all levels; support for growth and development of members.
7. Operatio nal Variety
Variety exists in response modes, procedures, systems; significant diversity in personnel. Pluralistic rather than monolithic definition of valued internal capabilities.
8. Multiple Advocate s
Top-down and bottom-up initiatives are possible; multiple advocates and gatekeepers exist.
9. Involved Leadersh ip
Leadership at significant levels articulates vision and is very actively engaged in its actualization; takes ongoing steps to implement visions; “hands-on” involvement in educational and other implementation steps.
10. Systems Perspecti ve
Strong focus on how parts of the organization are interdependent; seek optimization of organizational goals at the highest levels; see problems and solutions in terms of systemic relationships.
Amazon has utilized its knowledge effectively in a number of ways. As an Internet pioneer, the firm has a great deal of experience and web savvy, enabling the firm to address new market opportunities more expediently than many of its competitors. Amazon also maintains a database of customer information, allowing the firm to suggest additional products that may be of interest to a consumer while he or she is shopping online. The company has even used i t s r e c o m m e n d a t i o n s f e a t u r e o c c a s i o n a l l y t o m a k e “ f a u x s u g g e s t i o n s , ” p u r c h a s e recommendations that are not tied to a consumer's purchase history but rather enable the
firm to promote its new product lines to existing customers.62.
Knowledge and Competitive Advantage
Regardless of the choice of generic strategy, the acquisition and development of knowledge
can be a source of competitive advantage.63. Five operating principles can help guide this
process:64.
Knowledge-based strategies begin with strategy, not knowledge. Knowledge can support the traditional mechanisms for serving customers and delivering value, but cannot replace them. Knowledge-based strategies must be linked to traditional measures of performance. Quantifying the value of knowledge as a resource or an investment is difficult. However, performance can be evaluated only with quantifiable, objective measures. Executing a knowledge-based strategy is about nurturing people with knowledge, not managing knowledge per se. Companies must develop cultures conducive to learning, sharing, and personal growth; otherwise, its collective knowledge—housed within its people—will never be realized. Organizations leverage knowledge through networks of people who collaborate, not networks of technology that interconnect. Technology cannot completely replace the
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5.
need for the human interaction that transforms knowledge into market-viable innovations. The engine that drives knowledge development comes from the workers’ need for help in solving business problems. Company efforts to disseminate knowledge to its workers often lead to overload and frustration.
These principles highlight the importance of valuing HR as both creators and disseminators of knowledge throughout the organization. Without a clear commitment to HR, any attempt to leverage knowledge as a competitive advantage is likely to fail.
Information Systems Management
An effective IS can benefit all of a business unit's functional areas.65. An interactive decision support system can permit each functional area to access the information it needs and to improve coordination by communicating electronically with the other functional departments. Like HR, the link between the IS strategy and the business strategy is not always clear. An effective IS strategy can also cut internal costs while promoting differentiation and quality through a faster response to the market. Wal-Mart's system, for example, manages the reordering process on a real-time basis for the purchasing department while also providing critical data for the marketing department, such as which product combinations are most popular and the time of day certain products are likely to be purchased.
The value of quality information is not always easy to assess, but it can be great. Progressive online retailers like Overstock.com, Delightful Deliveries, and Sierra Trading Post collect extensive aggregate data about customer shopping habits and use it to craft personalized marketing approaches. A web surfer's gender, location, or connection speed can determine whether he or she is linked to a free shipping promotion or provided instant access to an online customer service representative. Internet searches using the words cheap and discount often pull up contextual advertisements targeted to bargain hunters. Creating a system to manage and utilize such data effectively can help retailers enhance their strategic
effectiveness, regardless of business strategy.66.
Whether an IS is conducted in house or outsourced, it is deemed effective if it helps the business carry out its strategy. Far too many companies emphasize the hardware and software components of their functional system rather than the system's ability to satisfy
customer needs.67. Today more than ever, the application of Internet technology to serve customers and support suppliers is typically a focal point of the IS strategy (see Case Analysis 8.4).
Case Analysis 8.4 Step 15: What Are the Current Strategies in Other Functional Areas Such as Human Resources and Information Systems?
What HR policies that support the current business-level strategy are in effect? Are these efforts successful? Why or why not? Is the organization poised to meet HR needs (i.e., changes in the workforce) in the future? How does the firm's HR department objectively compare to those of its competitors?
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What is the current state of the organization's IS? Is it supporting the implementation of the organization's business and corporate strategies? Why or why not? Does the firm have a competitive presence on the Internet? How does this presence compare to those of its competitors?
The company website can be a good source of information on both HR and IS strategies. Augmenting company information with outside perspectives is essential because firms tend to overstate their effectiveness in areas such as product quality, service excellence, and especially human resources. According to their websites, most firms hire only the best of the best and offer world-class training and development opportunities. It is important to evaluate such claims critically.
Functional Strategies and Industry Life Cycle
Although the alignment between functional and business strategies is critical to success, the appropriate functional strategies can also be linked to the industry life cycle stage. As industries develop, specific capabilities associated with several functional areas typically become more important. Moreover, the prominence of various functions can change as industries progress. The R&D function tends to play a prominent rule in the introduction stage, followed by marketing in the growth stage, production in the maturity stage, and finance in the decline stage. The HR function remains important but not dominant in all stages. These relationships are illustrated in Table 8.4.
Table 8.4 Functional Strategies and Industry Life Cycle
Summary
After corporate-level and business unit generic strategies are developed, top executives must align activities in the functional areas to ensure that the various departments are well coordinated and work together. Most notably, the functions of marketing, finance, production, purchasing, HR, and IS—including utilization of the Internet—should be considered.
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1.
2.
3.
4.
5. 6.
In many instances, an organization's business strategy suggests appropriate characteristics of its functional strategies. Each organization should develop integrated functional strategies that support the uniqueness of its business and corporate strategies.
Key Terms
Capital-Labor Substitution: An organization's ability to substitute labor for capital or vice versa as production increases. Experience Curve: The reduction in per-unit costs that occur as an organization gains experience producing a product or service. Functional Strategies: The strategies pursued by each functional area of a business unit, such as marketing, finance, or production. Human Capital: The sum of the capabilities of individuals in an organization. Just-In-Time (JIT) Inventory System: An inventory system, popularized by the Japanese, in which suppliers deliver parts just at the time they are needed by the buying organization to use in its production process. Knowledge Management: People and their skills and abilities (i.e., knowledge capital) represent the only resource that cannot readily be reproduced by a firm's competitors. Knowledge capital must be effectively leveraged if high-performing firms are to remain as such over the long term. Learning: The increased efficiency that occurs when an employee performs a task repeatedly. Process R & D: R & D activities that seek to reduce the costs of operations and make them more efficient. Product/Service R & D: R & D activities directed toward improvements or innovations in the quality or uniqueness of a company's outputs. Total Quality Management (TQM): A broad-based program designed to improve product and service quality and to increase customer satisfaction by incorporating a holistic commitment to quality as seen through the eyes of the customer.
Review Questions and Exercises
What are the relationships among corporate-level, business unit, and functional strategies? Why and how should the four Ps of marketing be aligned to support the organization's business strategy? What is the difference between product and process R&D? How can each align with business strategies? Relate the concept of the experience curve to the production operations of an automobile assembly plant. Explain the role of business process reengineering in various functional strategies. Explain the linkage that a JIT inventory system provides between the purchasing and production functions. What are the implications for quality?
Practice Quiz
True or False?
1. Because functional strategies should be designed to support corporate and business
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A. B. C. D.
A. B. C. D.
A. B. C. D.
A. B. C. D.
strategies, they should not be considered until corporate and business strategies have been formulated. 2. The most appropriate means of securing funds likely depends on the corporate and business strategies being pursued. 3. The reduction in per-unit costs that occurs as an organization gains experience producing a product or service is known as economies of scale. Economies of scale is one of the contributing factors to the experience curve. 4. The purchasing department in a low-cost business should always purchase raw materials at the lowest possible cost. 5. The HR department in a low-cost business should always attempt to hire managers and workers at pay rates below those of their competitors. 6. A key characteristic of an effective IS is its ability to serve and help integrate the other functional areas of the business.
Multiple Choice
7.
Functional strategies should_______.
be integrated across the business unit support the business strategy support the corporate strategy all of the above
8.
Which of the following is not part of the marketing strategy?
pricing distribution promotion none of the above
9.
The experience curve is based on which of the following?
potential for capital-labor substitutions economies of scale organizational learning all of the above
10.
Efforts directed toward improvements or innovations in the quality or uniqueness of a company's outputs is known as_______.
product R&D process R&D product innovation structural reorganization
11.
Reducing operational costs by making the production process more efficient is known
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A. B. C. D.
A. B. C. D.
as_______.
TQM process R&D product innovation structural innovation
12.
Which of the following is not a characteristic of the JIT approach to inventory?
JIT is difficult on suppliers. JIT reduces inventory costs. JIT is less risky than traditional inventory approaches. JIT is popular in Japan.
Student Study Site
Visit the student study site at www.sagepub.com/parnell4e to access these additional materials:
Answers to Chapter 8 practice quiz questions Web quizzes SAGE journal articles Web resources eFlashcards
Notes
1. P. Wright, M. Kroll, and J. A. Parnell, Strategic Management: Concepts (Upper Saddle River, NJ: Prentice Hall, 1998).
2. D. Webb and C. Webster, “An Exploration of the Meaning and Outcomes of a Customer- Defined Market Orientation,” Journal of Business Research 48 (2000): 101-112.
3. N. Wingfield, “Amazon Takes Page from Wal-Mart to Prosper on Web,” Wall Street Journal, November 22, 2002, A1, A6.
4. M. Whitford, “Motel 6 Converts Hotels to Launch Extended Stay Brand,” Hotel & Motel Management, March 15, 1999, 36.
5. M. McCarthy, “Mazda Earmarks $30 Million to Ring in Millenia,” Brandweek, March 7, 1994, 1, 6.
6. K. Lundegaard and S. Freeman, “Detroit's Challenge: Weaning Buyers From Years Of Deals,” Wall Street Journal, January 6, 2004, A1, A2; J. Grant, “Carmakers ‘Poised to Rebound’ This Year,” Financial Times, January 2, 2004, 1, 12.
7. R.E. Silverman, “Why You Waste So Much Money,” Wall Street Journal, July 16, 2003, D1, D2.
8. E. White, “P&G to Use Plugs in TV News Stories to Send Viewers to Its Web Sites,” Wall
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Street Journal, March 7, 2001, B1, B6.
9. M. Mangilindan, “Web Ads On the Rebound,” Wall Street Journal, August 25, 2003, B1, B6.
10. T. Zaun, “Very Defensive Driving,” Wall Street Journal, June 2, 2003, B1, B3.
11. J. Drucker and A. Latour, “New Value Meal: Big Mac, Fries, Web Access,” Wall Street Journal, July 8, 2003, D1, D5.
12. C. Terhune, “In Switch, Pepsi Makes Diet Cola Its New Flagship,” Wall Street Journal, March 16, 2005, B1, B2.
13. B. McKay, “Zero Is Coke's New Hero,” Wall Street Journal, April 17, 2007, C1, C2.
14. A. Zimmerman, “A General-Store Race Is On,” Wall Street Journal, April 30, 2012, B4.
15. S. Vranica, “Great Scott! Dunder Mifflin Morphs Into Real-Life Brand of Copy Paper,” Wall Street Journal, November 28, 2011, B1.
16. R . G . S c h r o e d e r , K . A . B a t e s , a n d M . A . J u n t t i l a , “ A R e s o u r c e - B a s e d V i e w o f Manufacturing Strategy and the Relationship to Manufacturing Processes,” Strategic Management Journal 23 (2002): 105-118.
17. A. G. Perkins, “Manufacturing: Maximizing Service, Minimizing Inventory,” Harvard Business Review 72, no. 2 (2000) 13-14.
18. J. Maas, “Customer Service: Extraordinary Results at Southwest Airlines, Charles Schwab, Lands’ End, American Express, Staples, and USAA,” Sloan Management Review 40, no. 1 (1999): 105.
19. S. Branch, “Forget ‘May I Help You?’,” Wall Street Journal, July 8, 2003, B1, B5.
20. S. Branch, “Going Private (Label),” Wall Street Journal, June 12, 2003, B1, B3.
21. R. Suskind, “Humor Has Returned to Southwest Airlines After 9/11 Hiatus,” Wall Street Journal, January 13, 2003, A1, A6.
22. A. Bennett, “Many Consumers Expect Better Service and Say They Are Willing to Pay for It,” Wall Street Journal, November 12, 1990, B1.
23. S. Moore, “Press 9 for More Options,” Wall Street Journal, May 4, 2012, A13.
24. L. Dube, L. M. Renaghan, and J. M. Miller, “Measuring Customer Satisfaction for Strategic Management,” Cornell Hotel and Restaurant Administration Quarterly (February 1994): 39-47.
25. L. Enos, “DaimlerChrysler Forms E-Business Subsidiary,” E-Commerce Times, October 9, 2000; D. Christensen, “Delivering the Promise of ‘E,’” World Trade, 13, no. 12 (December 2000): 60-61; M. Mahoney, “And The Dot-Com Survivors Are…” E-Commerce Times, February 2, 2001.
26. J. Jargon, “Asia Delivers for McDonald's,” Wall Street Journal, December 13, 2011, B1-B2.
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27. P. R. Brown, “A Model for Effective Financial Analysis,” Journal of Financial Statement Analysis 3, no. 4 (1998): 60-63.
28. M. Bustillo, “Sears Suffers as It Skims on Stores,” Wall Street Journal, November 17, 2011, B1, B7.
29. M. Pagell, S. Melnyk, and R. Handfield, “Do Trade-offs Exist in Operations Strategy? Insights from the Stamping Die Industry,” Business Horizons 43, no. 3 (2000): 69-77.
30. See Boston Consulting Group, Perspectives on Experience (Boston: The Boston Consulting Group, 1976); G. Hall and S. Howell, “The Experience Curve from an Economist's Perspective,” Strategic Management Journal 6 (1985): 197-212.
31. L. E. Yelle, “The Learning Curve: Historical Review and Comprehensive Survey,” Decision Sciences 10 (1979): 302-328.
32. T. Aeppel, “In Lights-Out Factories Machines Still Make Things Even When No One Is There,” Wall Street Journal, November 19, 2002, B1, B11.
33. R. D. Buzzell and B. T. Gale, The PIMS Principles (New York: Free Press, 1987), Ch. 6.
34. D. Michaels and J. L. Lunsford,” Streamlined Plane Making,” Wall Street Journal, April 1, 2005, B1, B2.
35. K. Rollins, “Using Information to Speed Execution,” Harvard Business Review 76, no. 2 (1998): 81.
36. B. Dumaine, “How Managers Can Succeed Through Speed,” Fortune, February 13, 1989, 54.
37. E. Abrahamson and G. Fairchild, “Management Fashion: Lifecycles, Triggers, and Collective Learning Processes,” Administrative Science Quarterly 44 (1999): 708-728.
38. D. F Kuratko, J. C. Goodale, and J. S. Hornsby, “Quality Practices for Competitive Advantage in Smaller Firms,” Journal of Small Business Management 39 (2001): 293-311.
39. J. A. DeFeo, “Creating Strategic Change More Effectively with a New Design for Six Sigma Process,” Journal of Change Management 3, no. 1 (2002): 60-80.
40. C. W. L. Hart, “The Power of Unconditional Service Guarantees,” The McKinsey Quarterly (Summer 1989): 75-76.
41. S. McCartney, “Continental Airlines Keeps Little Things, and It Pays Off Big,” Wall Street Journal, February 4, 2002, A1.
42. N. Shirouzu, “When Hybrid Cars Collide,” Wall Street Journal, February 6, 2003, B1, B5.
43. J. Levine, “Smokeless Cigarette Goes on Sale but Nothing Shows It's Safer for Smokers,” CNN Interactive,www.cnn.com/HEALTH/9606/03/cigarette (accessed November 28, 2011).
44. P. F. Drucker, “Japan: New Strategies for a New Reality,” Wall Street Journal, October 2, 1991, A12.
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45. N. Anbarci, R. Lemke, and S. Roy, “Interfirm Complementaries in R&D: Re-examination of the Relative Importance of Joint Ventures,” International Journal of Industrial Organization 20 (2002): 191-204.
46. T. H. Hendrick and F. G. Moore, Production/Operations Management, 9th ed. (Homewood, IL: Irwin, 1985), 336.
47. J. G. Miller and P. Gilmour, “Materials Managers: Who Needs Them?” Harvard Business Review 57, no. 4 (1979): 145.
48. S. P. Galante, “Distributors Bow to Demands of ‘Just-in-Time’ Delivery,” Wall Street Journal, June 30, 1986, B1; L. Beard and S. A. Butler, “Introducing JIT Manufacturing: It's Easier Than You Think,” Business Horizons 43, no. 5 (2000): 61-64.
49. J. Mitchell, “GM Saturn Ads Request Buyers to be Patient,” Wall Street Journal, September 25, 1992, B1.
50. J. Dreyfuss, “Shaping Up Your Suppliers,” Fortune, April 10, 1989, 116.
51. J. Browne, J. Harhen, and J. Shivnan, Production Management Systems: A CIM Perspective (Workingham, England: Addison-Wesley, 1988), 158-159.
52. A. A. Lado, “Strategic Human Resource Management,” Academy of Management Review 25 (2000): 677-679; R. A. Shafer et al., “Crafting a Human Resource Strategy to Foster Organizational Agility: A Case Study,” Human Resource Management 40 (2001): 197-212.
53. M. McCracken, “Detroit's Symbol of Dysfunction: Paying Employees Not to Work,” Wall Street Journal, March 1, 2006, A1, A12.
54. A. Davis, “Employers Dig Deep into Workers’ Pasts, Citing Terrorism Fears,” Wall Street Journal, March 12, 2002, A1.
55. E. White, “To Keep Employees, Domino's Decides It's Not All About Pay,” Wall Street Journal, February 27, 2005, A1, A9.
56. J. Pereira, “To Save on Health-Care Costs, Firms Fire Disabled Workers,” Wall Street Journal, July 14, 2003, A1, A7; T. Aeppel, “Skyrocketing Health Costs Start to Pit Worker vs. Worker,” Wall Street Journal, June 17, 2003, A1, A6.
57. A. S. Huff, “Changes in Organizational Knowledge Production,” Academy of Management Review 25 (2000): 288-293; T. H. Davenport et al., “Data to Knowledge to Results: Building an Analytic Capability,” California Management Review 43, no. 2 (2001): 117-138.
58. S. K. McElivy and B. Chakravarthy, “The Persistence of Knowledge-Based Advantage: An Empirical Test for Product Performance and Technological Knowledge,” Strategic Management Journal 23 (2002): 285-306.
59. C. Soo et al., “Knowledge Management: Philosophy, Processes, and Pitfalls,” California Management Review 44, no. 4 (2002): 129-150; J. Birkinshaw and T. Sheehan, “Managing the Knowledge Life Cycle,” MIT Sloan Management Review 44, no. 1 (2002): 85-93.
60. A. W. Sheldon, “Strategy Rules,” Fast Company (January 2001): 164-166.
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61. B. Moingeon and A. Edmondson, Organizational Learning and Competitive Advantage (Thousand Oaks, CA: Sage, 1996), 43. Reprinted by permission of Sage Publications.
62. N. Wingfield and J. Pereira, “Amazon Issues ‘Faux’ Recommendation for Its Clothing,” Wall Street Journal, December 4, 2002, B1, B3.
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Strategy + Business Reading: The Power of the Post-Recession Consumer
An analysis of attitudes and spending reveals a return to traditional values, driven by consumers searching for quality, affordability, and connection.
by John Gerzema and Michael D'Antonio
The wave of hyper-consumerism that propelled the U.S. economy through the last decades of the 20th century and into the first years of the 21st century has passed. Say good-bye to all the signs of easy wealth we knew from the recent past: McMansions, SUVs, and recreational shopping. Consumer spending patterns are changing as part of a trend that has been quietly gathering strength over the past 10 years. Say hello to a lifestyle more focused on community, connection, quality, and creativity. People are returning to old-fashioned values to build new lives of purpose and connection. They also realize that how they spend their money is a form of power, and are moving from mindless consumption to mindful consumption, increasingly taking care to purchase goods and services from sellers that meet their standards and reflect their values.
This change in consumer attitudes—visible not only in the United States but also in other countries affected by the Great Recession—is not a fad or whim. It is, in part, a reaction to economic hard times. But it is also closely related to the civic dissatisfaction
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that is rocking the political establishment, and additionally has some roots in environmental awareness and changing aspirations. That is why this Spend Shift movement, as we call it, is here to stay. It will create opportunities for businesses that heed its message, and penalize those that do not. (For another perspective, see “Values vs. Value,” by Timothy Devinney, Pat Auger, and Giana M. Eckhardt, s+b, Spring 2011.)
Our view of the Spend Shift is based on two years of gathering and analyzing data, and traveling around the U.S. to discover how the recession has affected people's lives. We started with Young & Rubicam's BrandAsset Valuator (BAV), which is a poll of consumer values, attitudes, and shopping behaviors that goes back nearly 20 years. (Although the data sample we focus on in this article is from the U.S., we found that there are similar dynamics in Europe and other industrialized countries.) The BAV holds data on more than 40,000 brands in more than 50 countries, and every quarter it is supplemented with new results—on purchasing and social attitudes — from 16,000 respondents in the U.S. alone. In all, we have queried more than a million consumers in 50 countries on some 70 brand metrics, which include the general awareness consumers have of a brand, the particular ways it makes them feel, and many others. (See “The Trouble with Brands,” by John Gerzema and Ed Lebar, s+b, Summer 2009.)
The BAV data revealed that even before the recession took hold in mid-2008, there were dramatic shifts in what people expected in the consumer marketplace and how they defined and pursued what they considered the good life. As a factor in decision making, sheer desire for the goods themselves has been declining sharply for the past decade. More recently, the BAV surveys show sharp increases in the number of consumers who want positive relationships with marketplace vendors and who focus more on corporate behavior. Between 2005 and 2009, a growing number of people rejected status-driven values such as snobbishness and exclusivity, and embraced attributes related to bringing people closer together or making the world a better place. Among the once-prized brand attributes that declined in this period were: “exclusive” (down 60 percent), “arrogant” (down 41 percent), “sensuous” (down 30 percent), and “daring” (down 20 percent). On the opposite side of the scale, the brand attributes Americans found more important as they began to sense the impending recession and then suffered through the crisis were: “kindness and empathy” (up 391 percent), “friendly” (up 148 percent), “high quality” (up 124 percent), and “socially responsible” (up 63 percent).
The reference to “kindness” is not a typo. Between 2005 and 2009, U.S. consumers expressed a nearly fourfold increase in their preference for companies, brands, and products that show kindness in both their operations and their encounters with customers. This desire for companies to be more empathetic toward consumers is the biggest shift in any attitude that we have ever seen during the BAV survey's two- decade history.
The BAV data told us that at the grass roots, people were well ahead of the pundits, corporations, and political leaders. Some of the most important economic statistics supporting this trend come from the U.S. Bureau of Economic Analysis reports on personal savings. The reports show that ordinary Americans began raising their deposits in savings accounts and other secure investments a full two years before the start of the recession. Even as unemployment surged past 10 percent, U.S. consumers socked away more money every month. By the middle of 2009, people were saving
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about 7 percent of their disposable income—a figure that hadn't been seen since 1995. We also know that people cut back on spending many months before the recession began. In fact, Americans reduced consumption so sharply that in the middle of 2008, it dropped below their disposable income and just kept falling. This reversal of earlier trends in saving and spending continued throughout all of 2009. Without being scolded, lectured, or led from above, U.S. consumers had quietly changed their behavior.
Regardless of companies’ size or their target market, they must understand the significance of the Spend Shift to compete in the post-recession economy. From the scores of interviews we conducted and thousands of data points we accumulated, we can identify a wide array of ways that the shift in attitudes, values, expectations, and behaviors will change the way we buy, sell, and live. We have distilled our findings into four defining principles that together offer a comprehensive look at the origins and impacts of the Spend Shift.
United by Change
The Spend Shift is a far-reaching and inclusive phenomenon that can't be defined by any particular demographic. According to our data, 55 percent of all Americans are part of this movement; in addition, about one-quarter of the U.S. adult population embraces many of the Spend Shift attitudes and characteristics (we call them Fast Followers). Although the word values tends to polarize U.S. citizens, the Spend Shift is blind to geography, education, age, and income.
Spend Shifters can be found across the nation: 17 percent are in the Northeast, 23 percent are in the Midwest, 36 percent are in the South, and 24 percent are in the West. Although we'll limit our discussion to what's happening in the U.S., it is worth noting that the BAV data shows that the Spend Shift is a global trend. For example, we found that 53 percent of French consumers are Spend Shifters, as are 45 percent of German and Italian consumers.
Members of the movement have varying education backgrounds: 23 percent have a high school diploma, 21 percent have a college degree, and 11 percent have completed postgraduate studies. Spend Shifters also represent diverse income brackets; for example, 28 percent earn less than US$40,000 a year, but 18 percent earn between $75,000 and $100,000. They represent Republicans, Democrats, and Independents (28, 31, and 41 percent, respectively). Millennials (the generation born between 1980 and 1995) lead the movement, with 58 percent of 22- to 28-year-olds participating, yet nearly half of all seniors belong, too (including 55 percent of adults age 68 and above).
What unites all these Spend Shifters is a common sense of optimism and newfound purpose. As the shock of economic loss wears off for many people, they are redefining what it means to be successful and happy. They are living with less and yet feeling greater satisfaction. Seventy-eight percent of those surveyed reported they are happier with a more back-to-basics lifestyle. Eighty-eight percent reported they buy less- expensive brands than they used to.
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The New Thrift
Prior to the Great Recession, the American dream was defined by largeness and acquisition. Yet as a result of the crisis and its lingering presence in the economy, more than two-thirds of U.S. respondents to our survey now prefer a pared-down lifestyle with fewer possessions and less emphasis on displays of wealth. (The figure rises to 77 percent among millennials.)
Consumer spending will no longer be able to grow faster than personal income, as it did during the 30 years leading up to the crisis. Greater savings coupled with less borrowing is not a value that is foreign to Americans. We would argue this is not a “new normal,” but an old one: If you look at historical savings rates in the U.S., people have on average saved 10 percent of their income going back as far as six decades. It was only in the mid-1980s that availability and promotion of consumer credit, as well as sustained economic growth, first encouraged ordinary people to get out over their skis. In only 20 years, average American households swung from being net savers to being net borrowers. Now, however, consumers are returning to traditional values that have long defined the U.S. ideal.
In the same vein, people want to do more on their own. In the post-recession economy, resourcefulness and self-sufficiency are viewed as virtues, and excessive consumption as a sign of weakness. In our surveys, 84 percent agreed with the following statement: “These days I feel more in control when I do things myself instead of relying on others to do them for me.” We examined the 2009 performance of a basket of “retooling” companies— those that are in the top 10 percent of our data on being “helpful,” “reliable,” “educational,” and “durable,” such as LeapFrog, Weight Watchers, Craftsman, and DeWalt, because they help people help themselves. The performance of these companies against all others is notable: They performed 249 percent better than other companies when respondents were asked whether they would recommend these brands to a friend, 234 percent better when respondents were asked if they used the products regularly, and 210 percent better on whether the products were worth a premium price.
Instead of seeking status through acquisition, many people, we discovered, are s e e k i n g w a y s t o e x p e r i e n c e a s e n s e o f c o m p e t e n c e , s e l f - s u f f i c i e n c y , a n d accomplishment. Look, for example, at Etsy.com, a craft and vintage item website that serves as a retail and trading marketplace for millions. Beginning in 2005, Etsy founder Rob Kalin and his partners began developing an online place where any artisan could display work and sell to any buyer in the world. Within five years, Etsy had 300,000 vendors—the majority were women in their 20s and 30s—the site was visited by millions of shoppers every month, and the company grew to be worth an estimated $300 million in 2010. Etsy's mission resonates in today's marketplace: “to enable people to make a living making things.” If you have an idea for helping people learn new skills and connect with others, your business has a good chance of success.
Transparency Breeds Trust
Today the buying public is savvy about marketing, search, and social media. Companies serving these customers, who know more and expect more, will need to continuously listen, respond, and innovate. They are in for a challenge: Our data
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shows that confidence in all types of big organizations, including big government and big business, has declined by nearly 50 percent in the past two years. Consumer confidence has dropped especially in the financial and automotive sectors, but also in retail, packaged goods, consumer electronics, and 20 other product and service categories.
Wary consumers are going beyond just reading labels to get the best products and the best deals. The most tech-savvy are using online services as they stand in the supermarket aisle to get instant access to information on prices and on a company's social or environmental record. GoodGuide, for example, a California company that tracks, tests, and publishes research on the basic “goodness” of products people buy, has reviewed more than 65,000 products and posted findings online for consumers since 1997. Shoppers are also relying on one another for information, via Facebook, Twitter, and online rankings.
Twentieth-century companies were in the information arbitrage business. They knew more about their product than customers did, and they used that information advantage to create profits. Today, however, customers have equal (and sometimes superior) access to data. As a result, transparency becomes all the more crucial. Today's stakeholders can see through a glossy cover-up. They crave a true, authentic story. They will be interested in how a company thinks and how it makes decisions.
One company that has recognized this is Patagonia Inc., evident by its launch of the Footprint Chronicles in late 2007. This online feature reveals how the manufacturing and delivery of Patagonia's products affect the environment. A visitor to the site can click on any product and track its environmental and social impact along its path to the store. As a product crisscrosses the globe, pop-up videos explain each stage of production, from design creation to sewing to distribution, giving statistics for each item's energy consumption, distance traveled, carbon emissions, and waste generated. Although the Footprint Chronicles have demonstrated that some Patagonia products have negative environmental impacts that are nearly impossible to upend, the company's presentation of fact rather than message has helped establish it as an honest, trustworthy company. In today's marketplace, successful companies will p r a c t i c e c o m p l e t e t r a n s p a r e n c y , l e t t i n g c u s t o m e r s s e e t h e i r s u p p l y c h a i n s , management strategies, and values.
Companies That Care
As we noted earlier, our data suggests that kindness and empathy are now dominant discriminators in commerce, and are valuable attributes of the best companies. The ability of a company to identify with its customers is now a prerequisite for any brand in the post-crisis age. Today, openness, humility, and understanding are critical. Generosity binds a company to its community and its stakeholders.
The rising importance of generosity reflects the fact that the post-crisis era will be defined by inclusion rather than exclusion. The emphasis is on being more human and humane in transactions with others, and people will set these same standards for the businesses with which they deal. Spend Shifters are buying artisanal food because they trust companies that reveal how their food is produced and handled. They patronize cooperative small businesses because such businesses use their profits to
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build up their local regions. Passionate customer groups will also band together to fund niche offerings that speak directly to the areas about which they feel most strongly. Because 71 percent of U.S. consumers are now aligning their spending with their values, businesses that practice in a new way will find a vibrant marketplace. Instead of selling shoes, such businesses sell empathy and respect. For each pair of Toms Shoes that a customer buys, for example, the company sends a pair to a child in the developing world. Instead of serving food, companies create communities of hope. Instead of making cars, they promise fairness, openness, and shared discourse.
Consumers will be looking for signs that companies care about their impact on communities and are investing in making things better. Selling to your customers will require investing in your customers. Generosity opens up networks, provides access to talent pools, and creates future customers. The vanguard companies understand that showing kindness and humanity is now a competitive advantage.
Microsoft is a telling example. Although Apple's ads make it seem as though all the cool kids hate Microsoft and favor Apple, the two companies aren't even close when it comes to the sentiments of the public at large. In our BAV survey, Microsoft always scores high on measures of its reputation, exceeding Apple by a wide margin. How does Microsoft do it? Despite its massive size, Microsoft is still widely associated with the single personality of its founder, Bill Gates. He gives Microsoft a human face and, more important, his philanthropy gives the company a heart. In February 2009, Microsoft launched a program called Elevate America to provide 2 million people with free training in information technology to help them find jobs in the postindustrial economy. By August 2010, Elevate America was running in more than 30 states and serving 900,000 people.
When we talked to Akhtar Badshah, Microsoft's senior director of global community affairs, he told us that in its response to the recession, Microsoft pursued three main areas of focus: education, innovation, and jobs and economic opportunity. Those choices are good for Microsoft, because they create an opportunity for the company to demonstrate its strengths to current and future customers. The key point is that Microsoft uses both its money and its true areas of expertise to maximize the good it can do as a citizen corporation, showing how a company can be charitable by redeploying its existing assets and infrastructure as tools for social and economic development.
The Consumer Connection
The Conference Board's Consumer Confidence Index was at 50.2 in October 2010, up from an all-time low of 25.3 in February 2009, but still far from 90, the indicator of a stable economy. (In May 2000, it reached a high of 144.7.) Although the growth of consumer spending appears to be slowing, we believe that people are simply reallocating the way they spend—looking for a connection to the creator of the product; banding together to get better deals; and pushing service and product creators to do more, price better, and connect more deeply to their wants and needs.
Even as people find themselves less rich, they are deploying their dollars in a more calculated and strategic way to influence institutions such as corporations and government. This desire to use money to express values stands out in our BAV data,
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and was expressed by many of the people with whom we spoke. Nearly two-thirds of all the people who responded to the BAV felt they could affect corporate behavior through their purchasing habits, and the same proportion avoided companies whose values contradicted their own.
The most successful companies will respond to this shift by adopting a business model in which all three parties—the business, the customer, and the community—win in every transaction. Although the Spend Shift will dampen domestic demand for some products, the market for values-oriented goods and services offers opportunities for growth in what might otherwise be considered mature categories. We examined the performance of a group of companies and brands that scored in the top 20 percent in the BAV survey on the values we had noted were becoming increasingly important— self-reliance, adaptability, honesty, quality, and community. And we found that in aggregate they enjoyed nearly three times as much usage and preference as brands that did not represent these values.
We believe that the future face of capitalism will be defined by delivering value and values. Those that embrace this reality and adapt will find extraordinary opportunities. Those that ignore it will do so at their peril.
Reprint No. 11107
Author Profiles:
John Gerzema is president of Brand Asset Consulting, a Young & Rubicam Brands company. He is a pioneer in the use of data to identify social change and to help companies both anticipate and adapt to new consumer interests and demands. Gerzema oversees the BrandAsset Valuator, the world's largest database of consumer insights. Follow him on Twitter at @johngerzema/Twitter.
Michael D'Antonio is a Pulitzer Prize-winning journalist based in New York. He is the author of more than a dozen books, including Forever Blue: The True Story of Walter O'Malley, Baseball's Most Controversial Owner, and the Dodgers of Brooklyn and Los Angeles (Riverhead Books, 2009).
http://dx.doi.org/10.4135/9781506374598.n8
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