For anyone

MGMT.odt

Home >Business & Finance homework help >Operations Management homework help >For anyone

5-1. Benefits and Pitfalls of Planning

Even inexperienced managers know that planning and decision making are central parts of their jobs. Figure out what the problem is. Generate potential solutions or plans. Pick the best one. Make it work. Experienced managers, however, know how hard it really is to make good plans and decisions. One seasoned manager says, “I think the biggest surprises are the problems. Maybe I had never seen it before. Maybe I was protected by my management when I was in sales. Maybe I had delusions of grandeur, I don’t know. I just know how disillusioning and frustrating it is to be hit with problems and conflicts all day and not be able to solve them very cleanly.” *

Planning is choosing a goal and developing a method or strategy to achieve that goal. Seventy dollars is the break-even price for a barrel of off-shore, deep-water oil. But with innovative fracking technologies, a barrel of (on ground) shale oil can be profitable at $50 or less. So Royal Dutch Shell’s new plan is to significantly cut the costs and time it takes to deliver oil from its offshore, deep-water platforms. “Chief irritants” have been assigned in each department to challenge, question and simplify how business gets done. Shell now takes 40 percent less equipment onto deep-water platforms, reducing costs and complexity. The number of support ships taking equipment and supplies to platforms has dropped from 61 to 16. Once-routine $10,000 helicopter trips to overnight parts to platforms are now used only for emergencies. Annual savings on logistics alone should reduce costs $300 million a year. Kevin McMahon, who manages an offshore platform, says, “This is not a cut-and-cope exercise. This is our new reality.” *

Are you one of those naturally organized people who always makes a daily to-do list, writes everything down so you won’t forget, and never misses a deadline because you keep track of everything with written lists, a spreadsheet, or task management apps like Todoist or WunderList on your smart-phone, tablet, or computer? Or are you one of those flexible, creative, go-with-the-flow people who dislikes planning and organizing because it restricts your freedom, energy, and performance? Some people are natural planners. They love it and can see only its benefits. Others dislike planning and can see only its disadvantages. It turns out that both views have real value.

Planning has advantages and disadvantages. Let’s learn about 5-1a the benefits and 5-1b the pitfalls of planning.

5-1a. Benefits of Planning

Planning offers several important benefits: intensified effort, persistence, direction, and creation of task strategies. * First, managers and employees put forth greater effort when following a plan. Take two workers. Instruct one to “do your best” to increase production, and instruct the other to achieve a 2 percent increase in production each month. Research shows that the one with the specific plan will work harder. *

Second, planning leads to persistence, that is, working hard for long periods. In fact, planning encourages persistence even when there may be little chance of short-term success. * McDonald’s founder Ray Kroc, a keen believer in the power of persistence, had this quotation from President Calvin Coolidge hung in all of his executives’ offices: “Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent.” *

The third benefit of planning is direction. Alex Macedo, President of BK North America, said, “In a moment when a lot of brands in quick service are trying to become more fast-casual, we’re taking an opposite view.” * After struggling to maintain sales with new menu items like cranberry salads and low calories “satisfries,” Burger King (BK) is returning to its fast food roots by focusing its menu on flame-grilled burgers, french fries, hot dogs, and chicken fries. David Harper who runs 72 BK restaurants says, “We know who we are now.” * Samestore sales are now growing 5.6 percent a year.

The fourth benefit of planning is that it encourages the development of task strategies. In other words, planning not only encourages people to work hard for extended periods and to engage in behaviors directly related to goal accomplishment, it also encourages them to think of better ways to do their jobs. Finally, perhaps the most compelling benefit of planning is that it has been proven to work for both companies and individuals. On average, companies with plans have larger profits and grow much faster than companies without plans. * The same holds true for individual managers and employees: There is no better way to improve the performance of the people who work in a company than to have them set goals and develop strategies for achieving those goals.

5-1b. Pitfalls of Planning

Despite the significant benefits associated with planning, it is not a cure-all. Plans won’t fix all organizational problems. In fact, many management authors and consultants believe that planning can harm companies in several ways

The first pitfall of planning is that it can impede change and prevent or slow needed adaptation. Sometimes companies become so committed to achieving the goals set forth in their plans or on following the strategies and tactics spelled out in them that they fail to see that their plans aren’t working or that their goals need to change. In 2015, only 25 percent of the makers of luxury Swiss mechanical watches thought Apple’s new smart watch would have a “meaningful impact” on sales. * But by the end of 2015, sales had dropped by $2 billion, or 1.6 percent. By the end of 2016, sales had fallen again, by 9.9 percent, or nearly or $19 billion. * To avoid price discounts, Swiss watch makers bought back nearly 10 percent of unsold watch inventory from retailers and dismantled those watches for parts. * Analysts estimate that Apple sold nearly 12 million Apple Watches in 2016, accounting for half the market share and 80 percent of the profits in global smart watches. * Will luxury buyers come back to mechanical watches? Hong Kong’s Jai Ignacio says, “This [Apple Watch] is more practical for me. I can change the bracelet to steel links when I need to dress up.” * Canalysis, a market research company, estimates that smart watch sales may total 67 percent of Swiss watch sales by the end of 2017. *

The second pitfall is that planning can create a false sense of certainty. Planners sometimes feel that they know exactly what the future holds for their competitors, their suppliers, and their companies. However, all plans are based on assumptions. “National home prices never go down. Eurozone countries don’t default. Saudi Arabia won’t let the price of oil crash. China’s demand for raw materials is infinite.” For plans to work, the assumptions on which they are based must hold true. If the assumptions turn out to be false, then the plans based on them are likely to fail. Indeed, according to the Wall Street Journal’s Greg Ip, the four assumptions just listed were “some of the most cherished assumptions of investors and policy makers in the past decade, assumptions that have underpinned trillions of dollars of investment and debt.” * And they were all completely wrong.

The third potential pitfall of planning is the detachment of planners. In theory, strategic planners and top-level managers are supposed to focus on the big picture and not concern themselves with the details of implementation (that is carrying out the plan). According to management professor Henry Mintzberg, detachment leads planners to plan for things they don’t understand. * Plans are meant to be guidelines for action, not abstract theories. Consequently, planners need to be familiar with the daily details of their businesses if they are to produce plans that can work.

When she became PepsiCo’s CEO, Indra Nooyi declared that healthy snacks represented one of PepsiCo’s “biggest growth opportunities.” * So PepsiCo began removing calories, redoing recipes, and delivering new products like Lemon Lemon (carbonated lemonade with real lemon juice), Quaker Real Medleys (oatmeal in portable packages that can be eaten anywhere), and Mountain Dew Kickstart (with half the regular calories). While great in theory, Nooyi’s plans ignored Pepsi’s own research that snackers care about taste and not health. Greg Yep, PepsiCo’s former senior vice president of long-term research, said, “I don’t know too many consumers who compromise on taste for something that’s more nutritious.” * Norman Deschamps, a market researcher at Packaged Facts, agreed, saying when people socialize, “they have snacks like potato chips and pretzels. They don’t all sit around and snack on granola bars.” In other words, Pepsi’s business is growing because consumers are reaching for the latest flavors of Fritos, Cheetos, and Lay’s potato chips. In fact, at the beginning of 2017, chips produced 52 percent of PepsiCo’s profits, up from 43 percent in 2010. *

5-2. How to Make a Plan That Works

Planning is a double-edged sword. If done right, planning brings about tremendous increases in individual and organizational performance. If planning is done wrong, however, it can have just the opposite effect and harm individual and organizational performance.

In this section, you will learn how to make a plan that works. As depicted in Exhibit 5.1, planning consists of 5-2a setting goals, 5-2b developing commitment to the goals, 5-2c developing effective action plans, 5-2d tracking progress toward goal achievement, and 5-2e maintaining flexibility in planning.

5-2a. Setting Goals

The first step in planning is to set goals. To direct behavior and increase effort, goals need to be specific and challenging. * For example, deciding to “increase sales this year” won’t direct and energize workers as much as deciding to “increase North American sales by 4 percent in the next six months.” Specific, challenging goals provide a target for which to aim and a standard against which to measure success.

One way of writing effective goals for yourself, your job, or your company is to use the S.M.A.R.T. guidelines. S.M.A.R.T. goals are Specific, Measurable, Attainable, Realistic, and Timely. * With annual sales of $83 billion, Cincinnati-based Procter & Gamble is a global leader in consumer products in 180 countries. It’s size, however, makes managing growth difficult. To combat this difficulty, in 2013, CEO A.G. Lafley established a goal of cutting P&G’s massive brand portfolio of roughly 165 brands to 65 core brands, organized into 10 key categories, by 2016. * Let’s see how P&G’s objectives measure up to the S.M.A.R.T. guidelines for goals.

First, is the goal S pecific? Yes, as opposed to saying that it wants to be smaller, P&G identified exactly how many brands it wanted in its portfolio by 2016—its 65 best-selling brands. Is the goal M easurable? Yes, P&G’s best-performing brands generate 95 percent of its profits, which are growing faster than the rest of P&G, while its poorer performing brands haves sales and profits that are shrinking 3 percent and 16 percent per year, respectively. * Whether the goal is A ttainable or not depends on many factors. First, P&G needs to find potential buyers for the 100 brands it is selling. After it identifies potential buyers, they must agree on a purchase price (a complex task with billion-dollar businesses). Then, it must clear the financial and legal hurdles involved in transferring ownership of each brand. But, major merger and acquisitions transactions aren’t new, certainly for P&G, and it’s unlikely these issues will be problematic. Finally, while the goals are ambitious, they are T imely. When P&G announced the goal in 2013, it gave itself three years to divest 50 of the 100 brands it has identified for sale. In 2016, it had successfully sold 43 beauty brands, including Clairol and Cover Girl, to Coty for $12.5 billion. * By March 2017, P&G had settled on 65 key brands in 10 different businesses ( http://us.pg.com/our-brands ).

5-2b. Developing Commitment to Goals

Just because a company sets a goal doesn’t mean that people will try to accomplish it. If workers don’t care about a goal, that goal won’t encourage them to work harder or smarter. Thus, the second step in planning is to develop commitment to goals. *

Goal commitment is the determination to achieve a goal. Commitment to achieve a goal is not automatic. Managers and workers must choose to commit themselves to a goal. Edwin Locke, professor emeritus of management at the University of Maryland and the foremost expert on how, why, and when goals work, tells a story about an overweight friend who lost 75 pounds. Locke says, “I asked him how he did it, knowing how hard it was for most people to lose so much weight.” His friend responded, “Actually, it was quite simple. I simply decided that I really wanted to do it.” * Put another way, goal commitment is really wanting to achieve a goal.

So how can managers bring about goal commitment? The most popular approach is to set goals participatively. Rather than assigning goals to workers (“Johnson, you’ve got till Tuesday of next week to redesign the flux capacitor so it gives us 10 percent more output”), managers and employees choose goals together. The goals are more likely to be realistic and attainable if employees participate in setting them. Another technique for gaining commitment to a goal is to make the goal public. For example, college students who publicly communicated their semester grade goals (“This semester, I’m shooting for a 3.5”) to important people in their lives (usually a parent or sibling) were much more committed to achieving their grades than those who did not. Still another way to increase goal commitment is to obtain top management’s support. Top management can show support for a plan or program by providing funds, speaking publicly about the plan, or participating in the plan itself.

5-2c. Developing Effective Action Plans

The third step in planning is to develop effective action plans. An action plan lists the specific steps (how), people (who), resources (what), and time period (when) for accomplishing a goal. It takes a blackberry bush three years to produce fruit, so to add a salad with blackberries to its 2016 summer menu, Wendy’s started planning well in advance, especially since sourcing blackberries was a significant challenge. Wendy’s usually interviews two to five potential suppliers before selecting one, but for blackberries, its procurement team spent 14 months reviewing over 30 growers before finding two that could supply its needs. Since most U.S. blackberries end up in supermarkets, with little left for restaurants, Wendy’s worked with those two growers to plant the blackberry bushes to grow the nearly 2 million extra berries, or 10 percent of the total U.S. blackberry crop, needed to serve a summer’s worth of salads at its nearly 6,700 North American restaurants. Wendy’s COO Bob Wright admits the plan was challenging to put into action, saying, “Just to have a salad on a menu is a very difficult thing to achieve.” *

5-2d. Tracking Progress

The fourth step in planning is to track progress toward goal achievement. There are two accepted methods of tracking progress. The first is to set proximal goals and distal goals. Proximal goals are short-term goals or subgoals, whereas distal goals are long-term or primary goals. *

When General Motors launched a plan to produce a driverless car by 2025 (the distal goal), managers identified three proximal goals to get there:

In 2010, driver is in charge.
In 2015, driver is mostly in charge.
In 2020, car is mostly in charge. *

The second method of tracking progress is to gather and provide performance feedback. Regular, frequent performance feedback allows workers and managers to track their progress toward goal achievement and make adjustments in effort, direction, and strategies. * Exhibit 5.2 shows the impact of feedback on safety behavior at a large bakery company with a worker safety record that was two-and-a-half times worse than the industry average. During the baseline period, workers in the wrapping department, who measure and mix ingredients, roll the bread dough, and put it into baking pans, performed their jobs safely about 70 percent of the time (see 1 in Exhibit 5.2). The baseline safety record for workers in the makeup department, who bag and seal baked bread and assemble, pack, and tape cardboard cartons for shipping, was somewhat better at 78 percent (see 2). The company then gave workers 30 minutes of safety training, set a goal of 90 percent safe behavior, and then provided daily feedback (such as a chart similar to Exhibit 5.2). Performance improved dramatically. During the intervention period, safely performed behaviors rose to an average of 95.8 percent for wrapping workers (see 3) and 99.3 percent for workers in the makeup department (see 4), and never fell below 83 percent. Thus, the combination of training, a challenging goal, and feedback led to a dramatic increase in performance. The importance of feedback alone can be seen in the reversal stage, when the company quit posting daily feedback on safe behavior. Without daily feedback, the percentage of safely performed behaviors returned to baseline levels—70.8 percent for the wrapping department (see 5) and 72.3 percent for the makeup department (see 6). For planning to be effective, workers need both a specific, challenging goal and regular feedback to track their progress. In fact, additional research indicates that the effectiveness of goal setting can be doubled by the addition of feedback.

5-2e. Maintaining Flexibility

Because action plans are sometimes poorly conceived and goals sometimes turn out not to be achievable, the last step in developing an effective plan is to maintain flexibility. One method of maintaining flexibility while planning is to adopt an options-based approach. * The goal of options-based planning is to keep options open by making small, simultaneous investments in many alternative plans. Then, when one or a few of these plans emerge as likely winners, you invest even more in these plans while discontinuing or reducing investment in the others. With revenues flat, layoffs at headquarters, and an unsuccessful effort to duplicate Amazon.com ’s prime membership plan (ShippingPass offered free two-day shipping for $49 a year), Walmart is using options-based planning to jump start its online sales which grew 7 percent last year, compared to 31 percent for amazon.com . Wal-mart is making numerous, simultaneous investments by acquiring promising online retailers, such as jet.com , which is growing by 400,000 customers a month. Jet sells products for 10 to 15 percent less than competitors by discounting prices for volume purchasing, opting out of costly free returns and paying with debit cards (which avoid credit card transaction fees). Walmart also bought ModCloth.com , a hipster clothing site, Moosejaw,com, which sells outdoor clothes and gear, and ShoeBuy.com , an online shoe retailer. And, in contrast to previous acquisitions that were absorbed into the company, Walmart will run these online sites as separate businesses. CEO Doug McMillion said, ”I don’t think it’s an exaggeration to say we are going through a transformative period.” *

In part, options-based planning is the opposite of traditional planning. Whereas the purpose of an action plan is to commit people and resources to a particular course of action, the purpose of options-based planning is to leave those commitments open by maintaining slack resources—that is, a cushion of resources, such as extra time, people, money, or production capacity, that can be used to address and adapt to unanticipated changes, problems, or opportunities. * Holding options open gives you choices. And choices, combined with slack resources, give you flexibility. Because it can take a year and a half to receive new equipment, U.S. power companies are funding Grid Assurance, LLC, which will buy and hold extra electrical transformers and circuit breakers to be used for emergencies when damaged power generating and transmission equipment needs replacing. Grid Assurance will also locate key equipment in secure, undisclosed locations. In case of terrorist attack, “The last thing we want is for someone to do a physical attack and wipe out our spares,” says Scott Moore, vice president of transmission engineering for American Electric Power. * Grid Assurance will need a minimum of 100 transformers, which can cost from $2 million to $10 million each. Grid Assurance provides the equivalent of catastrophic insurance, giving power companies the extra resources needed to survive unanticipated disruptions and breakdowns.

5-3. Planning from Top to Bottom

Planning works best when the goals and action plans at the bottom and middle of the organization support the goals and action plans at the top of the organization. In other words, planning works best when everybody pulls in the same direction. Exhibit 5.3 illustrates this planning continuity, beginning at the top with a clear definition of the company purpose and ending at the bottom with the execution of operational plans.

Let’s see how 5-3a top managers create the organization’s purpose statement and strategic objective, 5-3b middle managers develop tactical plans and use management by objectives to motivate employee efforts toward the overall purpose and strategic objective, and 5-3c first-level managers use operational, single-use, and standing plans to implement the tactical plans.

5-3a. Starting at the Top

Top management is responsible for developing long-term strategic plans that make clear how the company will serve customers and position itself against competitors in the next two to five years. Recall that P&G recently set a goal of cutting 100 of its brands. That goal was part of a strategic plan developed under former CEO A.G. Lafley. During his first term as CEO, the now twice-retired Lafley. Lafley focused on acquisitions and growth. His strategic focus turned P&G into the world’s largest consumer-products company. When he returned to serve as CEO for a second time, Lafley began purposefully shrinking the giant company. The reason? The company had grown too large to compete. Lafley sold Camay and Zest brands to archrival Unilever and exited the battery business by selling Duracell and the pet-food business by selling Iams. He also looked to sell Wella and Clairol, two brands that he acquired during his first term as P&G’s CEO. “Decade after decade, we have to find the strategy and the business model that wins with consumers,” Lafley said, and trimming P&G’s portfolio “strategically resets P&G’s where-to-play choices for at least the next five years.” *

Strategic planning begins with the creation of an organizational purpose. A purpose statement, which is often referred to as an organizational mission or vision, is a statement of a company’s purpose or reason for existing. * Purpose statements should be brief—no more than two sentences. They should also be enduring, inspirational, clear, and consistent with widely shared company beliefs and values. An excellent example of a well-crafted purpose statement is that of cosmetics company Avon: “To be the company that best understands and satisfies the product, service and self-fulfillment needs of women—globally.” * It guides everyone in the organization and provides a focal point for the delivery of beauty products and services to the customers, women around the world. The purpose is the same whether Avon is selling lipstick to women in India, shampoo packets to women in the Amazon, or jewelry to women in the United States. Despite these regional differences in specific strategy, the overall goal—understanding the needs of women globally—does not change. Other examples of organizational purpose statements that have been particularly effective include Walt Disney Company’s “to make people happy”, Schlage Lock Company’s “to make the world more secure,” and Highlights for Children, the long running magazine for children, “fun with a purpose.” *

The strategic objective, which flows from the purpose, is a more specific goal that unifies company-wide efforts, stretches and challenges the organization, and possesses a finish line and a time frame. * Collins and Porras explain that: “A mission is a clear and compelling goal that serves to unify an organization’s efforts. An effective mission must stretch and challenge the organization, yet be achievable.” However, many others define mission as an organization’s purpose. In this edition, to be more specific and avoid confusion, we use Collins and Porras’s term purpose statement, meaning a clear statement of an organization’s purpose or reason for existence. Furthermore, we will continue to use Collins and Porras’s definition of a mission (that is “a clear and compelling goal…”) but instead call it “the strategic objective.”

After two bankruptcies, Sbarro, a chain of Italian restaurants located in shopping mall food courts, will return to its New York–style pizza roots. CEO David Karam says, “The essence of this brand is pizza. It’s what consumers buy from Sbarro and how they view Sbarro.” * In other words, Sbarro’s reason for existence (that is, it’s purpose) is pizza. Sbarro’s strategic objective, which flows from that purpose, is to establish neighborhood pizza restaurants that also deliver pizza. Karam explained, “There are 900 malls in the U.S. with food courts, and we’re in a third of them. But instead of them representing 90 percent of our sites, I’d like them to represent less than half.” *

Once the strategic objective has been accomplished, a new one should be chosen. However, the new strategic objective must grow out of the organization’s purpose, which does not change significantly over time. Intuit started three decades ago with Quicken, its top-selling checkbook and budgeting software. Consistent with its purpose to “power prosperity around the world,” it then developed QuickBooks, accounting software for small businesses, and TurboTax, for individuals and businesses. So it was surprising when Intuit sold Quicken last year! Intuit, however, saw its customers and competitive environment moving to cloud-based services like Xero. Xero, which is cloud-based accounting software for small businesses, not only offers anywhere accessibility but also direct connections to corporate bank accounts (eliminating hand entry of data) and secure access for outside accounting firms (which no longer need company bookkeepers to prepare accounting data). In response to those changes, lntuit developed a new strategic objective, “being the operating system behind small business success and doing the nations’ taxes in the U.S. and Canada.” Which meant that Quicken, a standalone app without cloud-based capabilities no longer fit. So Intuit sold Quicken and then revamped QuickBooks into QuickBooks Online, which connects to 2,000 apps. QuickBooks Online subscriptions are up 49 percent in just one year. UBS analyst Brent Thrill said, “Whenever Intuit makes a wrong turn, they quickly get off the gravel and back onto the blacktop. That’s why the company has done so well for such a long time.” *

5-3b. Bending in the Middle

Middle management is responsible for developing and carrying out tactical plans to accomplish the organization’s strategic objective. Tactical plans specify how a company will use resources, budgets, and people to accomplish specific goals related to its strategic objective for the next five years. Whereas strategic plans and objectives are used to focus company efforts over the next two to five years, tactical plans and objectives are used to direct behavior, efforts, and attention over the next six months to two years. Hostess sells nearly $1.3 billion a year in Twinkies, Cupcakes, HoHos, Ding Dongs, and other snack cakes in more than 100,000 convenience stores across the United States. Still, says CEO Bill Toler, Hostess is 20,000 stores shy of reaching its strategic objective: “To be sold everywhere a candy bar is sold, whether it’s an airport kiosk, or a vending machine.” * To achieve that objective, Hostess’s tactical plans include expanding in the United States, broadening distribution in Europe and the Caribbean, and launching new distribution in Mexico and Canada. Hostess has extended its brand name by placing bread and sandwich buns in drug, dollar, and convenience stores, and is also considering entering the $400 million brownie category (and perhaps the cookie category as well). These expansions have limits, however. Toler wants to keep Hostess close to its roots as a maker of treats. According to him, “We have a mindful eye into healthier trends… but our primary focus is on being an indulgent snack.” *

Management by objectives is a management technique often used to develop and carry out tactical plans. Management by objectives is a four-step process in which managers and their employees

(1)

discuss possible goals

(2)

collectively select goals that are challenging, attainable, and consistent with the company’s overall goals

(3)

jointly develop tactical plans that lead to the accomplishment of tactical goals and objectives

(4)

meet regularly to review progress toward accomplishment of those goals.

Kimberly-Clark, the maker of diapers, tissues, and other consumer products, was a low-pressure workplace in which, according to retired sales director Rick Herbert, “A lot of people [meaning poor performers] could and would hide in the weeds.” * But the company has now switched to a performance management system, a variant of MBO, in which personalized goals and tracking data are used to closely monitor performance. Says Herbert, “People can’t duck and hide in the same way they could in the past.” Instead of once-a-year reviews, feedback regarding goal progress and personal improvement is real-time and continuous. Engineer Stephanie Martin said, says, “We have to routinely shuffle the resources and say, what’s the most important thing we need to do today, this week, this month, to drive this objective?” *

5-3c. Finishing at the Bottom

Lower-level managers are responsible for developing and carrying out operational plans, which are the day-today plans for producing or delivering the organization’s products and services. Operational plans direct the behavior, efforts, and priorities of operative employees for periods ranging from 30 days to six months. There are three kinds of operational plans: single-use plans, standing plans, and budgets.

Single-use plans deal with unique, one-time-only events. In 1905, General Electric Co. set up a banking division to finance the sale of its equipment to utility companies. By the 1930s, it financed appliances sales to consumers. By 2015, GE Capital had $500 billion in assets and was the seventh-largest U.S. bank. To sharpen its strategic focus and return to its industrial roots, GE aims to obtain 90 percent of earnings from industrial businesses in 2016, up from 58 percent in 2014. Accordingly, GE created a single-use plan, called “Project Hubble,” to dismantle and sell off GE Capital. Over a two-year period, GE will sell its $74 billion lending unit, including roughly $165 million in loans to companies such as Wendy’s, and liquidate $26.5 billion in commercial real estate. GE will use the proceeds from this one-time only event to invest further in its remaining industrial businesses, while also rewarding shareholders with $90 billion in dividends and stock buybacks. *

Unlike single-use plans that are created, carried out once, and then never used again, standing plans save managers time because after the plans are created, they can be used repeatedly to handle frequently recurring events. If you encounter a problem that you’ve seen before, someone in your company has probably written a standing plan that explains how to address it. When a snowstorm hit Atlanta in 2014, Delta Airlines transformed a Boeing 767 into sleeping quarters for stranded employees. Instead of going to the airport hotel—or to uncomfortable cots in the terminal—employees slept on the plane’s business class lie-flat seats and were rested and ready when the runways were clear in the morning. The contingency plan was so successful that Delta added it to its standard storm-response planning in 2015. Using a standing plan rather than reinventing the wheel allows Delta to save time. Delta’s senior vice president of operations, Dave Holtz, says, “We don’t want to limit our ability to get customers going because employees can’t get there.” * There are three kinds of standing plans: policies, procedures, and rules and regulations.

Policies indicate the general course of action that company managers should take in response to a particular event or situation. A well-written policy will also specify why the policy exists and what outcome the policy is intended to produce * . When bad weather threatened flights, the old policy followed by the airlines was to take care of frequent fliers first, finding them alternative routes to their destinations. As for everyone else, well, with limited seats available on any particular travel day, large numbers of travelers were guaranteed to be stuck at the airport. Now, however, the policy is to electronically issue passengers flexible weather waivers several days in advance of disruptive weather. The waivers allow passengers to cancel their flights (with a full refund), fly several days before or after their ticketed travel date, or, even fly out of or to nearby airports where flights are still operating, all without typical changes fees of $200 or more per ticket. Delta spokesperson Michael Thomas explained, “We used to just rebook passengers on the next available flight. Now we let them choose.” *

Procedures are more specific than policies because they indicate the series of steps that should be taken in response to a particular event. All commercial airplanes require regular cleaning. With no regulatory standards, airlines set their own procedures. At Singapore Airlines, which flies longer international flights, a 12-person team takes roughly 40 minutes to clean a Boeing 777-300 jet during a normal stopover. At United Airlines, most domestic flights require a quick turn (30 minutes or less), so the cleaning procedures focus on the following tasks:

Removing visible trash and cleaning out the seatback pockets

Cleaning and restocking the bathrooms and galleys

Pulling up the armrests

Wiping crumbs off seats

Cleaning large spills

In addition to between flights, United conducts more thorough overnight cleanings (vacuuming and cleaning restrooms and galleys) and “deep cleanings,” in which the plane is “scrubbed from nose to tail,” every 35 to 55 days. *

Rules and regulations are even more specific than procedures because they specify what must happen or not happen. They describe precisely how a particular action should be performed. For example, for security issues and worries about drug interactions, most hospitals prohibit patients from bringing medications from home. At the MD Anderson Cancer Center in Houston, admitting nurses must follow this regulation: “All medications brought into the hospital upon admission should be returned home whenever possible. Nursing personnel carrying out the admission procedure should determine whether the patient has brought any medication with him/her from home. Such medications should be placed in tamper-proof bags and placed in a secured area in the nursing unit.” *

After single-use plans and standing plans, budgets are the third kind of operational plan. Budgeting is quantitative planning because it forces managers to decide how to allocate available money to best accomplish company goals. According to Jan King, author of Business Plans to Game Plans, “Money sends a clear message about your priorities. Budgets act as a language for communicating your goals to others.”

5-4. Steps and Limits to Rational Decision Making

Decision making is the process of choosing a solution from available alternatives. * Rational decision making is a systematic process in which managers define problems, evaluate alternatives, and choose optimal solutions that provide maximum benefits to their organizations. Thus, for example, your boss comes to you requesting that you define and evaluate the various options for the company’s social media strategy; after all, you tweet and use Facebook, Instagram, SnapChat, Reddit, and so on and he doesn’t even know how to reboot his computer. Furthermore, your solution has to be optimal. Because budgets and expertise are limited, the company gets one, maybe two, tries to make its social media strategy work. If you choose incorrectly, the company’s investment will just go to waste, without increasing sales and market share. What would you recommend?

Let’s learn more about each of these: 5-4a define the problem, 5-4b identify decision criteria, 5-4c weigh the criteria, 5-4d generate alternative courses of action, 5-4e evaluate each alternative, and 5-4f compute the optimal decision. Then we’ll consider 5-4g limits to rational decision making.

5-4a. Define the Problem

The first step in decision making is identifying and defining the problem. A problem exists when there is a gap between a desired state (what is wanted) and an existing state (the situation you are actually facing). You’re in charge of ordering the pharmaceutical drugs used in your hospital system. You buy the drugs that doctors and nurses need for treating patients from wholesalers and are paid by insurers who negotiate a fixed reimbursement rate for those patients. When drug prices jump unexpectedly, such as when Valeant Pharmaceuticals increased the price of Nitropress and Isuprel (both used for treating heart-related health issues) by 200 to 500 percent, the hospital end ups absorbing the entire cost increase. In other words, there’s a huge gap between what you budgeted to pay for particular drugs like Nitropress and Isuprel, and the much-higher price that you’re actually paying when pharmaceutical firms suddenly raise prices. *

The presence of a gap between an existing state and a desired state is no guarantee that managers will make decisions to solve problems. Three things must occur for this to happen. * First, managers have to be aware of the gap. They have to know there is a problem before they can begin solving it. For example, after noticing that people were spending more money on their pets, a new dog food company created an expensive, high-quality dog food. To emphasize its quality, the dog food was sold in cans and bags with gold labels, red letters, and detailed information about its benefits and nutrients. Yet the product did not sell very well, and the company went out of business in less than a year. Its founders didn’t understand why. When they asked a manager at a competing dog food company what their biggest mistake had been, the answer was, “Simple. You didn’t have a picture of a dog on the package.” * This problem would have been easy to solve if management had only been aware of it.

Being aware of a problem isn’t enough to begin the decision-making process. Managers have to be motivated to reduce the gap between a desired and an existing state. Sales of carbonated soda have declined as public health concerns over obesity and diabetes have grown. In response, Pepsi Cola and Coca-Cola diversified by adding water, juice, and energy drinks to their product lines. But after missing its growth target (3–4%) for two straight years, Coke CEO Muhtar Kent settled on a simple strategy to close Coke’s sales gap—sell more soda. The company launched Freestyle self-serve soda machines that allow consumers to custom mix more than 100 drink flavors (there are now 27,000 Freestyle machines in U.S. restaurants) and is working with Keurig Green Mountain Inc. to develop an in-home counter-top soda machine. Coke also announced a $3 billion cost-cutting program, including some 1,500 layoffs. Soda accounts for 70 percent of Coke’s revenue, and Classic Coke and Diet Coke are the top-selling sodas in the United States. With Coke’s stalled stock prices making it a potential takeover target, management is highly motivated to address flagging soft drink sales. CEO Kent says, “If we don’t do what we need to do quickly, effectively, execute 100 percent, then somebody else will come and do it for us.” *

Finally, it’s not enough to be aware of a problem and be motivated to solve it. Managers must also have the knowledge, skills, abilities, and resources to fix the problem. So how do hospitals solve the problem of sudden price increases for pharmaceuticals (that is, closing the gap between what they budgeted to pay for drugs and the higher prices they actually pay when pharmaceutical companies unexpectedly raise prices). When Nitropress and Isuprel prices jumped 200 to 500 percent, MedStar Washington Hospital Center in Washington, D.C., switched from Nitropress to a cheaper, but identical generic drug and repackaged Isuprel from a onetime use ampule (used for injections), much of which was wasted, into five dosages. Savings amounted to $1.7 million a year. *

5-4b. Identify Decision Criteria

Decision criteria are the standards used to guide judgments and decisions. Typically, the more criteria a potential solution meets, the better that solution will be. Again, imagine your boss asks you to determine the best options for the company’s social media strategy. What general factors would be important when selecting one social media tool over another? Are you trying to increase your search rankings? Provide customer support? Are you trying to reach a particular target market? Is it young single women ages 18–25 or, perhaps, married women ages 25–35? Are you reaching out directly to consumers or to businesses (that is business-to-business)? Will your strategy focus on visual content, demonstrations, or detailed, complex knowledge? Answering questions like these will help you identify the criteria that will guide the social media strategy you recommend.

5-4c. Weigh the Criteria

After identifying decision criteria, the next step is deciding which criteria are more or less important. Although there are numerous mathematical models for weighing decision criteria, all require the decision maker to provide an initial ranking of the criteria. Some use absolute comparisons, in which each criterion is compared with a standard or is ranked on its own merits. For example, Consumer Reports uses nine criteria when it rates and recommends new cars: predicted reliability, current owners’ satisfaction, predicted depreciation (the price you could expect if you sold the car), ability to avoid an accident, fuel economy, crash protection, acceleration, ride, and front seat comfort. *

Different individuals will rank these criteria differently, depending on what they value or require in a car. Exhibit 5.4 shows the absolute weights that someone buying a car might use. Because these weights are absolute, each criterion is judged on its own importance using a five-point scale, with 5 representing “critically important” and 1 representing “completely unimportant.” In this instance, predicted reliability, fuel economy, and front seat comfort were rated most important, and acceleration and predicted depreciation were rated least important.

Another method uses relative comparisons, in which each criterion is compared directly with every other criterion. * Professor Jordan Ellenberg emphasizes that not comparing the data associated with each option is a fundamental mistake. He says, “A number by itself is often meaningless; it is the comparison between numbers that carries the force.” * Exhibit 5.5 shows six criteria that someone might use when buying a house. Moving down the first column of Exhibit 5.5, we see that the time of the daily commute has been rated less important (-1) than school system quality; more important (+1) than having an in-ground pool, a sun room, or a quiet street; and just as important as the house being brand new (0). Total weights, which are obtained by summing the scores in each column, indicate that the school system quality and daily commute are the most important factors to this home buyer, while an in-ground pool, sun room, and a quiet street are the least important. So with relative comparison, criteria are directly compared with each other.

5-4d. Generate Alternative Courses of Action

After identifying and weighting the criteria that will guide the decision-making process, the next step is to identify possible courses of action that could solve the problem. In general, at this step, the idea is to generate as many alternatives as possible. Let’s assume that you’re trying to select a city in Europe to be the location of a major office. After meeting with your staff, you generate a list of possible alternatives: Amsterdam, the Netherlands; Barcelona or Madrid, Spain; Berlin, Dusseldorf, Frankfurt, or Munich, Germany; Brussels, Belgium; London, England; and Paris, France.

5-4e. Evaluate Each Alternative

The next step is to systematically evaluate each alternative against each criterion. Because of the amount of information that must be collected, this step can take much longer and be much more expensive than other steps in the decision-making process. When selecting a European city for your office, you could contact economic development offices in each city, systematically interview businesspeople or executives who operate there, retrieve and use published government data on each location, or rely on published studies such as Cushman & Wakefield’s European Cities Monitor, which conducted a survey of more than 500 senior European executives who rated 34 European cities on 12 business-related criteria. *

No matter how you gather the information, once you have it, the key is to use that information systematically to evaluate each alternative against each criterion. Exhibit 5.6 shows how each of the 10 cities on your staff’s list fared with respect to each of the 12 criteria (higher scores are better), from qualified staff to freedom from pollution. Although London has the most qualified staff, the best access to markets and telecommunications, and is the easiest city to travel to and from, it is also one of the most polluted and expensive cities on the list. Paris offers excellent access to markets and clients, but if your staff is multilingual, Brussels might be a better choice.

5-4f. Compute the Optimal Decision

The final step in the decision-making process is to compute the optimal decision by determining the optimal value of each alternative. This is done by multiplying the rating for each criterion (Step 5-4e) by the weight for that criterion (Step 5-4c), and then summing those scores for each alternative course of action that you generated (Step 5-4d). For example, the 500 executives participating in Cushman & Wakefield’s survey of the best European cities for business rated the 12 decision criteria in terms of importance, as shown in the first row of Exhibit 5.6. Access to markets, qualified staff, telecommunications, and easy travel to and from the city were the four most important factors, while quality of life and freedom from pollution were the least important factors. To calculate the optimal value for Paris, the weight for each category is multiplied by its score in each category ( .53×.84 in the qualified staff category, for example). Then all of these scores are added together to produce the optimal value, as follows:

(.60×1.09)+(.53×.84)+(.52×.89)+(.42×1.36)+(.33×.22)+(.32×.10)+(.25×.37)+(.21×.58)+(.20×.30)+(.20×1.07)+(.16×.52)+(.16×.12)=2.83

Because London has a weighted average of 4.03 compared to 2.83 for Paris and 2.16 for Frankfurt (the cities with the next-best ratings), London clearly ranks as the best location for your company’s new European office because of its large number of qualified staff; easy access to markets; outstanding ease of travel to, from, and within the city; excellent telecommunications; and top-notch business climate.

5-4g. Limits to Rational Decision Making

In general, managers who diligently complete all six steps of the rational decision-making model will make better decisions than those who don’t. So, when they can, managers should try to follow the steps in the rational decision-making model, especially for big decisions with long-range consequences. Chapter 17, Managing Information, also addresses the limits of rational decisions, but does so by examining how models and algorithms can help managers make better, faster decisions (see section 17-4c on sharing knowledge and expertise).

To make completely rational decisions, managers would have to operate in a perfect world with no real-world constraints. Of course, it never actually works like that in the real world. Managers face time and money constraints. They often don’t have time to make extensive lists of decision criteria. And they often don’t have the resources to test all possible solutions against all possible criteria.

In theory, fully rational decision makers maximize decisions by choosing the optimal solution. In practice, however, limited resources along with attention, memory, and expertise problems make it nearly impossible for managers to maximize decisions. Consequently, most managers don’t maximize—they satisfice. Whereas maximizing is choosing the best alternative, satisficing is choosing a “good-enough” alternative.

In the opening to this section, your boss comes to you asking for a recommendation on the best options for the company’s social media strategy. With so many options and the fast pace of change, deciding isn’t easy. In other words, there’s no optimal solution that will satisfy all criteria. For instance, if you’re trying to increase your search rankings, you should use Facebook and YouTube, both of which are directly linked to Facebook and Google search algorithms. If you’re interested in providing customer support, then pay close attention to what your customers are saying on Facebook and Twitter, and reach out to them when they’re having problems or are dissatisfied. If your target market is teenagers, use Instagram and SnapChat. If it is young single women ages 18–25, use Facebook, SnapChat, or Instagram. If it’s married women ages 25–35, use Pinterest. If reaching out directly to consumers, use Pinterest and Facebook, but if reaching out to businesses, use LinkedIn and Twitter. Finally, if your strategy focuses on visual content, use Pinterest; if your intent is to demonstrate what your product or service does, use YouTube; and if you’ve got detailed, complex knowledge, use Twitter and blogs. * Your decision will be complete when you find a “good-enough alternative” that does the best job of meeting your decision criteria.

5-5. Using Groups to Improve Decision Making

A survey of 2,044 human resources and organizational leaders found that 84 percent of companies used teams for special projects, while 74 percent used teams to address departmental issues and innovation. * In other words, groups were used to solve problems and make decisions. Companies rely so heavily on groups to make decisions because when done properly, group decision making can lead to much better decisions than those typically made by individuals. In fact, numerous studies show that groups consistently outperform individuals on complex tasks.

Let’s explore the 5-5a advantages and pitfalls of group decision making and see how the following group decision-making methods—5-5b structured conflict, 5-5c the nominal group technique, 5-5d the Delphi technique, and 5-5e electronic brainstorming—can be used to improve decision making.

5-5a. Advantages and Pitfalls of Group Decision Making

Groups can do a much better job than individuals in two important steps of the decision-making process: defining the problem and generating alternative solutions. Still, group decision making is subject to some pitfalls that can quickly erase these gains. One possible pitfall is groupthink. Groupthink occurs in highly cohesive groups when group members feel intense pressure to agree with each other so that the group can approve a proposed solution. * Because groupthink leads to consideration of a limited number of solutions and restricts discussion of any considered solutions, it usually results in poor decisions. Groupthink is most likely to occur under the following conditions:

The group is insulated from others with different perspectives.

The group leader begins by expressing a strong preference for a particular decision.

The group has no established procedure for systematically defining problems and exploring alternatives.

Group members have similar backgrounds and experiences. *

A second potential problem with group decision making is that it takes considerable time. Reconciling schedules so that group members can meet takes time. Furthermore, it’s a rare group that consistently holds productive, task-oriented meetings to effectively work through the decision-making process. Some of the most common complaints about meetings (and thus group decision making) are that the meeting’s purpose is unclear, participants are unprepared, critical people are absent or late, conversation doesn’t stay focused on the problem, and no one follows up on the decisions that were made.

A third possible pitfall to group decision making is that sometimes one or two people, perhaps the boss or a strong-willed, vocal group member, can dominate group discussions and limit the group’s consideration of different problem definitions and alternative solutions. This may be more likely to happen when subject matter experts are part of groups. The pitfall is that subject matter experts dominate and limit group discussion as non-experts in the group defer to “expert” judgment. Doing so often results in much poorer quality decisions. * And, unlike individual decisions where people feel personally responsible for making a good choice, another potential problem is that group members may not feel accountable for the decisions made and actions taken by the group. Ironically, a fourth pitfall to group decision making is equality bias, which causes individuals to treat all group members as equally competent. More highly competent people tend to underestimate their abilities, while less competent people overestimate theirs. A recent study showed that even though the more competent person in a pair of study participants was correct over 70 percent of the time, the more competent person would agree to the less competent partner’s decision roughly 40 percent of the time. Likewise, the less competent person in the pair would agree with the more competent partner’s choice only 50 percent of the time—even though the other person was correct over 70 percent of the time. Study author Professor Bahudar Bahrami noted, “Even when we showed them exactly how competent they each were, they still gave each other more or less equal say. Incredibly, this still continued when people were rewarded with real money for making correct decisions.” Bahrami suggests two key reasons for equality bias. First, individuals do not want to exclude the other group members by asserting their competence. Second, individuals may be reluctant to take responsibility for group decisions. *

Although these pitfalls can lead to poor decision making, this doesn’t mean that managers should avoid using groups to make decisions. When done properly, group decision making can lead to much better decisions. The pitfalls of group decision making are not inevitable. Managers can overcome most of them by using the various techniques described next.

5-5b. Structured Conflict

Most people view conflict negatively. Yet the right kind of conflict can lead to much better group decision making. C-type conflict, or “cognitive conflict,” focuses on problem- and issue-related differences of opinion. * In c-type conflict,group members disagree because their different experiences and expertise lead them to view the problem and its potential solutions differently. C-type conflict is also characterized by a willingness to examine, compare, and reconcile those differences to produce the best possible solution. Victor Ho, the CEO and co-founder of Five Stars, a customer loyalty network for small and medium businesses, who worked for McKinsey & Company, a global consulting firm, said, “The strongest lesson I learned at McKinsey that I now share with every new hire is what they call the ‘obligation to dissent.’ It means that the youngest, most junior person in any given meeting is the most capable to disagree with the most senior person in the room.” * Amit Singh, president of Google for Work, agrees saying, “Some of the best discussions are passionate but respectful, so that you leave a meeting without feeling like you’ve lost something, even though your point of view may not have been the one that was adopted. That is what fosters innovation in a company — a clash of ideas, but a respectful clash.” *

By contrast, a-type conflict, meaning “affective conflict,” refers to the emotional reactions that can occur when disagreements become personal rather than professional. A-type conflict often results in hostility, anger, resentment, distrust, cynicism, and apathy. Unlike c-type conflict, a-type conflict undermines team effectiveness by preventing teams from engaging in the activities characteristic of c-type conflict that are critical to team effectiveness. Examples of a-type conflict statements are “your idea,” “our idea,” “my department,” “you don’t know what you are talking about,” or “you don’t understand our situation.” Rather than focusing on issues and ideas, these statements focus on individuals. *

The devil’s advocacy approach can be used to create c-type conflict by assigning an individual or a subgroup the role of critic. The following five steps establish a devil’s advocacy program:

Generate a potential solution.

Assign a devil’s advocate to criticize and question the solution.

Present the critique of the potential solution to key decision makers.

Gather additional relevant information.

Decide whether to use, change, or not use the originally proposed solution. *

When properly used, the devil’s advocacy approach introduces c-type conflict into the decision-making process. Contrary to the common belief that conflict is bad, studies show that these methods lead not only to less a-type conflict but also to improved decision quality and greater acceptance of decisions after they have been made. *

Another method of creating c-type conflict is dialectical inquiry, which creates c-type conflict by forcing decision makers to state the assumptions of a proposed solution (a thesis) and then generate a solution that is the opposite (antithesis) of the proposed solution. The five steps of the dialectical inquiry process are:

Generate a potential solution.

Identify the assumptions underlying the potential solution.

Generate a conflicting counterproposal based on the opposite assumptions.

Have advocates of each position present their arguments and engage in a debate in front of key decision makers.

Decide whether to use, change, or not use the originally proposed solution. *

5-5c. Nominal Group Technique

Nominal means “in name only.” Accordingly, the nominal group technique (NGT) received its name because it begins with a quiet time in which group members independently write down as many problem definitions and alternative solutions as possible. In other words, the NGT begins by having group members act as individuals. After the quiet time, the group leader asks each member to share one idea at a time with the group. As they are read aloud, ideas are posted on flip charts or wallboards for all to see. This step continues until all ideas have been shared. In the next step, the group discusses the advantages and disadvantages of the ideas. The NGT closes with a second quiet time in which group members independently rank the ideas presented. Group members then read their rankings aloud, and the idea with the highest average rank is selected. *

IBM manager Phil Gilbert used the NGT when his team developed a new email tool called IBM Verse. Instead of instructing them to come up with the next big thing in email, Gilbert had them spend ten minutes quietly writing down what they disliked about email on sticky notes—one idea per note, and no talking. As people finished writing, they stuck their notes on a big whiteboard until there weren’t any more to post. The team leader then organized the sticky notes into logical groupings for review. Then the team left (Gilbert says sometimes briefly or for days). When they returned to the whiteboard, they brought additional ideas. Regarding the NGT process, Gilbert says, “It makes for better teams, and it leads to better outcomes. When you give voice to more people, the best ideas win, not the loudest ones.” *

The nominal group technique improves group decision making by decreasing a-type conflict. But it also restricts c-type conflict. Consequently, the nominal group technique typically produces poorer decisions than the devil’s advocacy and dialectical inquiry approaches. Nonetheless, more than eighty studies have found that nominal groups produce better ideas than those produced by traditional groups. *

5-5d. Delphi Technique

In the Delphi technique, the members of a panel of experts respond to questions and to each other until reaching agreement on an issue. The first step is to assemble a panel of experts. Unlike other approaches to group decision making, however, it isn’t necessary to bring the panel members together in one place. Because the Delphi technique does not require the experts to leave their offices or disrupt their schedules, they are more likely to participate.

The second step is to create a questionnaire consisting of a series of open-ended questions for the group. In the third step, the group members’ written responses are analyzed, summarized, and fed back to the group for reactions until the members reach agreement. Asking group members why they agree or disagree is important because it helps uncover their unstated assumptions and beliefs. Again, this process of summarizing panel feedback and obtaining reactions to that feedback continues until the panel members reach agreement.

5-5e. Electronic Brainstorming

Brainstorming, in which group members build on others’ ideas, is a technique for generating a large number of alternative solutions. Brainstorming has four rules:

The more ideas, the better.

All ideas are acceptable, no matter how wild or crazy they might seem.

Other group members’ ideas should be used to come up with even more ideas.

Criticism or evaluation of ideas is not allowed.

Although brainstorming is great fun and can help managers generate a large number of alternative solutions, it does have a number of disadvantages. Fortunately, electronic brainstorming, in which group members use computers to communicate and generate alternative solutions, overcomes the disadvantages associated with face-to-face brainstorming. *

The first disadvantage that electronic brainstorming overcomes is production blocking, which occurs when you have an idea but have to wait to share it because someone else is already presenting an idea to the group. During this short delay, you may forget your idea or decide that it really wasn’t worth sharing. Production blocking doesn’t happen with electronic brainstorming. All group members are seated at computers, so everyone can type in ideas whenever they occur. There’s no waiting for your turn to be heard by the group.

The second disadvantage that electronic brainstorming overcomes is evaluation apprehension, that is, being afraid of what others will think of your ideas. An employee suffering from evaluation apprehension described this incident: “…for the thousandth time, I was in a meeting where I thought I had a great solution to a complicated problem my team is facing, and I was right. How do I know? Because I didn’t say a word, but the guy sitting next to me suggested the same thing I was thinking—and, as a result, got put in charge of a project I’d love to have been assigned.” *

Maximize Your Life Decisions Using a Spreadsheet

Maximizers, according to the Wall Street Journal’s Elizabeth Bernstein, “like to take their time and weigh a wide range of options—sometimes every possible one—before choosing.” Satisficers, on the other hand, “would rather be fast than thorough; they prefer to quickly choose the option that fills the minimum criteria.” Most of us are satisficers. But should we really make major life decisions based on what meets “minimum criteria?” Probably not. When it comes to the decisions that matter, it is in your best interest to weigh the costs and benefits of all available choices. This may sound like a daunting task, but a simple spreadsheet can help you evaluate your alternatives quickly and easily. Suppose you’re looking for a new apartment. First, list the criteria you’re looking for (location, cost, spaciousness) in the left-hand column and list your various alternatives at the top. As you gather information, rate each alternative against the criteria on a scale of 1–5 (1 being worst and 5 being best). Psychologist Fjola Helgadottir has used this spreadsheet method to “run 4 marathons, climb Mt Kilimanjaro, travel the world, and complete 4 university degrees.” What could a spreadsheet help you decide to do with your life?

Sources: F. Helgadottir, “How Excel Can Help You Achieve Goals,” The AI-Therapy Blog, August 27, 2012, accessed May 7, 2016, https://www.ai-therapy.com/blog/how-excel-can-help-you-achieve-goals/ ; R. Sanghani, “How Excel Spreadsheets Can Help You Make Major Life Decisions,” The Telegraph, January 4, 2016, accessed May 7, 2016, http://www.telegraph.co.uk/women/life/how-excel-spreadsheets-can-help-you-make-major-life-decisions/ ; E. Bernstein, “How You Make Decisions Says a Lot About How Happy You Are,” Wall Street Journal, October 6, 2014, accessed May 7, 2016, http://www.wsj.com/articles/how-you-make-decisions-says-a-lot-about-how-happy-you-are-1412614997 .

With electronic brainstorming, all ideas are anonymous. When you type in an idea and press the Enter key to share it with the group, group members see only the idea. Furthermore, many brainstorming software programs also protect anonymity by displaying ideas in random order. So if you laugh maniacally when you type “Cut top management’s pay by 50 percent!” and then press the Enter key, it won’t show up immediately on everyone’s screen. This makes it doubly difficult to determine who is responsible for which comments.

In the typical layout for electronic brainstorming, all participants sit in front of computers around a U-shaped table. This configuration allows them to see their computer screens, the other participants, a large main screen, and a meeting leader or facilitator. Step 1 in electronic brainstorming is to anonymously generate as many ideas as possible. Groups commonly generate 100 ideas in a half-hour period. Step 2 is to edit the generated ideas, categorize them, and eliminate redundancies. Step 3 is to rank the categorized ideas in terms of quality. Step 4, the last step, has three parts: generate a series of action steps, decide the best order for accomplishing these steps, and identify who is responsible for each step. All four steps are accomplished with computers and electronic brainstorming software. *

Studies show that electronic brainstorming is much more productive than face-to-face brainstorming. Four-person electronic brainstorming groups produce 25 to 50 percent more ideas than four-person regular brainstorming groups, and 12-person electronic brainstorming groups produce 200 percent more ideas than regular groups of the same size! In fact, because production blocking (having to wait your turn) is not a problem in electronic brainstorming, the number and quality of ideas generally increase with group size. *

Even though it works much better than traditional brainstorming, electronic brainstorming has disadvantages, too. An obvious problem is the expense of computers, networks, software, and other equipment. As these costs continue to drop, however, electronic brainstorming will become cheaper.

Another problem is that the anonymity of ideas may bother people who are used to having their ideas accepted by virtue of their position (that is the boss). On the other hand, one CEO said, “Because the process is anonymous, the sky’s the limit in terms of what you can say, and, as a result, it is more thought-provoking. As a CEO, you’ll probably discover things you might not want to hear but need to be aware of.” *

A third disadvantage is that outgoing individuals who are more comfortable expressing themselves verbally may find it difficult to express themselves in writing. Finally, the most obvious problem is that participants have to be able to type. Those who can’t type, or who type slowly, may be easily frustrated and find themselves at a disadvantage compared to experienced typists.

Study Tools5.

Located in Textbook

□

Rip out and review chapter review card.

Located at www.cengagebrain.com

□

Gain unique perspectives on key concepts with new 4LTR concept videos in the e-book.

□

Increase your comprehension with Aplia for MGMT11.

□

Complete interactive content within the e-book.

6-1. Sustainable Competitive Advantage

Just seven years ago, there was no market for tablet computers. A number of computer makers sold touchscreen laptops, but other than some programs that allowed users to handwrite notes, there was little to distinguish these machines from traditional laptops. All of that changed when Apple released the iPad, a tablet computer that is controlled by a multitouch display and can run hundreds of thousands of applications allowing users to read books, watch movies, listen to music, check the weather, or play games. With its innovative product, Apple in effect created a new market for portable, touch-based tablet computers. The iPad is not without its competitors, however. There is, for example, the Amazon Kindle Fire, Barnes & Noble’s Nook HD, and Samsung’s Android-based Galaxy Tab S3. The latest competitor is the Microsoft Surface, which comes with a touchscreen, a combination cover/detachable keyboard, and the Windows 10 operating system. Critics complain about the higher price ($2,099 for a 256GB Surface Pro 4 with a 12.3-inch screen, keyboard, and Surface Pen versus $1,350 for a 256GB iPad Pro with a 12.9-inch screen, keyboard, and the Apple Pencil), and the Surfaces’s 40 percent shorter battery life. Despite its competitors, Apple still dominates tablet sales, selling 45.6 million iPads in 2016 compared to just 3.9 million Surfaces, 26.5 million Galaxies, and 12.1 million Kindle fires. *

How can a company like Apple, which dominates a particular industry, maintain its competitive advantage as strong, well-financed competitors enter the market? What steps can Apple and other companies take to better manage their strategy-making process?

Resources are the assets, capabilities, processes, employee time, information, and knowledge that an organization controls. Firms use their resources to improve organizational effectiveness and efficiency. Resources are critical to organizational strategy because they can help companies create and sustain an advantage over competitors. *

Organizations can achieve a competitive advantage by using their resources to provide greater value for customers than competitors can. For example, the iPad’s initial competitive advantage came partly from its sleek, attractive design and partly from the reputation of Apple’s iPod and iPhone as innovative, easy-to-use products.

The goal of most organizational strategies is to create and then sustain a competitive advantage. A competitive advantage becomes a sustainable competitive advantage when other companies cannot duplicate the value a firm is providing to customers. Sustainable competitive advantage is not the same as a long-lasting competitive advantage, though companies obviously want a competitive advantage to last a long time. Instead, a competitive advantage is sustained if competitors have tried unsuccessfully to duplicate the advantage and have, for the moment, stopped trying to duplicate it. It’s the corporate equivalent of your competitors saying, “We give up. You win. We can’t do what you do, and we’re not even going to try to do it anymore.” Four conditions must be met if a firm’s resources are to be used to achieve a sustainable competitive advantage. The resources must be valuable, rare, imperfectly imitable, and nonsubstitutable.

Valuable resources allow companies to improve their efficiency and effectiveness. Unfortunately, changes in customer demand and preferences, competitors’ actions, and technology can make once-valuable resources much less valuable. Before the iPad was introduced, netbooks appeared to be the next big thing in mobile computing. These laptops were small and light, making them ultra portable; were very affordable, averaging anywhere from $200 to $500; and let users run basic programs such as web browsing and word processing on the go. At first, sales were brisk—in 2009, 7.5 million netbooks were sold in the United States and more than 34 million worldwide. But all that changed. The iPad had a touchscreen, an intuitive operating system, and a large selection of app software, while netbooks were often criticized for having small, hard-to-use keyboards, a slow operating system, and a lack of software options. While it took only 28 days for Apple to sell its first 1 million iPads, netbook sales fell by 40 percent in one year. * Only one year after netbook sales peaked, tablet sales passed them, and netbook sales have been steadily declining ever since. *

For sustained competitive advantage, valuable resources must also be rare resources. Think about it: How can a company sustain a competitive advantage if all of its competitors have similar resources and capabilities? Consequently, rare resources, resources that are not controlled or possessed by many competing firms, are necessary to sustain a competitive advantage. One of Apple’s rare resources has been its ability to reconfigure existing technology into elegantly designed, easy to use systems. Apple leveraged its experience with the iPod, iPod touch, and iPhone to develop the iOS operating system into a single platform giving users the same experience across multiple devices. Because of iOS, iPhone users instantly know how to use their new iPads. But, they might have trouble learning the macOS operating system on Apple Mac personal computers, which is substantially different. By contrast, with Windows 10, the Microsoft Surface 4 automatically and seamlessly switches apps from personal computer mode (when a keyboard is attached) to tablet mode. Detach the keyboard and Windows 10 asks if you want to switch into Tablet mode based on touch screen gestures, rather than mouse and keyboard clicks. In other words, Apple is no longer the only software/hardware provider to create an operating system that is easily used across multiple devices or input formats. PC Magazine even argues that Windows 10 “leads in innovation when it comes to desktop operating systems.” *

As this example shows, valuable and rare resources can create temporary competitive advantage. For sustained competitive advantage, however, other firms must be unable to imitate or find substitutes for those valuable, rare resources. Imperfectly imitable resources are those resources that are impossible or extremely costly or difficult to duplicate. Microsoft, Google, Amazon, and other Apple competitors buy standard “off the shelf” computer chips from Intel and other chipmakers. Because they all use the same chip architectures, none has an advantage with the “digital engines” that power their devices. By contrast, for over a decade Apple’s semiconductor team has designed the unique chips used in Apple iPhones, the latest being the A10 chip used in iPhone 7s. Why does this matter? Because it would take billions in investment and 5 to 10 years for competitors to catch up. Because the A10 chips are faster than the “off the shelf” chips from traditional semiconductor companies. * Because Apple takes the chips first designed for iPhones and then reuses them in other devices, such as iPads, Apple TVs, and Apple Watches. Tech analyst Steve Cheney says, “Because of Apple’s scale in smart phones, and reuse of chips in other device categories like the watch and TV, Apple has massive influence with suppliers. They can plan three to five years out and decide what to license, build, invest in, or buy.” * In short, it would be extremely costly and difficult for Apple’s competitors to match its chip design capabilities. Apple’s chip design advantage may be an imperfectly imitable resource.

Valuable, rare, imperfectly imitable resources can produce sustainable competitive advantage only if they are also nonsubstitutable resources, meaning that no other resources can replace them and produce similar value or competitive advantage. From 2007 to 2012, Google Maps was the iPhone’s dominant navigation app. In 2012, 91 percent of iPhone owners used Google Maps because it gave them accurate information, voice-guided direction, and the ability to map routes by car, public transportation, and walking. * So for five years, nothing else on the iPhone came close to providing the simple, accurate, easy-to-use navigation found in Google Maps. With 7,000 people working on Google Maps as “street view drivers, people flying planes, people drawing maps, people correcting listings, and people building new products,” Google Maps was a nonsubstitutable navigation resource on the iPhone. * Apple set out to change that in 2012 when the company released the first version of Apple Maps for iOS. However, it was so bad and inaccurate that CEO Tim Cook apologized, saying, “We are extremely sorry for the frustration,” and that iPhone users could, while Maps was being improved, “try alternatives by downloading map apps from the App Store or use Google or Nokia (now called Here) maps.” * By June 2015, after acquiring a number of mapping software companies, fixing incorrect map data, and largely matching the functionality found in Google Maps, Apple reported that iPhone owners used the Apple Maps app 5 billion times per week, 3.5 times more than the “next leading maps app,” Google Maps. * Does this mean that Apple Maps has a sustainable competitive advantage over Google Maps? No—not even close. But it does mean that Apple Maps is a worthy substitute for Google Maps, and that Google Maps lost its previously sustainable competitive advantage among iPhone users.

In summary, Apple reaped the rewards of a first-mover advantage when it introduced the iPad. The company’s history of developing customer-friendly software, the innovative capabilities of the iPad, the ease and uniformity of experience Apple’s iOS operating system provides across devices, and its—so far—imperfectly imitable chip design, have made Apple the most profitable business in history. Indeed, in smartphones alone, Apple is estimated to earn 80 percent or more of the profits in the smart-phone business! As demonstrated by the rise of Windows 10 and the stumble of Apple Maps, however, past success is no guarantee of future success. Apple needs to continue developing and improving its products or risk being unseated by more nimble competitors whose products are more relevant and have higher perceived value for consumers.

6-2. Strategy-Making Process

To create a sustainable competitive advantage, a company must have a strategy. * Exhibit 6.1 displays the three steps of the strategy-making process:

6-2a assess the need for strategic change, 6-2b conduct a situational analysis, and then 6-2c choose strategic alternatives. Let’s examine each of these steps in more detail.

6-2a. Assessing the Need for Strategic Change

The external business environment is much more turbulent than it used to be. With customers’ needs constantly growing and changing, and with competitors working harder, faster, and smarter to meet those needs, the first step in creating a strategy is determining the need for strategic change. In other words, the company should determine whether it needs to change its strategy to sustain a competitive advantage. *

Determining the need for strategic change might seem easy to do, but it’s really not. There’s a great deal of uncertainty in strategic business environments. Furthermore, top-level managers are often slow to recognize the need for strategic change, especially at successful companies that have created and sustained competitive advantages. Because they are acutely aware of the strategies that made their companies successful, they continue to rely on those strategies, even as the competition changes. In other words, success often leads to competitive inertia—a reluctance to change strategies or competitive practices that have been successful in the past. A decade ago, GameStop sold video game discs for personal computers (PC) and game consoles, such as the PlayStation or Xbox, that could only be purchased and picked up at its then 6,000 stores. GameStop sold each game twice, first as a new game and second as a used game (after the original buyer traded the new game in for store credit toward another game purchase). Double profit on each game was the competitive inertia that made GameStop reluctant to change. Today, however, video games can also be played online, on smart-phones, on streaming devices like the Apple TV, or on budding virtual reality systems. What all of those different gaming platforms have in common is that more often than not, games are downloaded to the device (including the most recent consoles). In 2014, in the United States and 2016 in the United Kingdom, sales of digitally downloaded and streamed games exceeded sales of game discs for the first time. * Likewise, in 2016, sales from mobile games, which are all streamed or downloaded, also exceeded console game sales for the first time. * GameStop has diversified into trading and selling collectibles, but its core business of selling games and gaming systems continues to shrink while the gaming industry grows. In 2016, sales dropped 8% and profits sagged 22%. GameStop closed 150 stores in 2017. *

Besides being aware of the dangers of competitive inertia, what can managers do to improve the speed and accuracy with which they determine the need for strategic change? One method is to actively look for signs of strategic dissonance. Strategic dissonance is a discrepancy between a company’s intended strategy and the strategic actions managers take when actually implementing that strategy. * Google has long been a leading innovator in voice technology, that is, using voice commands and natural language to interact with computer devices. Indeed, 20 percent of mobile searches (“Hey Google…”) are done by voice. So it was surprising that Amazon’s Echo, which uses voice commands to search for information (“Hey Alexa, what’s the weather today?”) and order things on amazon.com (“Hey Alexa, order barbecue potato chips.”), beat Google Home, Google’s voice-activated assistant, to market by nearly two years. Professor Scott Galloway said, “Amazon got there first, which is super impressive, and it has been a huge hit.” * Google was seriously invested in bringing voice capabilities to market. Its largest team was working on a stand-alone voice app for different smartphones. The Android team was working on building voice directly into the Android operating system for phones and tablets. But Google’s hardware divisions, which manufacture the phones, tablets, and Chromecast TV devices, never coordinated with those teams. So, in a clear case of strategic dissonance, no one was actually working on a voice device for people’s homes, despite Google’s strategic commitment to voice processing. *

Note, however, that strategic dissonance is not the same thing as when a strategy does not produce the results that it’s supposed to. Airbus created the wide-body, double decker A380, the largest passenger jet in the world capable of flying 853 passengers. The idea was that airlines would use the A380 for their most profitable, heavily traveled, long-haul international flights. But even with low jet fuel prices, the A380 is expensive to operate, which means it has to fly as full as possible to cover costs. So airlines are canceling orders and leases for the A380. Airbus delivered 27 planes last year, but will only make 14 in 2017 and 12 in 2018.*

6-2b. Situational Analysis

A situational analysis can also help managers determine the need for strategic change. A situational analysis, also called a SWOT analysis, for strengths, weaknesses, opportunities, and threats, is an assessment of the strengths and weaknesses in an organization’s internal environment and the opportunities and threats in its external environment. * Ideally, as shown in Step 2 of Exhibit 6.1, a SWOT analysis helps a company determine how to increase internal strengths and minimize internal weaknesses while maximizing external opportunities and minimizing external threats.

Shadow-Strategy Task Force

When looking for threats and opportunities, many managers focus on competitors in the external environment. Others, however, prefer to examine the internal environment through a shadow-strategy task force. This strategy involves a company actively seeking out its own weaknesses and then thinking like its competitors, trying to determine how they can be exploited for competitive advantage. To make sure that the task force challenges conventional thinking, its members should be independent-minded, come from a variety of company functions and levels, and have the access and authority to question the company’s current strategic actions and intent.

An analysis of an organization’s internal environment, that is, a company’s strengths and weaknesses, often begins with an assessment of its distinctive competencies and core capabilities. A distinctive competence is something that a company can make, do, or perform better than its competitors. For example, Consumer Reports magazine consistently ranks Toyota and Subaru cars as tops in quality, reliability, and owner satisfaction. * Similarly, PC Magazine ranked Intuit’s TurboTax the best tax preparation software for its user experience, thorough coverage of tax topic, and robust help resources. *

Whereas distinctive competencies are tangible—for example, a product or service is faster, cheaper, or better—the core capabilities that produce distinctive competencies are not. Core capabilities are the less visible, internal decision-making routines, problem-solving processes, and organizational cultures that determine how efficiently inputs can be turned into outputs. Distinctive competencies cannot be sustained for long without superior core capabilities.

Walmart’s distinctive competence, what it does better than competitors, is sell items at low prices. But that’s no longer true in groceries, as prices at Aldi grocery stores are consistently 20 percent lower than Walmart’s. What core capabilities help Aldi sell at such dramatically lower prices? It focuses on selling a limited number of groceries and household items in a small setting. Aldi stores are just 16 percent the size of a typical Walmart store and carry just 1,500 or so items, compared to 100,000 items in a superstore. Furthermore, most items are private brands—that is, goods that Aldi buys and packages itself. Hundreds of other small decisions keep costs and prices low. Instead of employees returning carts from parking lots, it charges customers a 25-cent deposit, which is paid inside Aldi stores. Likewise, Aldi charges 4 cents for paper bags and $1.99 for reusable shopping bags. Together, these decisions allow Aldi to run a store with just four to five employees. Aldi is growing strongly at 15 to 20 percent a year. *

After examining internal strengths and weaknesses, the second part of a situational analysis is to look outside the company and assess the opportunities and threats in the external environment. In Chapter 3, you learned that environmental scanning involves searching the environment for important events or issues that might affect the organization, such as pricing trends or new products and technology. In situational analysis, however, managers use environmental scanning to identify specific opportunities and threats that can either improve or harm the company’s ability to sustain its competitive advantage. Identification of strategic groups and formation of shadow-strategy task forces are two ways to do this (see box “Shadow-Strategy Task Force”).

Strategic groups are not groups that actually work together. They are companies—usually competitors—that managers closely follow. More specifically, a strategic group is a group of other companies within an industry against which top managers compare, evaluate, and benchmark their company’s strategic threats and opportunities. * (Benchmarkinginvolves identifying outstanding practices, processes, and standards at other companies and adapting them to your own company.) Typically, managers include companies as part of their strategic group if they compete directly with those companies for customers or if those companies use strategies similar to theirs. The U.S. home improvement industry has annual sales in excess of $364 billion. This market is divided into professional and consumer markets, both of which were forecast to grow roughly 4 percent in 2017. * It’s likely that the managers at Home Depot, the largest U.S. home improvement and hardware retailer, assess strategic threats and opportunities by comparing their company to a strategic group consisting of the other major home improvement supply companies. Exhibit 6.2 shows the number of stores, the size of the typical new store, and the overall geographic distribution (states, countries) of Home Depot stores compared with Lowe’s, Ace Hardware, and 84 Lumber.

In fact, when scanning the environment for strategic threats and opportunities, managers tend to categorize the different companies in their industries as core, secondary, and transient firms. * Core firms are the central companies in a strategic group. Home Depot operates 2,200 stores covering all 50 states, Puerto Rico, the U.S. Virgin Islands, Guam, Mexico, and Canada. The company has more than 400,000 employees and annual revenues of $94.6 billion. By comparison, Lowe’s has more than 2,129 stores and 285,000 employees in the United States, Canada, and Mexico; stocks about 36,000 products in each store; and has annual revenues of $65 billion. * Clearly, Lowe’s is the closest competitor to the Home Depot and is the core firm in Home Depot’s strategic group. Even though Ace Hardware has more stores (4,800) than Home Depot and appears to be a bigger multinational player (60 different countries), Ace’s different franchise structure and small, individualized stores (10,000–14,000 square feet, with each store laid out differently with a different mix of products) with 80,000 employees keep it from being a core firm in Home Depot’s strategic group. * Likewise, Home Depot’s management probably doesn’t include Aubuchon Hardware in its core strategic group, because Aubuchon has only 110 stores in New England and upstate New York. *

When most managers scan their environments for strategic threats and opportunities, they concentrate on the strategic actions of core firms, not unrelated firms such as Aubuchon. Where does a firm like Ace Hardware fit in? As a retailer-owned cooperative, Ace Hardware is a network of independently owned stores. Ace’s 20/20 vision employs a customer-focused strategy to grow the brand and improve store performance. *

Secondary firms are firms that use strategies related to but somewhat different from those of core firms. 84 Lumber has roughly 250 stores in 30 states, but even though its stores are open to the public, the company focuses on supplying professional contractors, to whom it sells 85 percent of its products. Without the wide variety of products on the shelves or assistance available to the average consumer, people without expertise in building or remodeling probably don’t find 84 Lumber stores very accessible. Home Depot would most likely classify 84 Lumber as a secondary firm in its strategic group analysis. * Managers need to be aware of the potential threats and opportunities posed by secondary firms, but they usually spend more time assessing the threats and opportunities associated with core firms.

6-2c. Choosing Strategic Alternatives

After determining the need for strategic change and conducting a situational analysis, the last step in the strategy-making process is to choose strategic alternatives that will help the company create or maintain a sustainable competitive advantage. According to strategic reference point theory, managers choose between two basic alternative strategies. They can choose a conservative, risk-avoiding strategy that aims to protect an existing competitive advantage. Or they can choose an aggressive, risk-seeking strategy that aims to extend or create a sustainable competitive advantage.

The choice to seek risk or avoid risk typically depends on whether top management views the company as falling above or below strategic reference points. Strategic reference points are the targets that managers use to measure whether their firm has developed the core competencies that it needs to achieve a sustainable competitive advantage. If a hotel chain decides to compete by providing superior quality and service, then top management will track the success of this strategy through customer surveys or published hotel ratings such as those provided by the prestigious Mobil Travel Guide. If a hotel chain decides to compete on price, it will regularly conduct market surveys to check the prices of other hotels. The competitors’ prices are the hotel managers’ strategic reference points against which to compare their own pricing strategy. If competitors can consistently underprice them, then the managers need to determine whether their staff and resources have the core competencies to compete on price.

As shown in Exhibit 6.3, when a company is performing above or better than its strategic reference points, top management will typically be satisfied with the company’s strategy. Ironically, this satisfaction tends to make top management conservative and risk-averse. Because the company already has a sustainable competitive advantage, the worst thing that could happen would be to lose it, so new issues or changes in the company’s external environment are viewed as threats. By contrast, when a company is performing below or worse than its strategic reference points, top management will typically be dissatisfied with the company’s strategy. In this instance, managers are much more likely to choose a daring, risk-taking strategy. If the current strategy is producing substandard results, the company has nothing to lose by switching to risky new strategies in the hope that it can create a sustainable competitive advantage. Managers of companies in this situation view new issues or changes in the external environment as opportunities for potential gain.

Strategic reference point theory is not deterministic, however. Managers are not predestined to choose risk-averse or risk-seeking strategies for their companies. In fact, one of the most important elements of the theory is that managers caninfluence the strategies chosen by their company by actively changing and adjusting the strategic reference points they use to judge strategic performance. If a company has become complacent after consistently surpassing its strategic reference points, then top management can change from a risk-averse to a risk-taking orientation by raising or changing the standards of performance (that is, the strategic reference points).

This is just what happened at Comcast Cable, long known for terrible customer service, being late to appointments, aggressively raising rates, and generally not addressing customer concerns. Vice chairman Neil Smit decided this needed to change. “As a company, we haven’t always put the customer first and we need to do a better job. We need to look at everything we do through a customer lens.” * Comcast budgeted $300 million for improving customer service via a 10-point Customer Experience Action Plan. A key point was “Being on Time, Every Time.” So Comcast linked a new phone app to improved scheduling software indicating when technicians would arrive. The app also let customers immediately rate the technician’s timeliness and service. * And, if the technician was still late, customer accounts were credited $20 for the inconvenience. Smit concluded, “Transformation isn’t going to happen overnight. In fact, it may take a few years before we can honestly say that a great customer experience is something we’re known for. But that is our goal and our number one priority…and that’s what we are going to do.” *

So even when (perhaps especially when) companies have achieved a sustainable competitive advantage, top managers must adjust or change strategic reference points to challenge themselves and their employees to develop new core competencies for the future. In the long run, effective organizations will frequently revise their strategic reference points to better focus managers’ attention on the new challenges and opportunities that occur in their ever-changing business environments.

6-3. Corporate-Level Strategies

To formulate effective strategies, companies must be able to answer these three basic questions:

What business are we in?

How should we compete in this industry?

Who are our competitors, and how should we respond to them?

These simple but powerful questions are at the heart of corporate-, industry-, and firm-level strategies.

Corporate-level strategy is the overall organizational strategy that addresses the question, “What business or businesses are we in or should we be in?” IBM CEO Virginia (Ginni) Rometty knows exactly what business her company is in: “When people say, ‘What’s IBM?’ I say, ‘it’s an enterprise innovation company.” * Similarly, Dr. Pepper is in the “flavored beverage business.” *

There are two major approaches to corporate-level strategy that companies use to decide which businesses they should be in: 6-3a portfolio strategy and 6-3b grand strategies.

6-3a. Portfolio Strategy

One of the standard strategies for stock market investors is diversification, or owning stocks in a variety of companies in different industries. The purpose of this strategy is to reduce risk in the overall stock portfolio (the entire collection of stocks). The basic idea is simple: if you invest in ten companies in ten different industries, you won’t lose your entire investment if one company performs poorly. Furthermore, because they’re in different industries, one company’s losses are likely to be offset by another company’s gains. Portfolio strategy is based on these same ideas. We’ll start by taking a look at the theory and ideas behind portfolio strategy and then proceed with a critical review which suggests that some of the key ideas behind portfolio strategy are not supported.

Portfolio strategy is a corporate-level strategy that minimizes risk by diversifying investment among various businesses or lines. * Just as a diversification strategy guides an investor who invests in a variety of stocks, portfolio strategy guides the strategic decisions of corporations that compete in a variety of businesses. For example, portfolio strategy could be used to guide the strategy of a company such as 3M, which makes 55,000 products for five different business groups: Consumer (Post-its, Scotch tape); Electronics and Energy (electronic devices, telecoms equipment, renewable energy solutions); Health Care (medical, surgical, and dental products, health information systems); Industrial (tapes, abrasives, adhesives, specialty materials, filtration systems); and Safety and Graphics (safety and security products, track and trace solutions, graphic solutions). *

Just as investors consider the mix of stocks in their stock portfolio when deciding which stocks to buy or sell, managers following portfolio strategy try to acquire companies that fit well with the rest of their corporate portfolio and to sell those that don’t. Procter & Gamble used to have a diverse portfolio of food, beverage, household, beauty, health care, pharmaceutical, pet food, and battery brands. However, when it decided to focus on its core business of household, beauty, and health care products, it began selling off brands that did not relate to its core business, a process that included the sale of Duracell to Warren Buffett’s Berkshire Hathaway for $4.7 billion and Iams and Eukanuba pet foods to Mars for $2.9 billion. *

First, according to portfolio strategy, the more businesses in which a corporation competes, the smaller its overall chances of failing. Think of a corporation as a stool and its businesses as the legs of the stool. The more legs or businesses added to the stool, the less likely it is to tip over. Using this analogy, portfolio strategy reduces 3M’s risk of failing because the corporation’s survival depends on essentially five different business sectors. Managers employing portfolio strategy can either develop new businesses internally or look for acquisitions, that is, other companies to buy. Either way, the goal is to add legs to the stool.

Second, beyond adding new businesses to the corporate portfolio, portfolio strategy predicts that companies can reduce risk even more through unrelated diversification—creating or acquiring companies in completely unrelated businesses (more on the accuracy of this prediction later). According to portfolio strategy, when businesses are unrelated, losses in one business or industry should have minimal effect on the performance of other companies in the corporate portfolio. For example, German-based Merck KGaA, founded in 1668, the world’s oldest pharmaceutical and chemical firm, has long sold prescription drugs and over-the-counter medicines. But in the last few years it has embarked on a strategy of unrelated diversification, growing a specialty chemical business that makes liquid crystals used to produce in LCD and OLED display screens, and spending $17 billion to acquire Sigma-Aldrich, which makes laboratory equipment for life sciences research and product development. *

Because most internally grown businesses tend to be related to existing products or services, portfolio strategy suggests that acquiring new businesses is the preferred method of unrelated diversification.

Third, investing the profits and cash flows from mature, slow-growth businesses into newer, faster-growing businesses can reduce long-term risk. The best-known portfolio strategy for guiding investment in a corporation’s businesses is the Boston Consulting Group (BCG) matrix. * The BCG matrix is a portfolio strategy that managers use to categorize their corporation’s businesses by growth rate and relative market share, which helps them decide how to invest corporate funds. The matrix, shown in Exhibit 6.4, separates businesses into four categories based on how fast the market is growing (high growth or low growth) and the size of the business’s share of that market (small or large). Stars are companies that have a large share of a fast-growing market. To take advantage of a star’s fast-growing market and its strength in that market (large share), the corporation must invest substantially in it. The investment is usually worthwhile, however, because many stars produce sizable future profits. Question marks are companies that have a small share of a fast-growing market. If the corporation invests in these companies, they may eventually become stars, but their relative weakness in the market (small share) makes investing in question marks riskier than investing in stars. Cash cows are companies that have a large share of a slow-growing market. Companies in this situation are often highly profitable, hence the name “cash cow.” Finally, dogs are companies that have a small share of a slow-growing market. As the name suggests, having a small share of a slow-growth market is often not profitable.

Because the idea is to redirect investment from slow-growing to fast-growing companies, the BCG matrix starts by recommending that while the substantial cash flows from cash cows last, they should be reinvested in stars (see 1 in Exhibit 6.4) to help them grow even faster and obtain even more market share. Using this strategy, current profits help produce future profits. Over time, as their market growth slows, some stars may turn into cash cows (see 2). Cash flows should also be directed to some question marks (see 3). Though riskier than stars, question marks have great potential because of their fast-growing market. Managers must decide which question marks are most likely to turn into stars and therefore warrant further investment and which ones are too risky and should be sold. Over time, managers hope some question marks will become stars as their small markets become large ones (see 4). Finally, because dogs lose money, the corporation should “find them new owners” or “take them to the pound.” In other words, dogs should either be sold to other companies or closed down and liquidated for their assets (see 5).

Although the BCG matrix and other forms of portfolio strategy are relatively popular among managers, portfolio strategy has some drawbacks. The most significant drawback is that contrary to the predictions of portfolio strategy, the evidence suggests that acquiring unrelated businesses is not useful. As shown in Exhibit 6.5, there is a U-shaped relationship between diversification and risk. * The left side of the curve shows that single businesses with no diversification are extremely risky (if the single business fails, the entire business fails). So, in part, the portfolio strategy of diversifying is correct—competing in a variety of different businesses can lower risk. However, portfolio strategy is partly wrong, too—the right side of the curve shows that conglomerates composed of completely unrelated businesses are even riskier than single, undiversified businesses.

A second set of problems with portfolio strategy has to do with the dysfunctional consequences that can occur when companies are categorized as stars, cash cows, question marks, or dogs. Contrary to expectations, the BCG matrix often yields incorrect judgments about a company’s potential. In other words, managers using the BCG matrix aren’t very good at accurately determining which companies should be categorized as stars, cash cows, questions marks, or dogs. The most common mistake is simply miscategorizing highly profitable companies as dogs. * In part, this is because the BCG matrix relies on past performance (previous market share and previous market growth), which is a notoriously poor predictor of future company performance. More worrisome, however, is research that indicates the BCG matrix actually makes managers worse at judging the future profitability of a business. A study conducted in six countries over five years gave managers and business students clear information about the current and future profits (that is, slow or fast growth) of three companies and asked them to select the one that would be most successful in the future. Although not labeled this way, one company was clearly a star, another was a dog, and the last was a cash cow. Just exposing people to the ideas in the BCG matrix led them to incorrectly categorize less profitable businesses as the most successful businesses 64 percent of the time, while actually using the BCG matrix led to making the same mistake 87 percent of the time. *

Furthermore, using the BCG matrix can also weaken the strongest performer in the corporate portfolio: the cash cow. As funds are redirected from cash cows to stars, corporate managers essentially take away the resources needed to take advantage of the cash cow’s new business opportunities. As a result, the cash cow becomes less aggressive in seeking new business or in defending its present business.

The Office productivity suite (Word, PowerPoint, Excel) has long been one of Microsoft’s two cash cows (the other is its Windows operating system). * But with free alternatives, such as Google Docs, Apache’s Open Office, and Apple’s Pages, Numbers, and Keynote apps (free on every Mac computer, iPhone and iPad), and strongly declining sales of PCs worldwide, Office, while still highly profitable, is facing major challenges that threaten its long-time dominance and ability to throw off cash. * These threats come at a time when Microsoft needs to divert cash from Office into its cloud-based file storage and Azure (cloud services, big data, servers, virtual machines, and website hosting) platforms to turn those questions marks into future stars, as well as its Surface tablets, a business which it hopes to transform from a dog to a question mark (and eventually a star). The risk, however, is that diverting cash from Office may make it less able to defend its current business or to grow by seeking new business. *

Finally, labeling a top performer as a cash cow can harm employee morale. Cash-cow employees realize that they have inferior status and that instead of working for themselves, they are now working to fund the growth of stars and question marks.

So, what kind of portfolio strategy does the best job of helping managers decide which companies to buy or sell? The U-shaped curve in Exhibit 6.5 indicates that, contrary to the predictions of portfolio strategy, the best approach is probably related diversification, in which the different business units share similar products, manufacturing, marketing, technology, or cultures. The key to related diversification is to acquire or create new companies with core capabilities that complement the core capabilities of businesses already in the corporate portfolio. Hormel Foods is an example of related diversification in the food business. The company both manufactures and markets a variety of foods, from deli meats to salsa to the infamous SPAM.

We began this section with the example of 3M and its 55,000 products sold in five different business groups. While seemingly different, most of 3M’s product divisions are based in some fashion on its distinctive competencies in adhesives and tape (for example, wet or dry sandpaper, Post-it notes, Scotchgard fabric protector, transdermal skin patches, and reflective material used in traffic signs). Furthermore, all of 3M’s divisions share its strong corporate culture that promotes and encourages risk taking and innovation. In sum, in contrast to a single, undiversified business or unrelated diversification, related diversification reduces risk because the different businesses can work as a team, relying on each other for needed experience, expertise, and support.

Hotels Respond: Fighting Back against Expedia and Airbnb

Travelers use Airbnb.com to rent private rooms, flats or houses directly from homeowners. Roughly a third of leisure travelers choose private accommodations, like those through Airbnb, over hotels. Thirty-one percent of business travelers have done the same in the last two years. Likewise, 81 percent of hotel rooms are booked through online travel sites like Expedia.com. When that happens, hotel chains pay travel sites a 15 to 25 percent commission, which means they make make less money per room. Hotels are fighting back by offering discounts and benefits to customers enrolled in hotel member rewards accounts who make direct room reservations using the hotel’s website. Hilton’s “Stop Clicking Around” plan offered 10 percent member discounts, whereas Marriott’s “It Pays to Be Direct” plan offered 2 to 5 percent discounts. Members benefit from “best price guarantees” on hotel websites. Hotels benefit because member discounts are smaller than commissions paid to travel sites. Hotels also offer members additional benefits that are only available through direct reservations on hotel websites, such as free Wi-Fi, digital check-in, and rewards points than can be used to pay for future reservations.

6-3b. Grand Strategies

A grand strategy is a broad strategic plan used to help an organization achieve its strategic goals. * Grand strategies guide the strategic alternatives that managers of individual businesses or subunits may use in deciding what businesses they should be in. There are three kinds of grand strategies: growth, stability, and retrenchment/recovery.

The purpose of a growth strategy is to increase profits, revenues, market share, or the number of places (stores, offices, locations) in which the company does business. Companies can grow in several ways. They can grow externally by merging with or acquiring other companies in the same or different businesses. Marriott International, with hotel brands such as Marriott, JW Marriott, Courtyard, and Renaissance, paid $12.2 billion to acquire Starwood Hotels & Resorts, which is known for its Westin, St. Regis, Sheraton, and Meridien hotels, among others. Marriott’s CEO Arne M. Sorenson said, “We’ve got an ability to offer just that much more choice. A choice in locations, a choice in the kind of hotel, a choice in the amount a customer needs to spend.” * Starwood’s CEO Adam Aron agreed, noting that, “To be successful in today’s lodging space, a wide distribution of brands and hotels across price points is critical. Today, size matters.” * Together the two firms will be the largest hotel business in the world, with $2.7 billion in revenue, 1.1 million rooms and 30 well-regarded hotel brands.

Another way to grow is internally, directly expanding the company’s existing business or creating and growing new businesses. In 2015, Amazon expanded its online e-tail business with several new selling platforms. Handmade at Amazon, a handicraft marketplace similar to Etsy.com, launched with 5,000 artisans from sixty countries selling 80,000 handmade items. Amazon charges vendors a 12 percent commission, but provides them with the same shipping services it offers its Marketplace sellers. Amazon Home Services, a referral service similar to Angie’s List, connects consumers with professionals who perform home repairs, upkeep, and upgrades. More than 700 different services can be booked through the service, and rather than charge its customers, Amazon collects a commission on the value of the services from the professionals who provide them. Finally, in its first move away from e-commerce, Amazon recently opened the first of 400 planned brick-and-mortar stores selling books, Kindle e-readers, and Fire tablets. *

The purpose of a stability strategy is to continue doing what the company has been doing, just doing it better. Companies following a stability strategy try to improve the way in which they sell the same products or services to the same customers. Vanguard Group, one of the world’s largest investment firms was designed at its founding in 1975 to offer low-cost investing options. Because it is client-owned, it returns profits to customers by lowering costs. Vanguard’s stability strategy to reduce costs means that Vanguard’s investment fees have dropped from $0.89 per $100 in 1975 to $0.12 today. Since the typical investment fund charges $1.01 per $100 invested in 2017, an investor with $100,000 invested would save $890 in fees per year with Vanguard. *

The purpose of a retrenchment strategy is to turn around very poor company performance by shrinking the size or scope of the business or, if a company is in multiple businesses, by closing or shutting down different lines of the business. The first step of a typical retrenchment strategy might include making significant cost reductions: laying off employees; closing poorly performing stores, offices, or manufacturing plants; or closing or selling entire lines of products or services. * Before search engines like Google, Yahoo’s directories were the fastest way to find things on the Internet. * Yahoo’s early success led to the company being valued at $125 billion in 2000. Flush with cash, it expanded into dozens of different businesses, and even made an unsuccessful bid to buy Google. But with Google dominating web search and advertising, Yahoo’s revenues declining for over a decade, and various strategies to reinvigorate Yahoo’s brand not working, CEO Marissa Mayer began shrinking Yahoo, closing down different lines of business. In 2016 alone, Yahoo closed seven digital magazines (most started just 2 years before), laid off 15 percent of employees, took a $230 million accounting write down on blog site Tumblr for which it paid $1 billion in cash three years ago, closed five offices to save $400 million in costs, and then sold its core Internet operations (Yahoo Mail, Yahoo Search, and websites such as Yahoo Finance) to Verizon Communications for $4.8 billion. After the sale closed in 2017, what’s left of Yahoo is called Altaba, reflecting a multibillion-dollar investment in China’s alibaba.com, and Yahoo Japan, which was not part of the sale to Verizon. *

After cutting costs and reducing a business’s size or scope, the second step in a retrenchment strategy is recovery. Recovery consists of the strategic actions that a company takes to return to a growth strategy. This two-step process of cutting and recovery is analogous to pruning roses. Prior to each growing season, roses should be cut back to two-thirds their normal size. Pruning doesn’t damage the roses; it makes them stronger and more likely to produce beautiful, fragrant flowers. The retrenchment-and-recovery process is similar.

Like pruning, the cuts are made as part of a recovery strategy intended to allow companies to eventually return to a successful growth strategy. When company performance drops significantly, a strategy of retrenchment and recovery may help the company return to a successful growth strategy.

After three years of slumping sales due to an overly complex menu and increased competition from fast-casual restaurants, McDonald’s returned to basics with a recovery strategy called “Plan to Win.” In addition to simplifying its menu, McDonald’s took several bold steps under this initiative:

Renovate existing locations rather than build new ones.

Increase font sizes on orders so that cooks can read them correctly.

Make the most of the core menu (by, for example, toasting hamburger buns longer and searing hamburgers so they’re juicier).

Institute all-day breakfast (which used to end at 10:30 a.m.).

Reduce employee turnover by increasing crew pay.

CEO Steve Easterbrook said about the new strategy, “Our goal is net simplification. We want to focus on fewer, bigger decisions that generate bigger reward.” * After nine months, same-store sales rose 6.2 percent and profits soared by 35 percent. *

6-4. Industry-Level Strategies

Industry-level strategy addresses the question, “How should we compete in this industry?”

Let’s find out more about industry-level strategies by discussing 6-4a the five industry forces that determine overall levels of competition in an industry as well as 6-4b the positioning strategies and 6-4c adaptive strategies that companies can use to achieve sustained competitive advantage and above-average profits.

6-4a. Five Industry Forces

According to Harvard professor Michael Porter, five industry forces determine an industry’s overall attractiveness and potential for long-term profitability: the character of the rivalry, the threat of new entrants, the threat of substitute products or services, the bargaining power of suppliers, and the bargaining power of buyers. The stronger these forces, the less attractive the industry becomes to corporate investors because it is more difficult for companies to be profitable. Porter’s industry forces are illustrated in Exhibit 6.6. Let’s examine how these forces are bringing changes to several kinds of industries.

Character of the rivalry is a measure of the intensity of competitive behavior among companies in an industry. Is the competition among firms aggressive and cutthroat, or do competitors focus more on serving customers than on attacking each other? Both industry attractiveness and profitability decrease when rivalry is cutthroat. For example, selling cars is a highly competitive business. Pick up a local newspaper on Friday, Saturday, or Sunday morning, and you’ll find dozens of pages of car advertising (“Anniversary Sale-A-Bration,” “Ford March Savings!” and “$99 Down, You Choose!”). In fact, competition in new-car sales is so intense that if it weren’t for used-car sales, repair work, and replacement parts, many auto dealers would actually lose money.

The threat of new entrants is a measure of the degree to which barriers to entry make it easy or difficult for new companies to get started in an industry. If new companies can enter the industry easily, then competition will increase, and prices and profits will fall. Altos Research provides real-time statistics and analysis of real estate markets for investors and news services such as Bloomberg Financial. Because its business relies on access to terabytes of market data, it leases computing power and data storage from Amazon Web Services (AWS), the market leader in cloud services. Without any negotiation, AWS cut its costs in half, enough to pay for two new programmers. On the other hand, if there are sufficient barriers to entry, such as large capital requirements to buy expensive equipment or plant facilities or the need for specialized knowledge, then competition will be weaker, and prices and profits will generally be higher. The automobile industry has traditionally had a high barrier to entry. So when Tesla entered the market in 2003 to manufacture a completely electric sports car, it was the first new car company in a generation. With billions of dollars in startup funding, the company hired thousands of engineers, built new manufacturing facilities, and created a complex supply chain to source, manufacture, and assemble 10,000 component parts. While its stock is valued at $30 billion, Tesla has never made a profit. In fact, the company has burned through $100 million a month in expenses since going public in 2010. With six new competitors poised to enter the automotive industry (including Apple, Google, and an upstart founded by a team of former Tesla executives), the barrier to entry is falling and competition is rising. Becoming profitable may take longer than Tesla planned as barriers to entry fall and competition rises. *

The threat of substitute products or services is a measure of the ease with which customers can find substitutes for an industry’s products or services. If customers can easily find substitute products or services, the competition will be greater, and profits will be lower. If there are few or no substitutes, competition will be weaker, and profits will be higher. Overnight delivery companies like UPS and DHL deliver millions of items every day. What would happen to these businesses if, instead of buying products and having them delivered, people could use 3-D printers to manufacture what they needed right at work or home? This new technology led UPS chief information officer Dave Barnes to wonder, “Should we be threatened by it or should we endorse it? * To answer that question, UPS created a 3-D printing test center at its Louisville, Kentucky hub. There, UPS explored the feasibility of local production and delivery of 3-D printed items. The center’s 100 industrial 3-D printers create everything from iPhone cases to replacement parts for UPS’s fleet of Airbus A300 jets. DHL’s initial studies show that just 2–4 percent of shipped products can reliably be 3-D printed. UPS, however, is purchasing 900 more 3-D printers for other locations. According to Barnes, “We saw the capability of a logistics company to be challenged on one side but on the other [to] be an enabler.” *

Bargaining power of suppliers is a measure of the influence that suppliers of parts, materials, and services to firms in an industry have on the prices of these inputs. When companies can buy parts, materials, and services from numerous suppliers, the companies will be able to bargain with the suppliers to keep prices low. On the other hand, if there are few suppliers, or if a company is dependent on a supplier with specialized skills and knowledge, then the suppliers will have the bargaining power to dictate price levels. On the flip side, the bargaining power of buyers is a measure of the influence that customers have on the firm’s prices. If a company sells a popular product or service to multiple buyers, then the company has more power to set prices. By contrast, if a company is dependent on just a few high-volume buyers, those buyers will typically have enough bargaining power to dictate prices.

We can see how the bargaining power of suppliers and buyers changes by examining the relationship between Amazon and its key delivery suppliers, UPS and FedEx. Since 2009, Amazon’s shipping costs have risen each year, from 7.5 percent of sales to 10.8 percent of sales, indicating UPS and FedEx’s growing supplier bargaining power. Amazon relies on them for package delivery, especially to Amazon Prime customers, who pay $99 a year for two-day, no charge deliveries. Prime members, who buy three times as much from Amazon as non-Prime customers, drove Amazon’s revenue growth from $89 billion in 2014 to $136 billion in 2016. * As Amazon has grown, it has reinvested profits into establishing 70 warehouses in 21 states, and leasing 40 Boeing 767s for “Prime Air” logistics and hundreds of “Prime Now” trucks, the latter of which promise free two-hour delivery. Why does Amazon appear to be establishing its own delivery service capabilities? Perhaps because the average shipping cost of $7.81 a package with FedEx and UPS could be reduced by 40 percent if Amazon delivered packages to customer on its own. With these moves, Amazon’s bargaining power as a buyer is clearly getting stronger. *

6-4b. Positioning Strategies

After analyzing industry forces, the next step in industry-level strategy is to protect your company from the negative effects of industry-wide competition and to create a sustainable competitive advantage. According to Michael Porter, there are three positioning strategies: cost leadership, differentiation, and focus.

Cost leadership means producing a product or service of acceptable quality at consistently lower production costs than competitors so that the firm can offer the product or service at the lowest price in the industry. Cost leadership protects companies from industry forces by deterring new entrants, who will have to match low costs and prices. Cost leadership also forces down the prices of substitute products and services, attracts bargain-seeking buyers, and increases bargaining power with suppliers, who have to keep their prices low if they want to do business with the cost leader. With entry-level surfboards costing $300 and top-of-the-line, handmade longboards going for $1,000 or more, surfing is expensive. Those high prices inspired Matt Zilinskas to create Wavestorm, an 8-foot, mass-produced soft-foam surfboard that sells for $99 at Costco. Now the industry’s bestselling surfboard, Wavestorm’s sales are so strong that other retailers have stopped selling more expensive soft-foam boards altogether. “Why even bother when you can go to Costco [and get one for] $100?” asked Cody Quarress, manager at the Huntington Surf & Sport. * Zilinkas has received complaints from competitors, but he sees his product as beneficial to the industry: “How many of the hundreds of thousands of people who bought our board have moved on to higher-end product? Ask any surfer in the water about Wavestorm. They probably own one.” *

Strategic Planning, Not Strategic Plans?

Winston Churchill, Britain’s WWII prime minister, said, “Plans are of little importance, but planning is essential.” U.S. President Dwight Eisenhower, who worked closely with Churchill during WWII as the Allied Supreme Commander, said, “Plans are useless, but planning is everything.” What they mean is that uncertainty makes it impossible for planners to anticipate and plan for much of what actually happens. The mistake that managers make, according to consultant Graham Kenny, is thinking of strategic plans like travel plans. (“After we go here, we go there. After we do this, we’ll do that.”) Instead, he says, think of plans as guides, things you might do, and assume all plans are a work in progress, meaning they need to be updated and revised. Be committed to strategic planning, not strategic plans.

Source: G. Kenny, “Strategic Plans Are Less Important than Strategic Planning,” Harvard Business Review, June 21, 2016, accessed April 1, 2017, https://hbr.org/2016/06/strategic-plans-are-less-important-than-strategic-planning .

Differentiation means making your product or service sufficiently different from competitors’ offerings that customers are willing to pay a premium price for the extra value or performance that it provides. Differentiation protects companies from industry forces by reducing the threat of substitute products. It also protects companies by making it easier to retain customers and more difficult for new entrants trying to attract new customers. Would you pay $290 for an Amazon Kindle Oasis ebook reader when the $119 Kindle Paperwhite and the $199 Kindle Voyage have identical high-resolution displays? Perhaps you’d pay more for the included leather cover? Because at 3.4 mm, it’s the thinnest ebook reader you can buy? Because it weighs a feather-light 4.6 ounces, versus 6.3 ounces for the Voyage and 7.2 ounces for the Paperwhite? Because it has 60 percent more LED lighting, physical buttons to turn pages, and a battery that lasts twice as long? Engadget’s Devindra Hardawar says there’s no practical reason to pay more for the Oasis, which he describes as, “A feast with the world’s finest caviar. It’s an all-you-can-eat Wagyu steak dinner. It’s an $80 cup of coffee.” * ZDNet’sJason Perlow calls the Oasis the “‘Executive Kindle,’ much like the big iPad Pro is the ‘Executive iPad.’” * Finally, Jason Snell of SixColors.com says, “The Oasis is the ebook reader equivalent of a luxury sedan, but it’s overkill for most people.” *

With a focus strategy, a company uses either cost leadership or differentiation to produce a specialized product or service for a limited, specially targeted group of customers in a particular geographic region or market segment. Focus strategies typically work in market niches that competitors have overlooked or have difficulty serving. Cable channel HGTV shows Property Brothers and Fixer Upper have a common theme: A couple shops for an outdated house, buying one of the three homes shown to viewers. The contractor takes out a wall, creating an open floor plan, and has an overbudget surprise. The couple moves in, crying with joy at the redesign of their beautiful home. HGTV’s target customer is very specific. She’s a college educated suburbanite with an $84,000 household income and an insatiable interest in home improvement. Chief programming officer Kathleen Finch says, “We super-serve our viewer what she likes, and we give her more and more of it.” HGTV’s focus strategy works. As the third-most popular cable network, it deliver twice as much web traffic for advertisers like Wayfair, an online retailer of furniture, home furnishings, and decor.*

6-4c. Adaptive Strategies

Adaptive strategies are another set of industry-level strategies. Whereas the aim of positioning strategies is to minimize the effects of industry competition and build a sustainable competitive advantage, the purpose of adaptive strategies is to choose an industry-level strategy that is best suited to changes in the organization’s external environment. There are four kinds of adaptive strategies: defenders, prospectors, analyzers, and reactors. *

Defenders seek moderate, steady growth by offering a limited range of products and services to a well-defined set of customers. In other words, defenders aggressively “defend” their current strategic position by doing the best job they can to hold on to customers in a particular market segment.

Not surprisingly, ultra-premium carmakers, such as Ferrari and Aston-Martin, are not as interested in growth as they are in retaining the luxury brand image. That’s because higher sales volume leads to ubiquity, which makes it harder to charge premium pricing. The retail price of a new Ferrari California is roughly $200,000, but a new LaFerrari model has an MSRP of $1.4 million. To retain is exclusivity, Ferrari has a self-imposed production cap of 7,000 vehicles a year. At Aston Martin, the level is much lower, at 4,000 cars per year. “This is not a car company that is ever going to be selling a lot of cars,” said Andy Palmer, CEO of Aston Martin. “Part of its mystique is its exclusivity.” *

Prospectors seek fast growth by searching for new market opportunities, encouraging risk taking, and being the first to bring innovative new products to market. Prospectors are analogous to gold miners who “prospect” for gold nuggets (that is, new products) in hope that the nuggets will lead them to a rich deposit of gold (that is, fast growth). 3M has long been known for its innovative products, particularly in the area of adhesives. Since 1904, it has invented sandpaper; masking, cellophane, electrical, and Scotch tapes; the first commercially available audiotapes and videotapes; and its most famous invention, Post-it notes. Lately, 3M has invented a film that increases the brightness of LCD displays on laptop computers; developed a digital system for construction companies to detect underground telecommunication, gas, water, sewer, or electrical lines without digging; and created a pheromone spray that, by preventing harmful insects from mating, will protect apple, walnut, tomato, cranberry, and grape crops. For more on 3M’s innovative products, see the 3M innovation archive ( http://solutions.3m.com/innovation/en_US/ ).

Analyzers are the blend of the defender and prospector strategies. They seek moderate, steady growth and limited opportunities for fast growth. Analyzers are rarely first to market with new products or services. Instead, they try to simultaneously minimize risk and maximize profits by following or imitating the proven successes of prospectors.

Facebook admits to using an analyzer strategy in copying the key features of Snapchat, the popular social media app in which users share pictures and videos. Facebook product manager Connor Hayes said, “The way people create content is changing to be from text to photos and videos. This is in turn changing the way they’re sharing with one another and interacting online. This is something that Snapchat has really pioneered.” Facebook has copied Snapchat’s features four times. First, Snapchat opens in camera view. Facebook made the camera available with one swipe. Second, it added the one-swipe capability to take and post picture and videos to its Instagram, WhatsApp, and Messenger apps. Third, similar to Snapchat stories, it named these features Facebook Stories. Fourth, just like in SnapChat, users can choose to create photos and stories that only exist for 24 hours. Facebook’s adoption of SnapChat features has already slowed Snapchat’s user growth. Instagram Stories has 150 million daily users, while Snap-chat’s daily user base is 158 million. *

Finally, unlike defenders, prospectors, or analyzers, reactors do not follow a consistent strategy. Rather than anticipating and preparing for external opportunities and threats, reactors tend to react to changes in their external environment after they occur. Not surprisingly, reactors tend to be poorer performers than defenders, prospectors, or analyzers. A reactor approach is inherently unstable, and firms that fall into this mode of operation must change their approach or face almost certain failure.

6-5. Firm-Level Strategies

Apple unveils its Apple Watch with advanced fitness tracking and FitBit counters with the Blaze, which has a color touchscreen and syncs automatically with your phone. Starbucks Coffee opens a store, and nearby locally run coffeehouses respond by improving service, increasing portions, and holding the line on prices. In the German luxury car industry, BMW, Audi, and Mercedes have an intense three-way rivalry that goes well beyond sales volume to include investments in technology, quality rankings, and profitability. According to one Audi executive, to get approval for a new project, “I just have to say BMW is already doing it, and it goes through.” The rivalry is just as heated over at BMW. When it comes to Audi, one BMW executive said, “We like to stick it to them.” * Attack and respond, respond and attack. Firm-level strategy addresses the question, “How should we compete against a particular firm?”

Let’s find out more about the firm-level strategies (direct competition between companies) by reading about 6-5a the basics of direct competition and 6-5b the strategic moves involved in direct competition between companies.

6-5a. Direct Competition

Although Porter’s five industry forces indicate the overall level of competition in an industry, most companies do not compete directly with all the firms in their industry. For example, McDonald’s and Red Lobster are both in the restaurant business, but no one would characterize them as competitors. McDonald’s offers low-cost, convenient fast food in a seat-yourself restaurant, while Red Lobster offers mid-priced seafood dinners complete with servers and a bar.

Instead of competing with an entire industry, most firms compete directly with just a few companies within it. Direct competition is the rivalry between two companies offering similar products and services that acknowledge each other as rivals and take offensive and defensive positions as they act and react to each other’s strategic actions. * Two factors determine the extent to which firms will be in direct competition with each other: market commonality and resource similarity. Market commonality is the degree to which two companies have overlapping products, services, or customers in multiple markets. The more markets in which there is product, service, or customer overlap, the more intense the direct competition between the two companies. Resource similarity is the extent to which a competitor has similar amounts and kinds of resources, that is, similar assets, capabilities, processes, information, and knowledge used to create and sustain an advantage over competitors. From a competitive standpoint, resource similarity means that your direct competitors can probably match the strategic actions that your company takes.

Exhibit 6.7 shows how market commonality and resource similarity interact to determine when and where companies are in direct competition. * The overlapping area in each quadrant (between the triangle and the rectangle, or between the differently colored rectangles) depicts market commonality. The larger the overlap, the greater the market commonality. Shapes depict resource similarity, with rectangles representing one set of competitive resources and triangles representing another. Quadrant I shows two companies in direct competition because they have similar resources at their disposal and a high degree of market commonality. These companies try to sell similar products and services to similar customers. McDonald’s intends to intensify its direct competition with Burger King by partnering with Uber to deliver food via UberEATS. In its top five markets, 75 percent of the population lives within three miles of a McDonald’s. Globally, one billion people live within 10 minutes of a McDonald’s. Senior vice president Lucy Brady said, “Delivery is the most significant disruption in the restaurant industry in our lifetime.

In Quadrant II, the overlapping parts of the triangle and rectangle show two companies going after similar customers with some similar products or services but doing so with different competitive resources. McDonald’s and Wendy’s restaurants would fit here. Wendy’s is after the same lunchtime and dinner crowds that McDonald’s is. Nevertheless, with its more expensive hamburgers, fries, shakes, and salads, Wendy’s is less of a direct competitor to McDonald’s than Burger King is. For example, Wendy’s has recently rebranded itself more like a casual dining restaurant, redesigning its locations with lounge seating, fireplaces, Wi-Fi, and digital menu boards.* Wendy’s goal is to convert 85 percent of its company-owned locations and 35 percent of its franchised stores by 2017.* Even though it competes less directly with Wendy’s, McDonald’s is taking aim at Wendy’s by switching from frozen to fresh beef in its Quarter Pounder hamburgers. Wendy’s has long touted its fresh beef as a key difference. Indeed, when McDonald’s announced the change to fresh beef, Wendy’s tweeted, “So you’ll still use frozen beef in MOST of your burgers in ALL of your restaurants? Asking for a friend.” *

In Quadrant III, the very small overlap shows two companies with different competitive resources and little market commonality. McDonald’s and Luby’s cafeterias fit here. Although both are in the fast-food business, there’s almost no overlap in terms of products and customers. Luby’s sells baked chicken, turkey, roasts, meat loaf, and vegetables, none of which are available at McDonald’s. Furthermore, Luby’s customers aren’t likely to eat at McDonald’s. In fact, Luby’s is not really competing with other fast-food restaurants, but with eating at home. Company surveys show that close to half of its customers would have eaten at home, not at another restaurant, if they hadn’t come to Luby’s. *

Finally, in Quadrant IV, the small overlap between the two rectangles shows that McDonald’s and Subway compete with similar resources but with little market commonality. In terms of resources, sales at McDonald’s are much larger, but Subway has grown substantially in the past decade and now has 44,830 stores in 98 countries, compared to McDonald’s with 36,899 stores in more than 100 countries. *

Though Subway and McDonald’s compete, they aren’t direct competitors in terms of market commonality in the way that McDonald’s and Burger King are because Subway, unlike McDonald’s, sells itself as a provider of healthy fast food. Thus, the overlap is much smaller in Quadrant IV than in Quadrant I. With detailed nutritional information available in its stores, and its close relationships with the American Heart Association, the American College of Cardiologists, and Heart Research UK, Subway has long focused on healthy eating and well being. *

6-5b. Strategic Moves of Direct Competition

While corporate-level strategies help managers decide what business to be in, and industry-level strategies help them determine how to compete within an industry, firm-level strategies help managers determine when, where, and what strategic actions should be taken against a direct competitor. Firms in direct competition can make two basic strategic moves: attack and response. These moves occur all the time in virtually every industry, but they are most noticeable in industries where multiple large competitors are pursuing customers in the same market space.

An attack is a competitive move designed to reduce a rival’s market share or profits. Gillette dominates the $3.3 billion U.S. shaving business, earning an enormous 32 percent profit on each blade. Dollar Shave Club, an online service selling razor blades via subscription plans, attacked Gillette with substantially lower prices. While Gillette cartridges cost $3.50 to $6.00 each, Dollar Shave Club’s entry-level plan, the Humble Twin, charges only $0.20 per cartridge and $2.00 per month for shipping. Dollar Shave Club quickly amassed nearly 53 percent of the online market for razors and blades. * Likewise, four-year old Harry’s Razor Co., which also sells razors via online monthly plans, already has 2 percent of the overall market for men’s razors. However, sales jumped when Target featured Harry’s products in its stores. Within weeks, Harry’s had 10 percent of Target’s cartridges sales and half of its handle sales, mostly at the expense of Gillette. *

A response is a countermove, prompted by a rival’s attack, that is designed to defend or improve a company’s market share or profit. There are two kinds of responses. * The first is to match or mirror your competitor’s move. This is what Gillette did when it launched the online Gillette Shave Club, which offers three subscription plans, free shipping on all orders, loyalty rewards, and sweepstakes for entertainment and major-league sports tickets. Gillette ran ads on Facebook and Twitter promoting the Gillette Shave Club, saying “Going to the store to buy blades is so 2014.” *

The second kind of response, however, is to respond along a different dimension from your competitor’s move or attack. Wireless carriers, such at AT&T, Verizon, and Sprint, have typically responded to competitors’ attacks by cutting prices, expanding coverage, or speeding up their networks. T-Mobile, the smallest of the major wireless carriers, faired poorly on those dimensions and lost 2 million customers as a result five years ago. * In the past three years, however, T-Mobile has grown from 33 million to 71.5 million customers, increasing its share of the U.S. wireless market from 10 to 17 percent. The company achieved this remarkable growth by responding with an “uncarrier” strategy that removes key restrictions found in its competitors’ wireless services. * Overage charges? Not at T-Mobile, which offers unlimited minutes and texts. Exorbitant roaming charges for international plans? T-Mobile charges a meager 20 cents per minute for international calls, while providing unlimited international data and texts at no extra charge in 140 countries. Moreover, with 35 percent of U.S. international calls and 55 percent of U.S. international travel to Mexico and Canada, T-Mobile has consolidated all three countries into one North American market in which access to data plans, 4G LTE fast connections, and calling are included—at no extra cost—for T-Mobile customers. Finally, are low data caps preventing music and streaming video on your phone? T-Mobile One introduced unlimited data, with music and HD streaming. T-Mobile then cut the price of its unlimited plans by including sales taxes and regulator fees in the advertised prices (not in addition to), and by reducing plans $5 a month if customers used autopay and by $10 a month when a phone uses less than 2GB a month (T-Mobile Kickback.) *

Market commonality and resource similarity determine the likelihood of an attack or response, that is, whether a company is likely to attack a direct competitor or to strike back with a strong response when attacked. When market commonality is large, and companies have overlapping products, services, or customers in multiple markets, there is less motivation to attack and more motivation to respond to an attack. The reason for this is straightforward: When firms are direct competitors in a large number of markets, they have a great deal at stake.

Airlines Air France-KLM and Lufthansa once dominated highly lucrative routes between Europe’s and Asia’s largest cities. That is, until Middle Eastern carriers such as Emirates Airlines and Etihad Airways attacked their market shares and profits by offering high-end amenities such as private suites, onboard showers, and a bar in first class. The European carriers quickly took note, with Air France-KLM CEO Alexandre de Juniac saying, “The Gulf carriers have significantly captured market share.” * Market commonality is extensive in the airline industry. With so much at stake, Germany-based Lufthansa responded by spending $3.4 billion for 650 new first-class seats, 7,000 business-class seats that lie flat (for sleeping), and upgrades to premium economy seating and in-flight entertainment. Air France-KLM responded similarly, spending $1.1 billion to install private, first-class suites on 44 planes and replace economy-class seating. *

Whereas market commonality affects the likelihood of an attack or a response to an attack, resource similarity largely affects response capability, that is, how quickly and forcefully a company can respond to an attack. When resource similarity is strong, the responding firm will generally be able to match the strategic moves of the attacking firm. Consequently, a firm is less likely to attack firms with similar levels of resources because it is unlikely to gain any sustained advantage when the responding firms strike back. On the other hand, if one firm is substantially stronger than another (that is, there is low resource similarity), then a competitive attack is more likely to produce sustained competitive advantage.

In general, the more moves (that is, attacks) a company initiates against direct competitors, and the greater a company’s tendency to respond when attacked, the better its performance. More specifically, attackers and early responders (companies that are quick to launch a retaliatory attack) tend to gain market share and profits at the expense of late responders. This is not to suggest that a full-attack strategy always works best. In fact, attacks can provoke harsh retaliatory responses.

Amazon uses automated pricing algorithms to search competitors’ retail websites for prices. When competitors lower prices, Amazon retaliates by aggressively lowering its prices to match or beat competitors’ prices. For example, the Star Shower Motion is a light projector sold during holiday season, which projects decorative light patterns on the outside of homes. It sells to retailers for a wholesale price of $30, retails for a suggested price of $49.99, and thus offers the possibility of a $19.99 profit. But once Amazon’s algorithm found lower prices on competitors’ websites, it began cutting Amazon’s price. When competitors repeated lowered prices in response, the algorithm eventually cut Amazon’s price to just below $31, or less than a dollar above cost. A. J. Khubani, CEO of Telebrands, which sells the Star Shower Motion, said that traditional brick and mortar retailers were angry that Amazon retaliated by cutting the price to $31. He said, “Keeping everybody happy while we are selling on Amazon has become a challenge.” *

Amazon’s aggressive retaliatory responses, driven by its web search algorithm, followed by competitors’ retaliatory price cuts, followed by more retaliatory price cutting from Amazon, eliminated all of the profit [after shipping costs] on the hot-selling Star Shower Motion projector. Because the pricing algorithm does this so often, Amazon calls these CRaP products, meaning “Can’t Realize a Profit.” * Despite the hit to its bottom line, Amazon has no plans to stop selling CRaP products. Amazon spokesperson Julie Law said, “We find the lowest prices and meet or beat them every day.” * Consequently, when deciding when, where, and what strategic actions to take against a direct competitor, managers should always consider the possibility of retaliation.