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CHAPTER 6 Planning, Strategy, and Competitive Advantage

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Learning Objectives

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

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

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

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

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Planning and Strategy 1

Planning:

• Identifying and selecting appropriate goals and courses of action for an organization.

Strategy:

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

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Planning and Strategy 2

Mission Statement:

• A broad declaration of an organization’s purpose that identifies the organization’s products and customers and distinguishes the organization from its competitors.

Tom Merton/AGE Fotostock

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Three Steps in Planning

Figure 6.1

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The Nature of the Planning Process

1. Establish and discover where an organization is at the present time.

2. Determine where it should be in the future, its desired future state.

3. Decide how to move it forward to reach that future state.

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Topics for Discussion 1

Describe the three steps of planning. Explain how they are related. [LO 6-1]

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Why Planning Is Important 1

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

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

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Why Planning Is Important 2

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

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

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Levels of Planning at General Electric

Figure 6.2

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Levels and Types of Planning 1

Corporate-Level Plan:

• Top management’s decisions pertaining to the organization’s mission, overall strategy, and structure.

Corporate-Level Strategy:

• A plan that indicates in which industries and national markets an organization intends to compete.

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Levels and Types of Planning 2

Figure 6.3

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Levels and Types of Planning 3

Business-Level Plan:

• Divisional managers’ decisions pertaining to a division’s long- term goals, overall strategy, and structure.

Business-Level Strategy:

• Outlines the specific methods a division, business unit, or organization will use to compete effectively against its rivals in an industry.

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Levels and Types of Planning 4

Functional-Level Plan:

• Functional managers’ decisions pertaining to the goals that they propose to pursue to help the division attain its business- level goals.

Functional-Level Strategy:

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

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Topics for Discussion 2

What is the relationship among corporate-, business-, and functional-level strategies, and how do they create value for an organization? [LO 6-2, 6-3]

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Time Horizons of Plans

Time Horizon is the intended duration of a plan.

• Long-term plans are usually 5 years or more.

• Intermediate-term plans are 1 to 5 years.

• Short-term plans are less than 1 year.

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Types of Plans

Standing Plans:

• Use in programmed decision situations.

Single-Use Plans:

• Developed for a one-time, nonprogrammed issue.

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Standing Plans

Policies:

• General guides to action.

Rules:

• Formal written specific guides to action.

Standard Operating Procedures (SOP):

• Specify an exact series of actions to follow.

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Single-Use Plans

Programs:

• Integrated plans achieving specific goals.

Project:

• Specific action plans to complete programs.

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Three Mission Statements

Figure 6.4

Sources: Company website, “Mission,” www.linkedin.com, accessed March 23, 2015: company website, “About,” https://about.twitter.com, accessed March 23, 2005, company website, “Our Mission,” www.facebook.com, accessed September 1, 2015.

COMPANY MISSION STATEMENT

LinkedIn Our mission is simple: Connect the world’s professionals to make them more productive and successful.

Twitter Our mission: To give everyone the power to create and share ideas and information instantly, without barriers.

Facebook Facebook’s mission is to give people the power to share and make the world more open and connected.

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Determining the Organization’s Mission and Goals 1

Defining the Business:

1. Who are our customers?

2. What customer needs are being satisfied?

3. How are we satisfying customer needs?

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Determining the Organization’s Mission and Goals 2

Establishing Major Goals:

• Goals provide the organization with a sense of direction.

• Goals stretch the organization to higher levels of performance.

• Goals must be challenging but realistic with a definite period in which they are to be achieved.

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Determining the Organization’s Mission and Goals 3

Strategic Leadership:

• The ability of the C E O and top managers to convey a compelling vision to their subordinates of what they want the organization to achieve.

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Formulating Strategy 1

Figure 6.5

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Formulating Strategy 2

SWOT Analysis:

• A planning exercise in which managers identify internal organizational strengths (S) and weaknesses (W) and external environmental opportunities (O) and threats (T).

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The Five Forces Model 1

Competitive Forces

Effects

Level of Rivalry. Increased competition results in lower profits.

Potential for Entry.

Easy entry leads to lower prices and profits.

Power of Suppliers.

If there are only a few suppliers of important items, supply costs rise.

Power of Customers.

If there are only a few large buyers, they can bargain down prices.

Substitutes. More available substitutes tend to drive down prices and profits.

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The Five Forces Model 2

Hypercompetition:

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

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Formulating Business-Level Strategies 1

Low-Cost Strategy:

• Driving the organization’s total costs down below the total costs of rivals.

Differentiation:

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

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Formulating Business-Level Strategies 2

“Stuck in the Middle”:

• Attempting to simultaneously pursue both a low- cost strategy and a differentiation strategy.

• Difficult to achieve low cost with the added costs of differentiation.

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Formulating Business-Level Strategies 3

Focused Low-Cost Strategy:

• Serving only one segment of the overall market and trying to be the lowest-cost organization serving that segment.

Focused Differentiation Strategy:

• Serving only one segment of the overall market and trying to be the most differentiated organization serving that segment.

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Topics for Discussion 3

Pick an industry and identify four companies in the industry that pursue one of the four main business- level strategies (low-cost, focused low-cost, etc.) [LO 6-1, 6-2]

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Formulating Corporate-Level Strategies

Concentration on a Single Industry:

• Reinvesting a company’s profits to strengthen its competitive position in its current industry.

Copyright Bloomberg via Getty Images

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Vertical Integration

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

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Stages in a Vertical Value Chain

Figure 6.6

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Diversification 1

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

Kuznetsov Alexey/Shutterstock

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Diversification 2

Related Diversification:

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

Synergy:

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

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Diversification 3

Unrelated Diversification:

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

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Topics for Discussion 4

What is the difference between vertical integration and related diversification? [LO 6-3]

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International Expansion 1

Global Strategy:

• Selling the same standardized product and using the same basic marketing approach in each national market.

• Cost savings.

• Vulnerable to local competitors.

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International Expansion 2

Multi-Domestic Strategy:

• Customizing products and marketing strategies to specific national conditions.

• Helps gain local market share.

• Raises production costs.

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Four Ways of Expanding Internationally

Figure 6.7

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International Expansion 3

Exporting:

• Making products domestically and selling them abroad.

Importing:

• Selling at home products that are made abroad.

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International Expansion 4

Licensing:

• Allowing a foreign organization to take charge of manufacturing and distributing a product in its country in return for a negotiated fee.

Franchising:

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

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International Expansion 5

Strategic Alliance:

• Managers pool their organization’s resources and know- how with a foreign company.

• Organizations agree to share risk and reward.

Joint Venture:

• Strategic alliance among two or more companies that agree to jointly establish and share the ownership of a new business.

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International Expansion 6

Wholly Owned Foreign Subsidiary:

• Managers invest in establishing production operations in a foreign country independent of any local direct involvement.

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© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.

No reproduction or further distribution permitted without the prior written consent of McGraw Hill.