MGT/521 Week 2 Management Planning Worksheet

Major Questions You Should Be Able to Answer

	6.1	What Is Effective Strategy? Major Question: What is strategic positioning, and what are the three principles that underlie it?
	6.2	The Strategic-Management Process Major Question: What’s the five-step recipe for the strategic-management process?
	6.3	Establishing the Mission & the Vision Major Question: What are the characteristics of good mission and vision statements?
	6.4	Assessing the Current Reality Major Question: What tools can help me describe where the organization stands from a competitive point of view?
	6.5	Formulating the Grand Strategy Major Question: How can three techniques—Porter’s four competitive strategies, diversification and synergy, and the BCG matrix—help me formulate strategy?
	6.6	Implementing & Controlling Strategy: Execution Major Question: How does effective execution help managers during the strategic-management process?

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the manager’s toolbox

Being a Successful Manager: Look beyond the Fads, Be Willing to Make Painful Decisions

“How can we build organizations that are as nimble as change itself—not only operationally, but strategically?” asks management professor Gary Hamel.1

Many people deal with uncertainty by succumbing to fads, or short-lived enthusiasms, suggests the author of a book on why smart people fall for fads.2 A fad, he says, “is seen as the way of the future, a genuine innovation that will help solve a big problem. . . . A lot of the attraction of a fad is that if you embrace it early, then you feel that you’re ahead of other people, that you’re hipper and maybe smarter than they are.”3

Fads are evident in the stream of business books touting the newest cure-all. Still, some ideas that started out as management fads survive. Why? Because they’ve been found to actually work. One of these is strategic planning, as we describe in this chapter.

Two lessons of successful managers:

Lesson 1—In an Era of Management Fads, Strategic Planning Is Still Tops

Business consultant Bain & Company annually conducts a survey on the most popular management tools. The 2013 survey found that the most widely used management tool in 2012 was used 12 or even 14 years earlier—namely, strategic planning, thought to be effective by about 80% of the senior managers surveyed. The use of mission and vision statements also continued to be popular, also favored by about 80%.4 Strategic planning is concerned with developing a comprehensive program for long-term success. Mission statements describe the organization’s purpose and vision statements describe its intended long-term goal. Successful managers know how to use all of them.

Lesson 2—Managers Must Be Willing to Make Painful Decisions to Suddenly Alter Strategy

Another lesson is that in a world of discontinuous change, managers must always be prepared to make large, painful decisions and radically alter their business design—“exiting businesses, firing people, admitting you were wrong (or at least not omniscient),” as writer Geoffrey Colvin puts it. “So the future will demand ever more people with the golden trait, the fortitude to accept and even seek psychic pain.”5

For Discussion Earlier we described the importance of practicing evidence-based management, with managers “seeing the truth as a moving target, always facing the hard facts, avoiding falling prey to half-truths, and being willing to admit when they’re wrong and change their ways.”6 Do you think you would have this mind-set when thinking about the overall direction of your organization or work unit?

We begin by discussing strategic positioning and the five steps in the strategic-management process. We then describe competitive intelligence, SWOT analysis, forecasting, benchmarking, and Porter’s model for industry analysis. We next consider Porter’s four competitive strategies, single-product versus diversification strategies, and the BCG matrix. Finally, we discuss execution.

Page 160What Is Effective Strategy? What is strategic positioning, and what are the three principles underlying it? THE BIG PICTURE Strategic positioning attempts to achieve sustainable competitive advantage by preserving what is distinctive about a company. It is based on the principles that strategy is the creation of a unique and valuable position, requires trade-offs in competing, and involves creating a “fit” among activities.

Harvard Business School professor Michael Porter “is the single most important strategist working today, and maybe of all time,” raved Kevin Coyne of consulting firm McKinsey & Co.7 He is “the most famous and influential business professor who has ever lived,” says Fortunewriter Geoffrey Colvin. “He is widely and rightly regarded as the all-time greatest strategy guru.”8

Is this high praise deserved? Certainly Porter’s status as a leading authority on competitive strategy is unchallenged. The Strategic Management Society, for instance, voted Porter the most influential living strategist. We refer to him repeatedly in this chapter.

Strategy guru. Harvard Business School professor Michael Porter suggests that every company is subject to five forces: its current competitors, possible new competitors, the threat of substitutes for its products or services, the bargaining power of its suppliers, and the bargaining power of its customers. Operating within that five-forces framework, a company must choose the right strategy—or be beaten by competitors. Do you think there are other forces that are equally important in forming strategy?

Strategic Positioning & Its Principles

According to Porter,  strategic positioning  attempts to achieve sustainable competitive advantage by preserving what is distinctive about a company. “It means,” he says, “performing different activities from rivals, or performing similar activities in different ways.”9

Three key principles underlie strategic positioning:10

1. Strategy Is the Creation of a Unique & Valuable Position Strategic position emerges from three sources:

   Few needs, many customers. Strategic position can be derived from serving the few needs of many customers. Example: Jiffy Lube provides only lubricants, but it provides them to all kinds of people with all kinds of motor vehicles.

   Broad needs, few customers. A strategic position may be based on serving the broad needs of just a few customers. Example: Wealth management and investment advisory firm Bessemer Trust focuses exclusively on high–net worth clients.

   Broad needs, many customers. Strategy may be oriented toward serving the broad needs of many customers. Example: National movie theater operator Carmike Cinemas operates only in cities with populations of fewer than 200,000 people.

2. Strategy Requires Trade-offs in Competing As a glance at the preceding choices shows, some strategies are incompatible. Thus, a company has to choose not only what strategy to follow but what strategy not to follow. Example: Neutrogena soap, points out Porter, is positioned more as a medicinal product than as a cleansing agent. In achieving this narrow positioning, the company gives up sales based on deodorizing, gives up large volume, and accordingly gives up some manufacturing efficiencies.

Page 1613. Strategy Involves Creating a “Fit” among Activities “Fit” has to do with the ways a company’s activities interact and reinforce one another. Example: A mutual fund such as Vanguard Group follows a low-cost strategy and aligns all its activities accordingly, distributing funds directly to consumers and minimizing portfolio turnover. However, when the short-lived (1993–1995) Continental Lite airline tried to match some but not all of Southwest Airlines’ activities, it was not successful because it didn’t apply Southwest’s entire interlocking system.

Does Strategic Management Work for Small as Well as Large Firms?

You would expect that a large organization, with its thousands of employees and even larger realm of “stakeholders,” would benefit from strategic management and planning. After all, how can a huge company such as Bank of America run without some sort of grand design?

But what about smaller companies (under 500 employees), which account for about half of private-sector employment and two-thirds of net new jobs in recent years?11 One analysis of several studies found that strategic planning was appropriate not just for large firms—indeed, companies with fewer than 100 employees could benefit as well, although the improvement in financial performance was small. Nevertheless, the researchers concluded, “it may be that the small improvement in performance is not worth the effort involved in strategic planning unless a firm is in a very competitive industry where small differences in performance may affect the firm’s survival potential.”12 

 EXAMPLE

Comparing Strategies: Big-Company “Make the Consumer a Captive” versus Small-Firm “Offer Personal Connections”

Big companies—especially big-tech companies such as Amazon, Google, or Apple—“are no longer content simply to enhance part of your life,” says one report. “The new strategy is to build a device, sell it to consumers, and then sell them the content to play on it. And maybe some ads too.”13

Big-Company Ways. That is, the idea is to get consumers tied not just to a brand or device or platform but to make them captive of the company’s ecosystem—and to get them connected “as tightly as possible so they and their content are locked into one system,” says analyst Michael Gartenberg.14 Thus, Amazon, for example, sells the Kindle e-book readers at a low price so that it can then sell e-books. “Amazon is in a race to embed itself into the fabric of world-wide commerce in a way that would make it indispensable to everyone’s shopping habits,” says one columnist, “and to do so before its rivals wise up.”15 Similarly, Apple enables users to easily create book content on its iBook Authors book-creation tool, but authors will only be able to sell the results through Apple. Google attempted to promote its Google Nexus smartphone as a platform for selling Google Wallet, a cell-phone payment system.

Small-Company Ways. “I don’t feel they behave in a way that I want to support with my consumer dollars,” says Chicago professor Harold Pollack about big Internet retailers like Amazon.16 So instead, Pollack started buying from small online retailers. Their prices are often higher, but he says he now has a clear conscience.

Whereas the strategy of big e-commerce companies is to try to tightly connect consumers with discounted prices, free shipping, and easy-to-use apps, the strategy of small retailers—like Hello Hello Books in Maine—is to discourage price comparisons (as in creating “buy it where you try it” campaigns or refusing to carry popular items carried by big retailers), offer freebies, and attempt to establish a personal or emotional connection with customers. They also try to exploit the sympathies of shoppers to “support the little guy,” as Pollack is doing.

YOUR CALL

Considering the proliferation of price comparison sites (Price-grabber.com, Bizrate.com, FreePriceAlerts.com) that will usually direct consumers to big e-commerce retailers, do you think low prices will always win in the end? Is there any strategy a small retailer can take to maintain an advantage?17

Page 162The Strategic-Management Process What’s the five-step recipe for the strategic-management process? THE BIG PICTURE The strategic-management process has five steps: Establish the mission and the vision. Assess the current reality. Formulate the grand strategy. Implement the strategy. Maintain strategic control. All the steps may be affected by feedback that enables the taking of constructive action.

When is a good time to begin the strategic-management process? Often it’s touched off by some crisis.

Back before General Motors recalled 25.69 million vehicles (in the first six months of 2014 alone) with defective ignition switches, Toyota went through its own recall crisis. In 2009 and 2010 the Japanese automaker encountered severe quality problems involving what seemed to be uncontrollable acceleration in its automobiles. Toyota Motor’s President Akio Toyoda concluded that these problems were partly due to the company’s “excessive focus on market share and profits,” requiring that the company reorient its strategy toward quality and innovation.18For Edward Lampert, who in 2005 merged Kmart and Sears into megaretailer Sears Holdings, the pressure was felt in years of underperforming returns despite cost cutting and store closures.19

 EXAMPLE

Crisis Leading to the Strategic-Management Process: Starbucks Reclaims Its Soul

Among the many things that Starbucks has going for it is this: it survived a near-death experience.20

Today’s CEO, Howard Schultz, joined the Seattle-based company as marketing director in 1982, when it was only a small chain selling coffee equipment. Over nearly two decades, he gained control and, inspired by the coffee houses of Europe, transformed the company into a comfortable “third place” between home and work, a place with a neighborhood feel selling fresh-brewed by-the-cup lattes and cappuccinos. By 2000, Starbucks (named for the first mate of the whaling ship in Herman Melville’s Moby Dick) had become the world’s largest specialty coffee retailer, with 3,501 stores, 78% of them in the United States.21

“Starbucks became, for many of us, what we talk about when we talk about coffee,” wrote one reporter. “It changed how we drink it (on a sofa, with Wi-Fi, or on the subway), how we order it (‘for here, grande, two-pump vanilla, skinny extra hot latte’), and what we are willing to pay for it,” such as $4.99 for a Frappuccino.”22

Schultz Steps Down. Schultz stepped down as CEO in 2000 (remaining as chairman), and for a while the business continued to thrive. Then two things happened that provoked a crisis. First, the company “lost a certain soul,” says Schultz, as the management became more concerned with profits than store atmosphere and company values and extended existing product lines rather than creating new ones. Second, as the Great Recession took hold in 2007, tight-fisted consumers abandoned specialty coffees, causing the stock price to nosedive. In January 2008, after an eight-year absence, Schultz returned as CEO.

The Reinvention Begins. “I didn’t come back to save the company—I hate that description,” Schultz told an interviewer. “I came back to rekindle the emotion that built it.”23

Among the risks he took to restore the company’s luster, he closed 800 U.S. stores, laid off 4,000 employees, and let go most top executives. As a morale booster, he flew 10,000 store managers to New Orleans, recently destroyed by Hurricane Katrina. Along with attending strategy sessions, they bonded in community-service activities, contributing thousands of volunteer hours to helping to restore parts of the city. “We wanted to give back to that community post-Katrina,” says Schultz, “and remind and rekindle the organization with the values and guiding principles of our company before we did a stitch of business.” Later he closed all U.S. stores for half a day so baristas could be retrained in how to make espresso.

The Payoff. After a couple of years, the company turned around, the result of better operations, modernized technology, a reinvigorated staff, and innovations such as Via premium instant Page 163coffee. (Since then it has acquired its own Costa Rican farm to develop proprietary coffee varieties; teamed with Oprah Winfrey to introduce Oprah Chai tea; acquired the La Boulange bakery chain; enabled customers to pay for coffee via a mobile-payment app; and even launched alcohol sales.)24 In mid-2014, it was serving more than 70 million customers face to face, in 20,200 stores in 64 countries, and its stock price was nine times what it had been in 2008.25

Starbucks in China. This coffee cafe is located in Chengdu in Sichuan province.

Schultz feels strongly that “there’s an opportunity for businesses to demonstrate a role in society that’s beyond profitability,” providing health insurance even for temps, creating tuition reimbursement, helping to raise loans for small businesses.

YOUR CALL

Some critics feel Starbucks is the symbol of “affordable luxury.” If we can’t afford a McMansion or a Lexus, says one observer, we may be “willing to make that $5 splurge at Starbucks simply because it makes us feel a bit better about ourselves.”26 Thus, despite the innovation in products, attempts to rekindle the cozy neighborhood café, and emphasis on positive social values, do you think another economic downturn could alter Starbucks’s fortunes?

The Five Steps of the Strategic-Management Process

The strategic-management process has five steps, plus a feedback loop, as shown below. (See  Figure 6.1 .) Let’s consider these five steps.

FIGURE 6.1 The strategic-management process

The process has five steps.

Step 1: Establish the Mission & the Vision We discussed mission and vision in Chapter 5 and explain them further in the next section. The mission, you’ll recall, is the organization’s purpose or reason for being, and it is expressed in a mission statement. An organization’s vision is its long-term goal describing what it wants to become, and it is expressed in a vision statement, which describes its long-term direction and strategic intent.

Step 2: Assess the Current Reality The second step is to do a  current reality assessment,  or organizational assessment—to look at where the organization stands and see what is working and what could be different so as to maximize efficiency and effectiveness in achieving the organization’s mission. 27 Among the tools for assessing Page 164the current reality are SWOT analysis, forecasting, benchmarking, and Porter’s model for industry analysis, all of which we discuss in Section 6.4.

Step 3: Formulate the Grand Strategy The next step is to translate the broad mission and vision statements into a  grand strategy,  which, after the assessment of the current reality, explains how the organization’s mission is to be accomplished. Three common grand strategies are growth, stability, and defensive, as we’ll describe.

Strategy formulation  is the process of choosing among different strategies and altering them to best fit the organization’s needs. Formulating strategy is a time-consuming process both because it is important and because the strategy must be translated into more specific strategic plans, which determine what the organization’s long-term goals should be for the next 1–5 years.

In Section 6.5, we consider the three common grand strategies (growth, stability, and defensive); Porter’s four competitive strategies, single-product strategy versus diversification strategy, and the BCG matrix.

Step 4: Implement the Strategy Putting strategic plans into effect is  strategy implementation . Strategic planning isn’t effective, of course, unless it can be translated into lower-level plans. This means that top managers need to check on possible roadblocks within the organization’s structure and culture and see if the right people and control systems are available to execute the plans.28

Step 5: Maintain Strategic Control: The Feedback Loop  Strategic control  consists of monitoring the execution of strategy and making adjustments, if necessary. To keep strategic plans on track, managers need control systems to monitor progress and take corrective action—early and rapidly—when things start to go awry. Corrective action constitutes a feedback loop in which a problem requires that managers return to an earlier step to rethink policies, redo budgets, or revise personnel arrangements.

We describe strategic implementation and strategic control in Section 6.6.

We discuss the details of the steps in the strategic-management process in the rest of this chapter. 

A public library’s new strategy. As Americans spend more time online, public libraries are having to find new strategies for remaining relevant. After the Skokie Public Library near Chicago put its reference collection online, it turned the newly freed-up space into a “fully functioning, Wi-Fi equipped office suite, capable of accommodating more than 50 people,” according to one report. “Users who can’t afford their own office space reserve it by the hour.”29 Can you think of other public or nonprofit institutions that need to reinvent themselves because information technology has altered their original purpose?

Page 165Establishing the Mission & the Vision What are the characteristics of good mission and vision statements? THE BIG PICTURE A mission statement should express the organization’s purpose or reason for being. A vision statement should be positive and inspiring, and it should stretch the organization and its employees to achieve a desired future state that appears beyond its reach.

Why am I here? What am I trying to do? What do I want to become?

These are bedrock questions that you should ask about your education. They are also the kind that top managers should ask about their organizations, whether profit or not-for-profit, as expressed in the mission statement and vision statement.

If you were called on to write a mission statement and a vision statement, how would you go about it?

Characteristics of a Good Mission Statement

The mission, we said, is the organization’s purpose or reason for being; it is expressed in a mission statement. For example, the mission statement of McGraw-Hill, publisher of this book, is as follows:

To serve the worldwide need for knowledge at a fair profit by gathering, evaluating, producing, and distributing valuable information in a way that benefits our customers, employees, authors, investors, and our society.

Family business. Do small, family-owned businesses need a mission statement and a vision statement? If no, why not? How many small-business owners with firms of, say, five employees or fewer, would you guess have taken the time to compose such statements?

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Characteristics of a Good Vision Statement

An organization’s vision, its long-term goal of what it wants to become, is expressed in a vision statement, which describes its long-term direction and strategic intent. For example, Walt Disney’s original vision for Disneyland went in part like this:

Disneyland will be something of a fair, an exhibition, a playground, a community center, a museum of living facts, and a showplace of beauty and magic. It will be filled with the accomplishments, the joys and hopes of the world we live in. And it will remind us and show us how to make those wonders part of our own lives.30

Although a vision statement can be short, it should be positive and inspiring, and it should stretch the organization and its employees to achieve a desired future state that appears beyond its reach. Google’s vision, for example, is “to organize the world’s information and make it universally accessible and useful.” Former Google CEO Eric Schmidt estimated that it might take 300 years to achieve the company’s vision, which would require Google to have strategic patience and to develop a grand strategy that is broad in focus.31

Guidelines for constructing powerful mission statements and vision statements are shown below. (See  Table 6.1 .) “Visions that have these properties challenge and inspire people in the organization and help align their energies in a common direction,” says Burt Nanus of the University of Southern California’s School of Business Administration. “They prevent people from being overwhelmed by immediate problems because they help distinguish what is truly important from what is merely interesting.”32 

TABLE 6.1 Mission Statements and Vision Statements

Sources: F. R. David, “How Companies Define Their Mission,” Long Range Planning, February 1989, pp. 90–97; and B. Nanus, Visionary Leadership: Creating a Compelling Sense of Direction for Your Organization (San Francisco: Jossey-Bass, 1992), pp. 28–29.

Page 167Assessing the Current Reality What tools can help me describe where the organization stands from a competitive point of view? THE BIG PICTURE To develop a grand strategy, you need to gather data and make projections, using the tools of competitive intelligence, SWOT analysis, forecasting, benchmarking, and Porter’s five competitive forces.

The second step in the strategic-management process, assess the current reality, looks at where the organization stands internally and externally—to determine what’s working and what’s not, to see what can be changed so as to increase efficiency and effectiveness in achieving the organization’s vision. An assessment helps to create an objective view of everything the organization does: its sources of revenue or funding, its work-flow processes, its organizational structure, client satisfaction, employee turnover, and other matters.33

Among the tools for assessing the current reality are competitive intelligence, SWOT analysis, forecasting, benchmarking, and Porter’s model for industry analysis.

Competitive Intelligence

Practicing  competitive intelligence  means gaining information about one’s competitors’ activities so that you can anticipate their moves and react appropriately. If you are a manager, one of your worst nightmares is that a competitor will surprise you with a service or product—as boutique beers did major brewers and mountain bikes did major bicycle makers—that will revolutionize the market and force you to try to play catch-up. Successful companies make it a point to conduct competitive intelligence.

Competitive intelligence venue. Since 1967, the International Consumer Electronics Show (CES) in Las Vegas has traditionally been a place where blockbuster products were introduced. Recently, however, the hottest gadgets from Apple, Amazon, and Microsoft have been unveiled in other, more exclusive venues. Still, CES remains the world’s largest consumer technology convention.

Page 168Gaining competitive intelligence isn’t always easy, but there are several avenues—and, surprisingly, most of them are public sources—including the following:

   The public prints and advertising. A product may be worked on in secret for several years, but at some point it becomes subject to announcement—through a press release, advertising piece, news leak, or the like. Much of this is available free through the Internet or by subscription to certain specialized databases, such as Nexus, which contains hundreds of thousands of news stories.

   Investor information. Information about new products and services may also be available through the reports filed with the Securities and Exchange Commission and through corporate annual reports.

   Informal sources. People in the consumer electronics industry every year look forward to major trade shows, such as the International Consumer Electronics Show in Las Vegas, when companies roll out their new products.34 At such times, people also engage in industry-gossip conversation to find out about future directions. Finally, salespeople and marketers, who are out calling on corporate clients, may return with tidbits of information about what competitors are doing.

SWOT Analysis

After competitive intelligence, the next point in establishing a grand strategy is  environmental scanning,  careful monitoring of an organization’s internal and external environments to detect early signs of opportunities and threats that may influence the firm’s plans. The process for doing such scanning is  SWOT analysis —also known as a situational analysis—which is a search for the Strengths, Weaknesses, Opportunities, and Threats affecting the organization. A SWOT analysis should provide you with a realistic understanding of your organization in relation to its internal and external environments so you can better formulate strategy in pursuit of its mission. (See  Figure 6.2 .)

FIGURE 6.2 Swot Analysis

SWOT stands for Strengths, Weaknesses, Opportunities, Threats.

Page 169The SWOT analysis is divided into two parts: inside matters and outside matters—that is, an analysis of internal strengths and weaknesses and an analysis of external opportunities and threats. The following table gives examples of SWOT characteristics that might apply to a college. (See  Table. 6.2 .)

TABLE 6.2 SWOT Characteristics That Might Apply to a College

Inside Matters: Analysis of Internal Strengths & Weaknesses Does your organization have a skilled workforce? a superior reputation? strong financing? These are examples of  organizational strengths —the skills and capabilities that give the organization special competencies and competitive advantages in executing strategies in pursuit of its vision.

Or does your organization have obsolete technology? outdated facilities? a shaky marketing operation? These are examples of  organizational weaknesses —the drawbacks that hinder an organization in executing strategies in pursuit of its vision.

Outside Matters: Analysis of External Opportunities & Threats Is your organization fortunate to have weak rivals? emerging markets? a booming economy? These are instances of  organizational opportunities —environmental factors that the organization may exploit for competitive advantage.

Alternatively, is your organization having to deal with new regulations? a shortage of resources? substitute products? These are some possible  organizational threats —environmental factors that hinder an organization’s achieving a competitive advantage.

 EXAMPLE

SWOT Analysis: How Would You Analyze Toyota?

“I fear the pace at which we have grown may have been too quick,” said Akio Toyoda, the grandson of Toyota Motor’s founder, in 2010 testimony before a U.S. congressional committee looking into sudden acceleration problems. “Priorities became confused, and we were not able to stop, think, and make improvements as much as we were able to before.”35 Toyota’s U.S. sales fell 9% that month because of safety-related recalls of millions of vehicles, and by late 2010 journalists were writing that the company had lost its edge.36 By the end of 2011, Toyota Motor, formerly the world’s largest automaker, had slipped to third place in production behind General Motors and Volkswagen.

Page 170Toyota’s new young president, Akio Toyoda, whose motto is “be fast, be flexible,” energetically took on the automaker’s problems, traveling to the United States to fire up dealers, personally taking charge of the sagging Lexus brand, and redesigning the firm’s reporting system and flattening the management hierarchy.37 In late 2013, profits were up 70%, close to their previous record high, and the company had displaced General Motors as the world’s largest automaker; by the following year, net profit was up more than fivefold.38

Still, the challenges have kept on coming. If you were a top Toyota manager, what would be the kinds of things you would identify in a SWOT analysis?

The Internal Strengths. Originally the “Toyota Way,” as practiced from assembly line to boardroom, stressed the values of continuous improvement (“kaizen”) and eliminating waste (“muda”). The Toyota Way, says one report, “mandates planning for the long term; highlighting problems instead of hiding them; encouraging teamwork with colleagues and suppliers; and, perhaps most important, instilling a self-critical culture that fosters continuous and unrelenting improvement.”39 Developed in the 1950s, these precepts later became the basis for such concepts as lean manufacturing and just-in-time inventory management (discussed in Chapter 2).

“At their core,” says one analysis, “was an attention to detail and a noble frugality that shunned waste of every kind.”40 Said its top engineer, “Basically, Toyota’s growth has been underpinned by QDR [quality, dependability, reliability] that was very high compared with competitors’.”41 As of 2014, Toyota continues to lead most other car companies in quality rankings: All three of its 2011 brands appeared in the top 10 J.D. Power 2014 rankings for reliability, with 15 Toyota, Lexus, and Scion models winning or tied for first place in their vehicle categories.42

The Internal Weaknesses. In the 1990s, Toyota launched an effort to become the world’s largest automaker, embarking on aggressive overseas expansion and doubling its plants in North America, Asia, and Europe. During this time, the focus on cost reduction intensified to the point that the virtue became a vice. Suppliers were continually pushed to design parts that were 10% cheaper and 10% lighter. Common parts were used in most Toyota models, acquired from outside companies instead of trusted traditional suppliers.43 Toyota also began to treat its cars like “transportation appliances,” causing it to fall behind in design leadership, making buyers feel less of an emotional connection with Toyota products. The company was said to have succumbed to “big-company disease,” becoming ponderous and bureaucratic, with every decision tightly controlled in Japan, to the detriment of its managers in the United States.44

Then suddenly, from 2000 to 2010, driver complaints to the National Highway Traffic and Safety Administration about “vehicle speed control” issues soared, with 11.7% of faulty vehicle components identified as Toyota’s.45 Next came widely publicized problems with sticking accelerators, prompting two huge recalls of 10 million vehicles and suspension of the sales and production of eight models in the American market.46 Later it developed that the “unintended acceleration” was probably caused by sticky pedals or floor mats rather than Toyota electronics (although some critics thought it traced to driver error).47 By then, however, the damage to Toyota’s vaunted reputation for quality was severe. “When your whole deal was quality, every mistake is a big deal,” said a manufacturing expert.48

In 2014, Toyota agreed to a $1.2 billion penalty to end a U.S. criminal probe into the sudden-acceleration problems.49 No sooner had it done so, however, than the company’s reputation for reliability and assembly-line mastery took another massive hit, when Toyota was forced to recall 6.4 million vehicles for five potential hazards, including faulty power-window switches, possibly unstable steering column brackets, and potential hindrances to deployment of driver’s-side airbags.50

The External Opportunities. Although slow to awaken to its quality problems in 2009–2010, the company went into full PR battle mode, moving to discredit critics who blamed accelerator problems on faulty electronics and stressing its commitment to its millions of U.S. customers.51 Today, under the new president’s direction, the 1950s-style traditional organization has been modernized, with layers of management removed and with Akio meeting weekly with five top advisors to make on-the-spot decisions. The company has also reorganized its vehicle-development system to speed decision making, cut costs, and generate more world-wide appeal.52

In addition, Toyota moved to give its cars more exciting designs, taking initiatives to “improve upon the emotion of cars” with better styling and high-quality interiors.53 It joined forces with Ford to develop a gas-electric hybrid fuel system for trucks and sport utility vehicles and has continued to push green technology, as with the plug-in Prius and a new concept car powered by hydrogen fuel cells.54 It launched the sporty $375,000 Lexus LFA, a carbon fiber supercar.

Toyota. How fast, how flexible?

Page 171General Motors’s fatal ignition switch mistakes, described by GM’s own CEO, Mary Barra, as representing “a pattern of incompetence and neglect,” and the recall of 2.6 million 2000–2011 small cars worldwide (for a total of 11.2 million vehicles in 2014) presents Toyota with an unprecedented opportunity to grab its rival’s customers.55 Will Toyota benefit from this development—especially in light of its own 2014 recall announcement?

The External Threats. Toyota was able to work past its accelerator-sticking troubles of 2009–2010, which presented its American and European rivals with a chance to cut into the Japanese automaker’s market share.56 Toyota also faced the worldwide Great Recession, which damaged auto spending. In addition, Toyota had to face setbacks brought about by the 2011 deadly earthquake and tsunami, which devastated plants in the north of Japan and disrupted the supply of over 500 parts; flooding in Thailand, which led to new supply difficulties; and currency problems of a strong yen against a weak U.S. dollar, which further reduced revenues.57 Finally, Toyota competitors began to close the quality gap, with the Ford Fusion, Hyundai Sonata, Volkswagen Passat, and other midsize vehicles severely impacting sales of the Toyota Camry.58

By 2011, Toyota’s market share in the United States had fallen all the way from 18.3% to 12.9%, recovering to 14.3% in 2013, putting it in third place behind General Motors at 17.9% and Ford at 15.9% (Chrysler had 11.5%).59 According to one source, Toyota was predicted to achieve an American market share of 14.6% in 2015.60

YOUR CALL

“Comfortably preoccupied with rooting out internal weakness,” said one writer in 2010, “the Toyota Way is lost when it comes to contending with outside threats. . . . If a flaw does get through, the company as a whole is loath to admit that the system broke down.”61 Do you agree? How well do you think Akio Toyoda is doing in dealing with Toyota’s threats and opportunities, both internal and external?

Forecasting: Predicting the Future

Once they’ve analyzed their organization’s Strengths, Weaknesses, Opportunities, and Threats, planners need to do forecasting for making long-term strategy. A  forecast  is a vision or projection of the future.

Lots of people make predictions, of course—and often they are wrong. In the 1950s, the head of IBM, Thomas J. Watson, estimated that the demand for computers would never exceed more than five for the entire world. In the late 1990s, many computer experts predicted power outages, water problems, transportation disruptions, bank shutdowns, and far worse because of computer glitches (the “Y2K bug”) associated with the change from year 1999 to 2000.

Of course, the farther into the future one makes a prediction, the more difficult it is to be accurate, especially in matters of technology. Yet forecasting is a necessary part of planning.

Two types of forecasting are trend analysis and contingency planning.

Trend Analysis A  trend analysis  is a hypothetical extension of a past series of events into the future. The basic assumption is that the picture of the present can be projected into the future. This is not a bad assumption, if you have enough historical data, but it is always subject to surprises. And if your data are unreliable, they will produce erroneous trend projections.

An example of trend analysis is a time-series forecast, which predicts future data based on patterns of historical data. Time-series forecasts are used to predict long-term trends, cyclic patterns (as in the up-and-down nature of the business cycle), and seasonal variations (as in Christmas sales versus summer sales).

Contingency Planning: Predicting Alternative Futures  Contingency planning —also known as scenario planning and  scenario analysis —is the creation of alternative hypothetical but equally likely future conditions. For example, scenarios may be created with spreadsheet software such as Microsoft Excel to present alternative combinations of different factors—different economic pictures, different strategies by competitors, different budgets, and so on.

Page 172

Climate change damage? With so much storm damage, such as that in 2012 when Hurricane Sandy hit the New Jersey coast, what kind of contingency planning should insurance companies do?

 EXAMPLE

Contingency Planning for Climate Change: Drought, Rain, & Fire

Several U.S. government agencies have launched contingency planning to prepare for the effects of climate change—from the Navy studying the threat of rising seas to naval operations to the Department of Agriculture’s planning for possible effects of drought and wildfire on agriculture and livestock to the Department of Transportation’s exploration of risk of high temperatures on highways and bridges. Even some governments of coastal cities, such as those in Florida and Virginia, are trying to make plans to anticipate the effect of rising oceans on their infrastructures.62

But what kinds of contingency planning is being done in private industry for the impact of climate change? Many CEOs of energy, food, and food distribution companies, for example, are reportedly not unduly concerned about the effect of global warming on their businesses.63 But shouldn’t the top managers of insurance companies be?

The Evidence of the Present. “Climate change, once considered an issue for a distant future, has moved firmly into the present,” says the 2014 National Climate Assessment.64 “From Hurricane Sandy’s devastating blow to the Northeast to the protracted drought that hit the Midwest Corn Belt,” pointed out economic writer Eduardo Porter, “natural catastrophes pounded insurers [in 2012], generating $35 billion in privately insured property damage, $11 billion more than the average over the last decade.”65 The insurance industry, he reported, expected the situation to get worse, a view reinforced by a 2014 report by the Intergovern-mental Panel on Climate Change, a United Nations group.66

Anticipating the Worst? Despite the mounting weather-related claims, which included damage by floods and wildfires, a report by Ceres, a Boston-based nonprofit promoting eco-minded business practices, said most U.S. insurance companies, large and small, did not have comprehensive strategies to cope with climate change.67 “Of 184 companies surveyed,” says one account, “only 23 had such strategies, and 13 of those were foreign-owned.”68

However, research by a scientist at the federally funded Lawrence Berkeley National Laboratory, which studied large global insurers, said the industry was stepping up to the challenge, having made 1,148 efforts to adapt and mitigate climate change.69

Whatever the past behavior, the Geneva Association, an international think tank for strategically important insurance and risk management issues, called on insurers to start setting rates “based on climate-modeling scenarios rather than historic trends traditionally employed.”70

YOUR CALL

Based on contingency planning for climate variability and volatility in every part of the globe, what is the responsibility of insurance companies? Just try to avoid catastrophic losses by raising premiums, adding exclusions, and refusing to cover high-risk communities? Or try to educate consumers about building more resilient structures in less risky areas?

Page 173Because the scenarios try to peer far into the future—perhaps five or more years—they are necessarily written in rather general terms. Nevertheless, the great value of contingency planning is that it not only equips an organization to prepare for emergencies and uncertainty, it also gets managers thinking strategically.

Benchmarking: Comparing with the Best

Benchmarking  is a process by which a company compares its performance with that of high-performing organizations. 71 Professional sports teams do this all the time, but so do other kinds of organizations, including nonprofit ones. Example: Airlines use such benchmarks as average turnaround time, on-time arrivals, cost per seat per passenger mile, fuel cost, numbers of lost bags, and so on. At Xerox Corp., generally thought to be the first American company to use benchmarking, it is defined as, in one description, “the continuous process of measuring products, services, and practices against the toughest competitors or those companies recognized as industry leaders.”72

Porter’s Five Competitive Forces

What determines competitiveness within a particular industry? After studying several kinds of businesses, strategic-management expert Michael Porter suggested in his  Porter’s model for industry analysis  that business-level strategies originate in five primary competitive forces in the firm’s environment: (1) threats of new entrants, (2) bargaining power of suppliers, (3) bargaining power of buyers, (4) threats of substitute products or services, and (5) rivalry among competitors. 73

1. Threats of New Entrants New competitors can affect an industry almost overnight, taking away customers from existing organizations. Example: Kraft Macaroni & Cheese is a venerable, well-known brand but is threatened from the low end by store brands, such as Walmart’s brand, and from the high end by Annie’s Organic & Natural Mac and Cheese.

Threat of new entrants. McDonald’s is being threatened by new so-called fast-casual restaurants such as Chipotle and Five Guys, which attract customers in their 20s and 30s, who are seeking fresher, healthier food and customizable menu options. What’s your opinion of these new chains compared to the older ones?

Page 1742. Bargaining Power of Suppliers Some companies are readily able to switch suppliers in order to get components or services, but others are not. Example: Clark Foam of Laguna Niguel, California, supplied nearly 90% of the foam cores used domestically to make custom surfboards. When it suddenly closed shop in late 2005, blaming government agencies for trying to shut it down, many independent board shapers and small retailers found they couldn’t afford to get foam from outside the country. On the other hand, Surftech in Santa Cruz, California, was one of the few board manufacturers to use resin instead of foam, and so it saw a spike in sales.74

3. Bargaining Power of Buyers Customers who buy a lot of products or services from an organization have more bargaining power than those who don’t. Customers who use the Internet to shop around are also better able to negotiate a better price. Example: Buying a car used to be pretty much a local activity, but now potential car buyers can use the Internet to scout a range of offerings within a 100-mile or larger radius, giving them the power to force down the asking price of any one particular seller.

4. Threats of Substitute Products or Services Again, particularly because of the Internet, an organization is in a better position to switch to other products or services when circumstances threaten their usual channels. Example: Oil companies worried when Brazil achieved energy self-sufficiency in 2006, able to meet its growing demand for vehicle fuel by substituting ethanol derived from sugar cane for petroleum—until 2007, when population and economic growth forced the country to start importing oil again.75

5. Rivalry among Competitors The preceding four forces influence the fifth force, rivalry among competitors. Think of the wild competition among makers and sellers of portable electronics, ranging from smartphones to tablets to videogame systems. Once again, the Internet has intensified rivalries among all kinds of organizations.

An organization should do a good SWOT analysis that examines these five competitive forces, Porter felt. Then it was in a position to formulate effective strategy, using what he identified as four competitive strategies, as we discuss in the next section.

To what extent do you think that a current or past employer was good at strategic thinking? Based on past research, firms that are better at strategic thinking should outperform those that are not. You can assess the strategic thinking of a current or past employer by taking Self-Assessment 6.1. 

SELF-ASSESSMENT 6.1

Assessing Strategic Thinking

This survey is designed to assess an organization’s level of strategic thinking. Go to connect.mheducation.com and take Self-Assessment 6.1. When you’re done, answer the following questions:

1.   What is the level of strategic thinking? Are you surprised by the results?

2.   If you were meeting with an executive from the company you evaluated, what advice would you provide based on the survey results and what you learned about assessing current reality?

Page 175Formulating the Grand Strategy How can three techniques—Porter’s four competitive strategies, diversification and synergy, and the BCG matrix—help me formulate strategy? THE BIG PICTURE Strategies may be growth, stability, or defensive strategies. Strategy formulation makes use of several concepts, including Porter’s four competitive strategies, diversification and synergy, and the BCG matrix.

After assessing the current reality (Step 2 in the strategic-management process), it’s time to turn to strategy formulation—developing a grand strategy (Step 3). Examples of techniques that can be used to formulate strategy are Porter’s four competitive strategies, diversification and synergy, and the BCG matrix.

The grand strategy must then be translated into more specific strategic plans, which determine what the organization’s long-term goals should be for the next 1–5 years. These should communicate not only the organization’s general goals about growth and profits but also information about how these goals will be achieved. Moreover, like all goals, they should be SMART—Specific, Measurable, Attainable, Results-oriented, and specifying Target dates (Chapter 5).

Three Common Grand Strategies

The three common grand strategies are growth, stability, and defensive.

1. The Growth Strategy A  growth strategy  is a grand strategy that involves expansion—as in sales revenues, market share, number of employees, or number of customers or (for nonprofits) clients served. Example: IBM under its previous CEO, Samuel J. Palmisano, decided to get out of low-profit businesses that were fading, such as the personal computer business, and shift to services and software, often delivered over the Internet from data centers connecting all kinds of devices—the growth business of cloud computing. 76 (Since then, however, the company has had a “rocky time,” says present CEO Virginia Rometty, as IBM found itself lagging in cloud computing sales, having lost important business to Amazon, and is now attempting to refocus its business.)77

2. The Stability Strategy A  stability strategy  is a grand strategy that involves little or no significant change. Example: Without much changing their product, the makers of Timex watches decided to stress the theme of authenticity (“Wear it well”) over durability (the old slogan was “It takes a licking and keeps on ticking”). In an age of smartphones and other gadgets, when people don’t need a watch to tell the time, the new theme of authenticity makes sense, according to The New York Times, “as consumers watching what they spend seek out products with longevity whose ability to stand the test of time implies they are worth buying.”78

3. The Defensive Strategy A  defensive strategy,  or a retrenchment strategy, is a grand strategy that involves reduction in the organization’s efforts. Example: Redbox, which installed more than 40,000 DVD movie-rental kiosks in groceries, 7-Elevens, and Walmart stores during a seven-year growth period, in 2014 began uninstalling kiosks (more than 500 in the United States) and switching to a defensive strategy. Not only had the company run out of good locations in which to place its machines, it was also contending with challenges from online streaming and more original television programs.79

Variations of the three strategies are shown on the next page. (See  Table 6.3 .)

Page 176TABLE 6.3 How a Company Can Implement a Grand Strategy

FIGURE 6.3 Porter’s four competitive strategies

Porter’s Four Competitive Strategies

Porter’s four competitive strategies  (also called four generic strategies) are (1) cost-leadership, (2) differentiation, (3) cost-focus, and (4) focused-differentiation. 80 The first two strategies focus on wide markets, the last two on narrow markets. (See  Figure 6.3 .) Time Warner, which produces lots of media and publications, serves wide markets around the world. Your neighborhood video store (if one still exists) serves a narrow market of just local customers.

Let’s look at these four strategies.

1. Cost-Leadership Strategy: Keeping Costs & Prices Low for a Wide Market The  cost-leadership strategy  is to keep the costs, and hence prices, of a product or service below those of competitors and to target a wide market.

This puts the pressure on R&D managers to develop products or services that can be created cheaply, production managers to reduce production costs, and marketing managers to reach a wide variety of customers as inexpensively as possible.

Firms implementing the cost-leadership strategy include Timex, computer maker Acer, hardware retailer Home Depot, and pen maker Bic.

2. Differentiation Strategy: Offering Unique & Superior Value for a Wide Market The  differentiation strategy  is to offer products or services that are of unique and superior value compared with those of competitors but to target a wide market.

Because products are expensive, managers may have to spend more on R&D, marketing, and customer service. This is the strategy followed by Ritz-Carlton hotels and the makers of Lexus automobiles.

Page 177The strategy is also pursued by companies trying to create brands to differentiate themselves from competitors. Although Coca-Cola may cost only cents more than a supermarket’s own house brand of cola, Coke spends millions on ads.

3. Cost-Focus Strategy: Keeping Costs & Prices Low for a Narrow Market The  cost-focus strategy  is to keep the costs, and hence prices, of a product or service below those of competitors and to target a narrow market.

This is a strategy you often see executed with lowend products sold in discount stores, such as low-cost beer or cigarettes, or with regional gas stations, such as the Terrible Herbst, Rotten Robbie, and Maverik chains in parts of the West.

Needless to say, the pressure on managers to keep costs down is even more intense than it is with those in cost-leadership companies.

Focused differentiation. The world’s largest cruise ship, the 1,181-foot-long, 16-deck MS Allure of the Seas, features such amenities as four swimming pools, a skating rink, a small golf course, volleyball and basketball courts, a multi-deck dining room that can seat 3,000, and lavish lodging quarters. Clearly, there’s something here for everyone—if you can afford it.

4. Focused-Differentiation Strategy: Offering Unique & Superior Value for a Narrow Market The  focused-differentiation strategy  is to offer products or services that are of unique and superior value compared to those of competitors and to target a narrow market.

Some luxury cars are so expensive—Rolls-Royce, Ferrari, Lamborghini—that only a few car buyers can afford them. Other companies following the strategy are jeweler Cartier and shirtmaker Turnbull & Asser. Yet focused-differentiation products need not be expensive. The publisher Chelsea Green has found success with niche books, such as The Straw Bale House.

Single-Product Strategy versus Diversification Strategy

A company also needs to think about whether to have a single-product strategy or a diversification strategy. After all, if you have only one product to sell, what do you do if that product fails?

The Single-Product Strategy: Focused but Vulnerable In a  single-product strategy,  a company makes and sells only one product within its market. This is the kind of strategy you see all the time as you drive past the small retail businesses in a small town: There may be one shop that sells only flowers, one that sells only security systems, and so on.

The single-product strategy has both positives and negatives:

   The benefit—focus. Making just one product allows you to focus your manufacturing and marketing efforts just on that product. This means that your company can become savvy about repairing defects, upgrading production lines, scouting the competition, and doing highly focused advertising and sales.

A small-business example: Green Toys of Mill Valley, California, makes all its toddler tea sets, toy trucks, and building blocks out of plastic recycled from milk jugs and, in a strategy called “reverse globalization,” carries out all its operations in California, a push back against offshoring and outsourcing.81 Another example: See’s Candies, a chain of 200 stores throughout the West, specializes in making boxed chocolates—something it does so well that when See’s was acquired by Berkshire Hathaway, its corporate owner chose not to tamper with success and runs it with a “hands-off” policy.Page 178

   The risk—vulnerability. The risk, of course, is that if you do not focus on all aspects of the business, if a rival gets the jump on you, or if an act of God intervenes (for a florist, roses suffer a blight right before Mother’s Day), your entire business may go under.

Example: Indian Motorcycle Company, once a worthy rival to Harley-Davidson, sold only motorcycles. It went bankrupt twice, the second time because of quality problems, notably an overheating engine. (Purchased by Polaris Industries in 2011, it is presently being manufactured in Spirit Lake, Iowa.)82

The Diversification Strategy: Operating Different Businesses to Spread the Risk The obvious answer to the risks of a single-product strategy is  diversification,  operating several businesses in order to spread the risk. You see this at the small retailer level when you drive past a store that sells gas and food and souvenirs and rents DVD movies.

There are two kinds of diversification—unrelated and related.

Unrelated Diversification: Independent Business Lines If you operate a small shop that sells flowers on one side and computers on the other, you are exercising a strategy of  unrelated diversification —operating several businesses under one ownership that are not related to one another. This has been a common big-company strategy. General Electric, for instance, which began by making lighting products, diversified into such unrelated areas as plastics, broadcasting, and financial services. Disney, Time Warner, and Sony run different divisions specializing in television, music, publishing, and the like.

Related Diversification: Related Business Lines In some parts of the world you have to do all your grocery shopping in separate stores—the butcher, the baker, the greengrocer, and so on. In most U.S. grocery stores, all these businesses appear under the same roof, an example of the strategy of  related diversification,  in which an organization under one ownership operates separate businesses that are related to one another. A big-company example: The famous British raincoat maker Burberry started by making and marketing outerwear clothing but since then has expanded into related business lines, including accessories such as umbrellas, children’s clothing, and even fragrances, which it sells in its own stores.

Related diversification has three advantages:

   Reduced risk—because more than one product. If one product is weak, others may take up the slack. Example: When rainwear sales are slow, Bur-berry’s economic risk is reduced by sales of its other product lines, such as children’s clothes.

   Management efficiencies—administration spread over several businesses. Whatever the business, it usually has certain obligatory administrative costs—accounting, legal, taxes, and so on. Example: Burberry need not have separate versions of these for each business line. Rather, it can actually save money by using the same administrative services for all its businesses.

   Synergy—the sum is greater than the parts. When a company has special strengths in one business, it can apply those to its other related businesses. Example: PepsiCo can apply its marketing muscle not only to Pepsi Cola but also to 7-Up and Mountain Dew, which it also owns. This is an example of  synergy —the economic value of separate, related businesses under one ownership and management is greater together than the businesses are worth separately.

An example of a company that went from a single-product strategy to a diversification strategy is Skilled Manufacturing Inc. of Traverse City, Michigan, which used to supply power-train components to the auto industry, but shuttered one of its two Michigan Page 179plants in 2005 after one of its automotive clients moved the work to Mexico. Now it has reopened the factory because it has branched out to other sectors, such as aerospace, in addition to continuing to serve the auto industry.83

The BCG Matrix

Developed by the Boston Consulting Group, the  BCG matrix  is a means of evaluating strategic business units on the basis of (1) their business growth rates and (2) their share of the market. Business growth rate is concerned with how fast the entire industry is increasing. Market share is concerned with the business unit’s share of the market in relation to competitors.

In general, the BCG matrix suggests that an organization will do better in fast-growing markets in which it has a high market share rather than in slow-growing markets in which it has a low market share. These concepts are illustrated below. (See  Figure 6.4 .)

FIGURE 6.4 The BCG matrix

Market growth is divided into two categories, low and high. Market share is also divided into low and high. Thus, in this matrix, “Stars” are business units that are highly desirable (high growth, high market share), compared to “Dogs,” which are not so desirable (low growth, low market share).

Now that you have learned about the tools companies use to create their grand strategies, what type of skills do you think managers need to use these tools? Do you think you possess those skills? If you are curious, then we encourage you to take Self-Assessment 6.2. 

SELF-ASSESSMENT 6.2

Core Skills Required for Strategic Planning

This survey is designed to assess the skills needed in strategic planning. Go to connect.mheducation.com and take Self-Assessment 6.2. When you’re done, answer the following questions:

1.   Do you have what it takes? Are you surprised by the results?

2.   Based on the results, what are your top two strengths and deficiencies when it comes to strategic planning?

3.   Assuming you wanted to do strategic planning at some point in your career, what can you do to improve your skills associated with strategic planning? Be specific.

Page 180Implementing & Controlling Strategy: Execution How does effective execution help managers during the strategic-management process? THE BIG PICTURE Strategic implementation is closely aligned with strategic control. Execution is a process that helps align these two phases of the strategic-management process.

Stage 1 of the strategic-management process was establishing the mission and the vision. Stage 2 was assessing the current reality. Stage 3 was formulating the grand strategy. Now we come to the last two stages—4, strategic implementation, and 5, strategic control.

Implementing the Strategy

Strategy implementation is putting strategic plans into effect. As we said, this means dealing with roadblocks within the organization’s structure and culture and seeing if the right people and control systems are available to execute the plans.

Often implementation means overcoming resistance by people who feel the plans threaten their influence or livelihood. This is particularly the case when the plans must be implemented rapidly, since delay is the easiest kind of resistance there is (all kinds of excuses are usually available to justify delays). Thus, top managers can’t just announce the plans; they have to actively sell them to middle and supervisory managers.

Maintaining Strategic Control

Strategic control consists of monitoring the execution of strategy and taking corrective action, if necessary. To keep a strategic plan on track, suggests Bryan Barry, you need to do the following:84

   Engage people. You need to actively engage people in clarifying what your group hopes to accomplish and how you will accomplish it.

   Keep it simple. Keep your planning simple, unless there’s a good reason to make it more complex.

   Stay focused. Stay focused on the important things.

   Keep moving. Keep moving toward your vision of the future, adjusting your plans as you learn what works.

Execution. Occupying a sprawling campus in Cary, North Carolina, software maker SAS has always been ranked in the top three positions on Fortune’s lists of “100 Best Companies to Work For” (No. 1 in 2010 and 2011, No. 2 in 2013 and 2014, and No. 3 in 2012). Its ability to execute effectively has also made it highly profitable and the world’s largest privately owned software company.

Execution: Getting Things Done

In implementing strategy and maintaining strategic control, what we are talking about is effective execution. Larry Bossidy, former CEO of AlliedSignal (later Honeywell), and Ram Charan, a business adviser to senior executives, are authors of Execution: The Discipline of Getting Things Done. 85  Execution,  they say, is not simply tactics, it is a central part of any company’s strategy. It consists of using questioning, analysis, and follow-through to mesh strategy with reality, align people with goals, and achieve results promised.

Page 181How important is execution to organizational success in today’s global economy? A survey of 769 global CEOs from 40 countries revealed that “excellence in execution” was their most important concern—more important than “profit growth,” “customer loyalty,” “stimulating innovation,” and “finding qualified employees.”86

Bossidy and Charan outline how organizations and managers can improve the ability to execute. Effective execution requires managers to build a foundation for execution within three core processes found in any business: people, strategy, and operations.87

The Three Core Processes of Business: People, Strategy, & Operations

A company’s overall ability to execute is a function of effectively executing according to three processes: people, strategy, and operations. Because all work ultimately entails some human interaction, effort, or involvement, Bossidy and Charan believe that the people process is the most important.

The First Core Process—People: “You Need to Consider Who Will Benefit You in the Future” “If you don’t get the people process right,” say Bossidy and Charan, “you will never fulfill the potential of your business.” But today most organizations focus on evaluating the jobs people are doing at present, rather than considering which individuals can handle the jobs of the future. An effective leader tries to evaluate talent by linking people to particular strategic milestones, developing future leaders, dealing with nonperformers, and transforming the mission and operations of the human resource department.

The Second Core Process—Strategy: “You Need to Consider How Success Will Be Accomplished” In most organizations, the strategies developed fail to consider the “how” of execution. According to the authors, a good strategic plan addresses nine questions. (See  Table 6.4 .) In considering whether the organization can execute the strategy, a leader must take a realistic and critical view of its capabilities and competencies. If it does not have the talent in finance, sales, and manufacturing to accomplish the vision, the chances of success are drastically reduced.

The Third Core Process—Operations: “You Need to Consider What Path Will Be Followed” The strategy process defines where an organization wants to go, and the people process defines who’s going to get it done. The third core process, operations, or the operating plan, provides the path for people to follow. The operating plan, as we described in Chapter 5, should address all the major activities in which the company will engage—marketing, production, sales, revenue, and so on—and then define short-term objectives for these activities, to provide targets for people to aim at. We also discuss operations management in Chapter 16.

TABLE 6.4 Necessary Answers: What Questions Should a Strong Strategic Plan Address?

Source: From Execution by Larry Bossidy and Ram Charan, Copyright © 2002 by Larry Bossidy and Ram Charan. Used by permission of Crown Business, a division of Random House, Inc.

How Execution Helps Implement & Control Strategy

Many executives appear to have an aversion to execution, which they associate with boring tactics—with the tedium of doing, as opposed to the excitement of visioning—and which they hand off to subordinates. Further, there are many organizational obstacles to effective execution, and many of these Page 182are associated with organizational culture. Organizational culture is a system of shared beliefs and values within an organization that guides the behavior of its members. In this context, effective execution will not occur unless the culture supports an emphasis on getting quality work done in a timely manner. Chapter 8 presents 11 ways managers can attempt to create an execution-oriented culture.88

 PRACTICAL ACTION

Building a Foundation of Execution

The foundation of execution is based on leadership (as we discuss in Chapter 14) and organizational culture (discussed in Chapter 8). Bossidy and Charan suggest that there are seven essential types of leader behaviors that are needed to fuel the engine of execution. Managers are advised to engage in seven kinds of behaviors, as follows:

Know Your People & Your Business: “Engage Intensely with Your Employees” In companies that don’t execute, leaders are usually out of touch with the day-to-day realities. Bossidy and Charan insist leaders must engage intensely and personally with their organization’s people and its businesses. They cannot rely on secondhand knowledge through other people’s observations, assessments, and recommendations.

Insist on Realism: “Don’t Let Others Avoid Reality” Many people want to avoid or shade reality, hiding mistakes or avoiding confrontations. Making realism a priority begins with the leaders being realistic themselves, and making sure realism is the goal of all dialogues in the organization.

Set Clear Priorities: “Focus on a Few Rather Than Many Goals” Leaders who execute focus on a very few clear priorities that everyone can grasp.

Follow Through: “Establish Accountability & Check on Results” Failing to follow through is a major cause of poor execution. “How many meetings have you attended where people left without firm conclusions about who would do what and when?” Bossidy and Charan ask. Accountability and follow-up are important.

Reward the Doers: “Show Top Performers That They Matter” If people are to produce specific results, they must be rewarded accordingly, making sure that top performers are rewarded far better than ordinary performers.

Expand People’s Capabilities: “Develop the Talent” Coaching is an important part of the executive’s job, providing useful and specific feedback that can improve performance.

Know Yourself: “Do the Hard Work of Understanding Who You Are” Leaders must develop “emotional fortitude” based on honest self-assessments. Four core qualities are authenticity, self-awareness, self-mastery, and humility.

Do you think your current or a past employer was good at execution? What obstacles may have impaired the company’s ability to execute? You can answer these questions by taking Self-Assessment 6.3.

SELF-ASSESSMENT 6.3

Assessing the Obstacles to Strategic Execution

This survey is designed to assess the obstacles to strategic execution that may be impacting an organization’s ability to execute. Go to connect.mheducation.com and take Self-Assessment 6.3. When you’re done, answer the following questions:

1.   How does the company stand with respect to execution?

2.   Based on the results, what are the company’s strengths and weaknesses when it comes to execution?

3.   What advice would you give to senior management about improving the company’s ability to execute based on the results? Be specific.

In conclusion, by linking people, strategy, and operating plans, execution allows executives to direct and control the three core processes that will advance their strategic vision. 

Page 183Key Terms Used in This Chapter

BCG matrix

benchmarking

competitive intelligence

contingency planning

cost-focus strategy

cost-leadership strategy

current reality assessment

defensive strategy

differentiation strategy

diversification

environmental scanning

execution

focused-differentiation strategy

forecast

grand strategy

growth strategy

organizational opportunities

organizational strengths

organizational threats

organizational weaknesses

Porter’s four competitive strategies

Porter’s model for industry analysis

related diversification

scenario analysis

single-product strategy

stability strategy

strategic control

strategic positioning

strategy formulation

strategy implementation

SWOT analysis

synergy

trend analysis

unrelated diversification

Key Points

 6.1  What Is Effective Strategy?

•   Strategic positioning attempts to achieve sustainable competitive advantage by preserving what is distinctive about a company.

•   Strategic positioning is based on the principles that strategy is the creation of a unique and valuable position, requires tradeoffs in competing, and involves creating a “fit” among activities, so that they interact and reinforce each other.

•   Strategic management works best for large firms, but can also be effective for small firms.

•   Every organization needs to have a “big picture” about where it’s going and how to get there, which involves strategy, strategic management, and strategic planning. A strategy is a large-scale action plan that sets the direction for an organization. Strategic management involves managers from all parts of the organization in the formulation and implementation of strategies and strategic goals. Strategic planning determines the organization’s long-term goals and ways to achieve them.

•   Three reasons why an organization should adopt strategic management and strategic planning: They can (1) provide direction and momentum, (2) encourage new ideas, and (3) develop a sustainable competitive advantage. Sustainable competitive advantage occurs when an organization is able to get and stay ahead in four areas: (1) in being responsive to customers, (2) in innovating, (3) in quality, and (4) in effectiveness.

 6.2  The Strategic-Management Process

•   The strategic-management process has five steps plus a feedback loop.

•   Step 1 is to establish the mission statement and the vision statement. The mission statement expresses the organization’s purpose. The vision statement describes the organization’s long-term direction and strategic intent.

•   Step 2 is to do a current reality assessment, to look at where the organization stands and see what is working and what could be different so as to maximize efficiency and effectiveness in achieving the organization’s mission. Among the tools for assessing the current reality are SWOT analysis, forecasting, benchmarking, and Porter’s model for industry analysis (described below).

•   Step 3 is strategy formulation, to translate the broad mission and vision statements into a grand strategy that explains how the organization’s mission is to be accomplished. Strategy formulation is the translation of the grand strategy into more specific strategic plans, choosing among different strategies and altering them to best fit the organization’s needs.

•   Step 4 is strategy implementation—putting strategic plans into effect.

•   Step 5 is strategic control, monitoring the execution of strategy and making adjustments.

•   Corrective action constitutes a feedback loop in which a problem requires that managers return to an earlier step to rethink policies, budgets, or personnel arrangements.

 6.3  Establishing the Mission & the Vision

•   A mission statement should express the organization’s purpose or reason for being.

Page 184•   A vision statement should be positive and inspiring, and it should stretch the organization and its employees to achieve a desired future state that appears beyond its reach.

 6.4  Assessing the Current Reality

•   Step 2 in the strategic-management process, assess the current reality, looks at where the organization stands internally and externally—to determine what’s working and what’s not, to see what can be changed so as to increase efficiency and effectiveness in achieving the organization’s vision.

•   An assessment helps to create an objective view of everything the organization does: its sources of revenue or funding, its work-flow processes, its organizational structure, client satisfaction, employee turnover, and other matters.

•   Among the tools for assessing the current reality are competitive intelligence, SWOT analysis, forecasting, benchmarking, and Porter’s model for industry analysis.

•   Practicing competitive intelligence means gaining information about one’s competitors’ activities, through public news sources, investor information, and informal sources, so that you can anticipate their moves and react appropriately.

•   The next point in establishing a grand strategy is environmental scanning, careful monitoring of an organization’s internal and external environments to detect early signs of opportunities and threats that may influence the firm’s plans. The process for doing such scanning is called SWOT analysis, a search for the Strengths, Weaknesses, Opportunities, and Threats affecting the organization.

•   Organizational strengths are the skills and capabilities that give the organization special competencies and competitive advantages. Organizational weaknesses are the drawbacks that hinder an organization in executing strategies. Organizational opportunities are environmental factors that the organization may exploit for competitive advantage. Organizational threats are environmental factors that hinder an organization’s achieving a competitive advantage.

•   Another tool for developing a grand strategy is forecasting—creating a vision or projection of the future. Two types of forecasting are (1) trend analysis, a hypothetical extension of a past series of events into the future; and (2) contingency planning, the creation of alternative hypothetical but equally likely future conditions.

•   Benchmarking is a process by which a company compares its performance with that of high-performing organizations.

•   Porter’s model for industry analysis suggests that business-level strategies originate in five primary competitive forces in the firm’s environment: (1) threats of new entrants, (2) bargaining power of suppliers, (3) bargaining power of buyers, (4) threats of substitute products or services, and (5) rivalry among competitors.

 6.5  Formulating the Grand Strategy

•   Three common grand strategies are (1) a growth strategy, which involves expansion—as in sales revenues; (2) a stability strategy, which involves little or no significant change; and (3) a defensive strategy, which involves reduction in the organization’s efforts.

•   Strategy formulation (Step 3 in the strategic-management process) makes use of several concepts, including (1) Porter’s four competitive strategies, (2) diversification and synergy, and (3) the BCG matrix.

•   Porter’s four competitive strategies are as follows: (1) The cost-leadership strategy is to keep the costs, and hence the prices, of a product or service below those of competitors and to target a wide market. (2) The differentiation strategy is to offer products or services that are of unique and superior value compared with those of competitors but to target a wide market. (3) The cost-focus strategy is to keep the costs and hence prices of a product or service below those of competitors and to target a narrow market. (4) The focused-differentiation strategy is to offer products or services that are of unique and superior value compared with those of competitors and to target a narrow market.

•   Companies need to choose whether to have a single-product strategy, making and selling only one product within their market, or a diversification strategy, operating several businesses to spread the risk.

•   There are two kinds of diversification: unrelated diversification consists of operating several businesses that are not related to each other; related diversification consists of operating separate businesses that are related to each other, which may reduce risk, produce management efficiencies, and produce synergy or the sum being greater than the parts.

•   The BCG matrix is a means of evaluating strategic business units on the basis of (1) their business growth rates and (2) their share of the market. In general, organizations do better in fast-growing markets in which they have a high market share rather than slow-growing markets in which they have low market shares.

 6.6  Implementing & Controlling Strategy: Execution

•   The last two steps of the strategic-management process are strategy implementation and strategic control.

Page 185•   Strategy implementation is putting strategic plans into effect, dealing with roadblocks within the organization’s structure and culture, and seeing if the right people and control systems are available to execute the plans.

•   Strategic control consists of monitoring the execution of strategy and taking corrective action, if necessary. To keep a strategic plan on track, you should engage people, keep your planning simple, stay focused, and keep moving.

•   Implementing strategy and maintaining strategic control require effective execution. Execution is not simply tactics, it is a central part of any company’s strategy; it consists of using questioning, analysis, and follow-through to mesh strategy with reality, align people with goals, and achieve results promised.

•   Three core processes of execution are people, strategy, and operations. (1) You have to evaluate talent by linking people to particular strategic milestones, developing future leaders, dealing with nonperformers, and transforming the mission and operations of the human resource department. (2) In considering whether the organization can execute the strategy, a leader must take a realistic and critical view of its capabilities and competencies. (3) The third core process, operations, or the operating plan, provides the path for people to follow. The operating plan should address all the major activities in which the company will engage and then define short-term objectives for these activities, to provide targets for people to aim at. By linking people, strategy, and operating plans, execution allows executives to direct and control the three core processes that will advance their strategic vision.

Understanding the Chapter: What Do I Know?

1.  What is strategic positioning, and what are the three principles that underlie it?

2.  What are the five steps in the strategic management process?

3.  Name some characteristics of good mission and vision statements.

4.  What is competitive intelligence?

5.  What are the tools that can help you assess the current reality?

6.  Explain what SWOT is.

7.  Describe three techniques that can help you formulate a grand strategy.

8.  What are three common grand strategies?

9.  Explain Porter’s four competitive strategies.

10.  In execution, what are the three core processes of business?

Management in Action

Putting AutoZone into Drive

Joseph “Pitt” Hyde III, 70, knew nothing about cars. But after turning his grandfather’s company, Malone & Hyde, into the nation’s third-largest wholesale food distributor, he figured there was money to be made under the hood. Touting low everyday prices (a strategy he learned from serving on the board of Walmart), he founded AutoZone, which is now the nation’s largest retail auto parts chain. . . .

I was born in Memphis, and grew up here. My grandfather started Malone & Hyde, a wholesale food distributor, in 1907. He ran it, my father ran it, and I ran it. From the time I was 4 or 5, my grandfather would take me to visit the stores, and my father always discussed the big decisions being made with me. I was always told that I had the opportunity to run Malone & Hyde, and the obligation to do it better than my grandfather and father did. I never knew I had a choice. . . .

After I graduated from the University of North Carolina with an economics degree, my father grew ill. So in 1968, at 26, I had to take over. It was the ultimate baptism by fire. Most of the people reporting to me were twice my age. That year, we had $240 million in sales. Fortunately, I was able to continue to grow the company.

Page 186In the mid-1970s I had concerns about the long-term outlook, and looked for areas to diversify into. We had a successful drug chain [called Super D] and felt comfortable with specialty retailing. So when this small company, Checker Auto Parts in Phoenix, came up for sale, I checked it out. I saw how it was growing with auto parts geared to the do-it-yourself market. We passed, and Lucky Supermarkets bought it. We started looking at chains like Pep Boys.

I could see the auto parts business was growing rapidly and wasn’t as price-sensitive as food. I didn’t see anyone doing a superior job of customer service, and most were not well kept. I thought we could bring a lot to the table. We decided to start a company from scratch.

We opened our first store in Forrest City, Arkansas, on July 4, 1979, and called it Auto Shack. We changed the name after we were sued by RadioShack [for trademark infringement]. Auto Shack initially won the lawsuit, but RadioShack successfully appealed. Rather than fight it, we changed the name to AutoZone.

In 1988 we sold Malone & Hyde, which by then had $3.3 billion in sales. We had set up AutoZone in its own corporate structure, so when we sold the base business, I kept AutoZone. I’d never been a do-it-yourselfer and didn’t know the auto parts business, but I knew there was an opportunity. We worked on small margins and were very tight operators, so that discipline helped us through as we learned the business.

We started with four stores and were the first auto parts store with electronic catalogues, so customers could instantly look up parts and warranty information. Our objective was to build a culture around superior customer service, and to have everyday low prices in good-looking stores.

In 1991 we went public, and the competition saw how well we were doing. They started copying our store layout and pricing. But none of them could copy our culture. Today we have 5,000 stores. . . .

When you’re running a big business, you spend 80% of the time addressing small things and 20% on the big things that really make a difference. It took me 35 years to figure out if you spend 80% of the time on the big things, and 20% on the small things, life will be much more meaningful. Money is a small part of the equation for success. Sweat equity is what makes things work.

Source: Excerpted from an Interview by D. Eng, “Putting AutoZone into Drive,” Fortune, August 12, 2013, pp. 17–18.

FOR DISCUSSION

1.  Using no more than two sentences, describe Auto-Zone’s strategy.

2.  Based on Michael Porter’s discussion of the characteristics of an effective strategy, does AutoZone have a good strategy for growth? Explain.

3.  To what extent is AutoZone following the five steps of the strategic-management process?

4.  Conduct an environmental scan or SWOT analysis of AutoZone’s current reality and recommend whether the company’s current strategy is poised to succeed.

4.  Which of Michael Porter’s four competitive strategies is AutoZone trying to follow? Discuss.

5.  What is the greatest takeaway from this case in terms of strategic management?

Legal/Ethical Challenge

Should Companies Be Pressured to Recruit Females for Boards of Directors?

A company’s board of directors plays a role in the strategic management process. Not only can a board provide input into the planning process, but it ultimately signs off on the intended strategies. Interestingly, a 2011 study by Catalyst, a nonprofit organization, compared financial performance of companies with zero female board members versus those with three or more female members. Results indicated that female representation was associated with (1) 84% higher return on sales, (2) 60% higher return on sales, and (3) 46% higher return on equity. This challenge pertains to whether it is appropriate for outside groups to pressure a company to include women on its board of directors.

Small percentages of female board members may be caused by many factors, such as a lack of specific experience (e.g., finance), limited social networks, and negative stereotypes. Regardless of the cause, external groups are sprouting up around the United States that are focused on putting pressure on companies to recruit female directors. One example is a group that calls itself “2020 Women on Boards.” This nonprofit group has a goal of mobilizing stakeholders Page 187to encourage companies to increase female representation on boards of directors. The group plans to publish a list of the Fortune 1000 companies that have no female directors. Some believe that efforts like this will promote good corporate governance, while others see it as an intrusion into the internal functioning of an organization.

SOLVING THE CHALLENGE

Where do you stand on this issue?

1.  It is a great idea to pressure companies to include more females on boards of directors. After all, the Catalyst study showed that female representation was associated with higher financial performance.

2.  Companies should be allowed to select people for boards based on their experience, networks, and performance. Gender should not be considered as a relevant criterion for selecting board members. I am not in favor of this type of social pressure because it does not ensure that the most qualified people are placed on boards of directors.

3.  I’m middle of the road on this issue. Part of me feels that organizations should be left alone to put whoever they want on a board. At the same time, sometimes organizational leaders need to be nudged to do the right thing, such as putting females on the board. I thus think that social pressure from groups like “2020 Women on Boards” is okay, but organizations should not feel forced to do anything they do not want to do.

4.  Invent other options. Discuss.