AT&T and DirectTV merger case study

Chapter 04 Minilecture - Developing Competitive Advantage and Strategic Focus

Chapter 04 in your text introduces several important concepts having to do with corporate and business-unit strategy. Chapter 02 presented the components of strategic planning that are common to many courses in marketing and management: The Mission Statement, and Corporate and/or Business Unit objectives that derive from a careful analysis of internal and external factors, followed by implementation and evaluation/control .  To these, Chapter 04 adds a valuable discussion of SWOT analysis.

In the continuous evolution in strategic thinking, organizations' top managers have been forced to move from static planning models to those focused on dynamism and change. The portfolio models of the 1970s are pretty good tools for internal analysis of a firm's competencies (mostly internal things), while later thinking formulated in the 1980s -- most notably Michael Porter's famous Five-Factor Model of industry profitability -- rightly places more focus on external, ever-changing competitive circumstances (exclusively external factors).   But that was then.

The currently prevalent "resource-based” view of the firm, however, provides a needed corrective to earlier models' tendency only to look at half the picture. To be brief, the Resource-Based view of the firm returns our focus to an organization's internal distinctive competencies, and the way that the firm can align these competencies with external opportunities. One important point from Resource Theory is the recognition that every firm has, necessarily, a limited set of competencies. But the best firms will enter into strategic alliances with partners, sometimes from other industries -- to acquire the resources that will let them fill the gaps in their skill set. Whether it's teaming up with a headhunting agency to find the best managerial talent, or setting up a co-branding initiative, each organization must have in place a plan to meet customers' needs better than competitors. Through lower costs, or contractual ties with the best brands out there, these are just some ways that organizations seek sustainable competitive advantage: an operating advantage based on lower cost structures or the superior market power of strong brands that is extremely difficult for competitors to overcome -- at least in the short run.

Recall from the Chapter 02 readings, that every marketing organization is really about one thing: creating value, which can be broken down into 3 activities, choosing, providing, and communicating the value.  And the firms that do this best have the best chance to enjoy a sustainable competitive advantage. 

As one example of the foregoing discussion, I give you Toshiba.  Recognizing that they couldn't dominate any technology or industry alone, they actively set out to develop synergistic partnerships with businesses in different strategic groups (a strategic group is your set of nearest competitors).  In the 1990s they partnered with GE to develop light bulb filaments, and later with Apple to develop various multimedia computer products.   While Apple is strong in software and design (among other things), Toshiba contributed manufacturing expertise to the partnership.  Toshiba also hooked up with Microsoft to develop hand-held computing devices.  They later worked with Siemens and IBM to conduct basic semiconductor research:  Toshiba's strengths in etching matched nicely with IBM's in lithography, and Siemen's in engineering.

And the story continues:  Toshiba has partnered with National Semiconductor and Motorola to produce memory chips, and with IBM to produce color flat panel displays for notebook computers.  For more than you can ever read about Toshiba's innovative partnership initiatives in telecommunications, you can visit their web site.

What's Old is New Again

Now I don't wish to detract from the significance of the resource-based view, but I would like to point out that this is really nothing new... Good old-fashioned SWOT analysis (analysis of Strengths, Weakness, Opportunities, and Threats) has been around for a long time and it has always existed for the purpose of aligning strengths and opportunities. This, when all's said and done, is the very definition of strategy. Or as world-renowned marketing expert Philip Kotler puts it: "Market-Oriented Strategic Planning is the managerial process of developing and maintaining a viable fit among the organization's objectives, skills, and resources and its changing marketing opportunities.”

And that's pretty much it: finding the fit between internal abilities and external opportunities. What could be simpler? Or harder?

The problem with SWOT analysis is that all too often, students and managers alike make a simple, elegant list of the strengths, weaknesses, etc. of a given organization and pretty much leave it at that . As noted in your text, however, SWOT's simplicity often leads to unfocused and poorly conducted analyses. Remember that internal and external analysis, according to the Classical Strategy Framework, are the very foundation of corporate and/or business unit OBJECTIVES. What's usually left unanswered in most SWOT analyses is the question: SO WHAT?

That's the whole point of this little discussion.

Until somebody connects the dots, we're no closer to a coherent set of objectives than we were before planning began. Your company may succeed or fail based on luck, or a strong economy, or some combination thereof that makes all managers look like geniuses. But when the going gets tough, only those organizations with sound strategies and meaningful objectives will survive the kind of shakeout we have seen in recent years.

In the figure immediately below, I have drawn on the strategy literature to suggest the important connections among Strengths, Weaknesses, Opportunities, and Threats that actually might yield meaningful objectives . This discussion can take place at the corporate level or at the business-unit level, but, make no mistake about it; it is entirely about the connections .

The take away here is that internal and external analyses should make as their goal the identification of leverage, constraints, vulnerabilities, and problems - the TRUE source of corporate and business unit objectives. Color coding is supplied to help focus on the connections.

Strengths

Opportunities

Leverage

Vulnerability

Constraints

Problems

Internal Factors:

External Factors:

Weaknesses

Threats

To simplify:

Leverage means simply that we are good at something (a strength) and AT THE SAME TIME there exists somewhere out there (an opportunity) to put this internal strength to good use. A strength that has no corresponding opportunity is essentially meaningless, from the perspective of strategy. Leverage closes that gap. Example: Yahoo! is great at reaching an ENORMOUS number of users, and advertisers are looking for a web site that will reach the largest possible audience: GREAT leveraging tactic for Yahoo! - to sell lots of banner ads.

The resulting objective? Well, sales reps for Yahoo! should beat the bushes 24/7 to find more companies out there to buy ad space at Yahoo! Facebook?  Another example of a company finding a way to leverage its strength:  Intermap, the "..preeminent digital mapping company creating uniform high-resolution 3D digital models of the earth's surface" formed an alliance with satellite navigation giant, Garmin. Presumably Intermap's technology will present more opportunities for leverage in an increasingly mobile world.

A constraint indicates that while there may be a nice opportunity out there, we lack the needed resources to capitalize on it (an internal weakness). If we don't size up external Opportunities against our internal weaknesses, we won't develop strategies and tactics to address these constraints.  Essentially, the opportunity will be illusory or meaningless. As pointed out in an earlier mini-lecture, many companies solve this problem by partnering with others to acquire (at least indirectly) the necessary assets. Google and other search services didn't initially have the actual hard- and software to search the trillions of web pages that are out there - usually, they took a partner like Inktomi to provide search services. Without such partnerships, the huge demand for Internet search services and the difficulty of providing them would represent a constraint that would have kept Google, Excite, and others from being a player.

The objective? Well, if we want to get into the Internet search business, maybe we need a partner who actually HAS the resources to help us achieve our objectives. Find a partner, or build the needed resources internally, or as they used to say on the Sopranos: "fuggedaboutit.” We talk about Apple a lot; the paragon of 21st century marketing.  So far. But Apple's product and marketing leadership -- its wow factor -- wouldn't have been possible without its partnership with decidedly old-school Motorola to develop flash-technology memory chips.

A vulnerability, on the other hand, is a set of external circumstances in which environmental turbulence (most often these days, the DISRUPTIVE effects of advancing technologies) threatens to make our strengths irrelevant. (!) Example: Pets.com. This company, as you may recall from some years back, spent about a year's promotional budget on two or three minutes of advertising on the Super Bowl. This was supposed to be an objective based on leveraging strengths against opportunities. What they didn't know - and most people missed - was that the economy and the online advertising market generally was due for some very substantial softening. Environmental turbulence basically turned out to be a threat that made their strength (a well-known brand) basically irrelevant, because a business model based on selling advertising at their website was based on incorrect assumptions about external factors and left Pets.com vulnerable . Result: Pets.com went belly up.

(What would have been a good) objective: diversify into other revenue streams besides merely selling online advertising. They didn't do this well enough, if at all, and were sunk because they didn't have corporate objectives that would patch over their vulnerabilities. You could probably identify any company competing against the iPad, the iPhone, and talk about vulnerabilities: Blackberry, Garmin navigation devices, booksellers, music stores, and on and on. Amazon's Kindle and Barnes and Noble's Nook might be good examples of marketers responding to vulnerabilities.

Finally, a Problem exists when a firm is facing substantial changes in its environment AND it doesn't have the resources to cope with these changes. Example: one of my favorite stores, Home Depot, has recognized for some time that they are world famous for being a "very large hardware store, where big, burly men go to purchase their tools and supplies" -- that they are basically "over-positioned” as a hardware store ( New York Times , January 2011). Now this is a problem because their own research indicates that, as a matter of fact, half of their customers are women, who (much more than guys) are interested in fashionable merchandise for which Home Depot has a miserable reputation at best. Classic example of Weaknesses aligned against Threats (environmental turbulence) calling for clear objectives...

Objectives? Fix the problem. Re-position Home Depot as a store where customers can find name-brand fashionable merchandise. With their partnership with Martha Stewart in 2011, Home Depot turned their weakness into a strength, which can be leveraged against the evolving demographics of their customer base. Now, in addition to table saws and plywood, female customers can shop for patio furniture, draperies, carpets, and paint. Home Depot is of course not alone in fixing this problem in this way: Pet Smart, Lowes, Michael's (crafts) also now offer Martha Stewart Leashes, dog sweaters, etc. -- to name but a few.

(This can be carried too far, however. I'll also mention that Sears did this some time ago, with its partnership with Lands End. Now some observers, including marketing guru Al Ries -- the inventor of "positioning" -- are saying they need to stick to appliances!). Maybe it's marketing megalomania (trying to be all things to all people, and ending up nowhere), but the last time I went there to buy lawnmower blades, they didn't stock the ones I needed. Had to order them online and wait!)

This is strategy: capitalizing on leverage opportunities, and dealing with constraints, vulnerabilities, and/or problems. It's no guarantee of success, but at least it provides defensible and logical objectives at the corporate and business level which can be compared to the organization's mission, which give confidence to the investment community, and most important, let the marketing department go forward with plans to develop an Integrated Marketing Communications model, encompassing advertising, consumer- and trade-promotion, personal selling, and public relations.

Here's a very interesting article from Ad Age, February 11, 2015: 

http://adage.com/article/cmo-strategy/j-c-penney-partners-disney-cinderella-push/296858/?utm_source=daily_email&utm_medium=newsletter&utm_campaign=adage&ttl=142423102

Again you don't have to read it, but I'll summarize:  J.C.Penney is experiencing tough times and wants to reconnect with consumers, especially women.  Says chief marketing officer at Penney's, Deb Berman: "We want to make sure we connect to the customer... You want to feel absolutely fabulous.... We think Cinderella is the hyperbole of that (sic).  When you have a Cinderella moment, it is on. You look gorgeous from the inside out."  Accordingly, J.C.Penney is expanding its partnership with Disney Corp. to promote the upcoming, live-action "Cinderella" film.  According to the Ad Age article, Penny's partnership with Disney has been a bright spot in its efforts to turn around the company; Ms. Berman says "We have stepped into a greater level of partnership" (with Disney).  Based on the discussion above, I'd say they're removing constraints.

Please note: if you have read the text chapter and this minilecture carefully, you will have noticed that my presentation of SWOT analysis is somewhat different from Ferrell and Hartline's. Their discussion -- drawn from Nigel Piercy -- entails converting weaknesses to strengths, and converting threats to opportunities, followed by (what I think is an overly complex) quantitative assessment (Exhibit 4.6). I will just say that, for the purposes of case analyses going forward this semester, you can use either approach: the approach presented in the text, or the "leverages, constraints, vulnerabilities and problems" approach outlined above. I believe each approach achieves pretty much the same goals -- a set of credible marketing objectives -- but I think the perspective provided in this minilecture is a bit more straightforward and better suited for case work in ba651 this semester.    Please be sure to use one or the other in your future case presentations.

One caveat about SWOT analysis: every semester at least two-thirds of students and teams get their SWOT analysis wrong.  Specifically, I'm referring to the "Opportunities” section in which students will mistakenly offer tactics the firm could undertake - as opposed to external factors against which it could LEVERAGE its strengths.  Your text book discussion in Chapter 04 (pages 92, 93) makes note of this also.  Please don't make this error in your cases.  If you discuss tactics in your SWOT analysis, you're getting ahead of yourself.  SWOT is good for identifying tactics having to do with leveraging, constraint, vulnerabilities, but the Opportunities section should NEVER contain tactics (things like "Ikea needs to develop an online catalogue."  An opportunity may be an external factor like "online shopping for durable goods has increased 40% since 2010."  That's what belongs in the "Opportunities" box - not a recommendation for an online catalogue).

Blue Ocean

On another note: in the world of business and marketing strategy, just as in the world of marketing products and services, every now and then some innovative intellectual entrepreneur comes along with a "revolutionary new paradigm" which will change our way of thinking about marketing, business, and strategy. In other words, someone has something to sell us, and this time, it's not Jeff Zuckerberg or Steve Jobs: it's business-professors-as-marketers. For these new products to gain traction, obviously they have to be sound and logical. Earlier examples include Michael Porter's 5-Forces model and his "Generic Strategies" model (which I know you're all familiar with), Hunt and Morgan's "Resource Advantage Model," Parasuraman and Zeithamel's "Service Disconfirmation Model," etc.

Our idea marketers for this week are W. Chan Kim and Renee Mauborgne, from one of the world's leading b-schools, the INSEAD Institute, near Paris. Their product is on full display on page 106; they call it "Blue Ocean Strategy." The ideas are thought provoking, and may well prove useful to marketers trying to find some way to break outside the box. If you like, you can visit the Blue Ocean Strategy website and learn more about their ideas. On first inspection, it appears to be devoted to selling books, but behind the marketing are what I think are some very interesting ideas!

In particular, I'd like to say a bit about The Four-Actions Framework (see page 106), which holds basically that:

1. Businesses need to identify those areas of value delivery that -- while important -- aren't true differentiators. After all, all banks are safe; every computer on the market has more storage and faster processing than you have now. Let's shift the discussion. This is the REDUCE action -- if nothing else we need to reduce our emphasis on what everyone else is already doing. You may know that a lot of the domestic US air carriers make a lot of $ on fees for extras: things like pillows, blankets, the ability to change your reservation... But not Southwest Airlines. They figure their flights are too short to try to sell these "extras" and their customers appreciate that the flight you book online and the fee you pay at that time is the FINAL cost of flying Southwest (you may have seen some of their commercials in recent weeks touting the way they have "passed over" the opportunity to squeeze you for changing your reservation; they call this "no surprises."). Here's a first class REDUCTION strategy, that's winning the PR wars for them, and solidifying their position in the industry (If you're interested, see Fortune online, "How Southwest Won the Fee Wars,” by Shelley DuBois, February 3, 2011.)

2. Businesses need to identify those areas of value delivery that are more or less "sacred cows" (...it's often said that sacred cows make the best burgers). What so-called benefits have lost their luster and ought to be trashed, in order to lower costs and improve efficient delivery of services? This is the ELIMINATE action. You may be aware that Bank of America has been leading the industry in closing branches.  An understandable (if occasionally inconvenient) elimination strategy, given the number of BofA customers who, like me, are 100% online banking customers (more information from November 2014; if you want you can read more at: http://www.wcnc.com/story/money/business/2014/11/14/bank-of-america-a-trendsetter-in-closing-branches/19044855/).

3. Businesses need to identify as yet unrecognized benefits their industry hasn't yet offered. This is the really hard one, and in the language of SWOT... businesses need to find opportunities, unmet needs along the lines we discussed in Chapter 03. This is the CREATE option.  I don't have any specific examples here to direct you to, but will say that Apple's Steve Jobs once remarked something to the effect: "...A lot of times, people don't know what they want until you show it to them.” Probably more than any other company, Apple doesn't *follow* stated consumer needs; they figure out what consumers need before they even know it. A risky strategy I would be cautious with.

4. Businesses need to raise the bar. What are the new criteria for world-class product and service providers that competitors are underperforming on? This is the RAISE strategy. Whether it's developing an app for your smart phone that will let you remotely program your cable box to record media (DISH Network) or change your priorities for the next DVD to be delivered to your home (Netflix), the goalpost is always moving. Technology is constantly opening up new horizons of opportunity. That won't last long. The now-famous "Internet of things” paradigm acknowledges that consumers everywhere just might be receptive to household appliances - thermostats, refrigerators, TVs, hot water heaters, cameras - that can be controlled by the internet.  In the past few weeks, I have installed a wi-fi thermostat, and a wi-fi controlled AC power oulet in my house that I can control from any place on the planet, at any time, using an app on my smart phone.  Good thinking Honeywell, Belkin electronics. That's raising the bar.

So do yourself a favor. Long after you're done with ba651 and getting on with your career, can you see the ways your organization can reduce, eliminate, create, and raise the criteria for success? Kim and Mauborgne have a shiny new product and a nice web site to promote it, but at the end of the day, they're exhorting you to do something we've talked about in marketing strategy for a long time: creating sustainable competitive advantage .

Post Script:  I believe an effective SWOT analysis is the heart and soul of a good case presentation.  I won't tell your teams how to organize their work, but I believe the SWOT should be at the center of your thinking.  If you haven't yet done so, take a look at "the architecture of a coherent case presentation,” available at the course materials page.  Do your chosen alternatives 1) reflect the main problem, and 2) make sense given your SWOT analysis?  Be sure to say "how” your chosen alternative makes sense given your SWOT analysis (too many teams do the SWOT analysis, and then drop it altogether when they discuss alternatives.

Last updated: Saturday, January 12, 2019