Overview of the Chapter
In an uncertain competitive environment, managers must engage in thorough planning to find strategies that will help their organization to compete effectively. This chapter explores the manager’s role both as planner and as strategist. It discusses the three major steps of the planning process, different kinds of plans, strategy formulation, and the challenge of strategy implementation. This chapter also contains a detailed explanation of SWOT analysis and Michael Porter’s business level strategies.
Describe the three steps of the planning process.
Explain the relationship between planning, strategy, and change.
Explain the role of planning in predicting the future and in changing the organization so it can meet future challenges.
Outline the main steps in SWOT analysis.
Differentiate among corporate-, business-, and functional-level strategies.
Describe the vital role played by strategy implementation in determining a manager’s ability to change an organization to achieve future goals.
MANAGEMENT IN ACTION: JUST-IN-TIME LOW-COST FASHION
Zara, a Spanish clothing manufacturer, has managed to position itself as the low price/low cost leader in the fashion segment of the clothing market because of the way it uses information technology. It has created an information system that allows the management of its design and manufacturing process in a way that minimizes inventory costs and provides instant feedback concerning market demand, which creates a competitive advantage for the company. Zara can do all of this at with relatively small output levels, which is also a part of its specialized, focused strategy.
While it takes other fashion houses at least six months to design a collection and three additional months to make it available in stores, Zara can complete these two steps in only five weeks. Because of its short manufacturing-to-sales cycle, Zara can offer its clothing collections at relatively low prices and still make profits that are the envy of the fashion industry.
What goals do you think Zara’s top managers set for themselves when their company first entered the fashion industry? What are their future goals?
In their earlier years, Zara’s goals probably included achieving profitability and becoming an industry leader. Future goals include opening stores in all major cities around the world and building their brand name recognition.
Which of Porter’s strategies did Zara use to reach their current level of success?
Zara employs a low cost strategy. It has developed a competitive advantage by developing a means of producing its quality products at costs below its rivals. Technology was a major contributor to the successful implementation of this strategy.
I. THE PLANNING PROCESS
The Planning Process
Planning is a process that managers use to identify and select appropriate goals and courses of action for an organization.
The organizational plan that results from the planning process details how managers intend to attain those goals.
The decisions and actions that managers take to help an organization attain its goals is its strategy.
Planning is a three-step activity.
The first step is determining the organization’s mission and goals. A mission statement is a broad declaration of an organization’s purpose that identifies the organization’s products and customers and distinguishes the organization from its competitors.
The second step is formulating strategy.
The third step is implementing strategy.
Levels of Planning
In large organizations, planning usually takes place at three levels of management: corporate, business or division, and department or functional.
At the corporate level are the CEO, other top managers, and their support staff.
At the business level are the different divisions of the company, usually led by a divisional manager. A division is a business unit that competes in a distinct industry.
Each division has its own set of functions or departments, such as manufacturing, marketing, R&D, human resources, etc.
The corporate-level plan contains top management’s decisions pertaining to the organization’s mission and goals, overall strategy, and structure. It provides the framework within which divisional managers create their business-level plans. Corporate-level strategy indicates in which industries and national markets an organization intends to compete.
At the business level, the managers of each division create a business-level plan that details long-term goals that will allow the division to meet corporate goals and the division’s business-level strategy and structure. Business-level strategy states the methods a division or business intends to use to compete against its rivals in an industry.
A function is a unit or department in which people have the same skills or use the same resources to perform their jobs. The business-level plan provides the framework within which functional managers devise their plans. A functional-level plan states the goals that functional managers pursue to help the division attain its business-level goals. Functional-level strategy sets forth the actions that managers intend to take at the level of departments.
Corporate-level planning is the primary responsibility of top managers. Corporate-level managers are responsible for approving business- and functional-level plans to ensure they are consistent with the corporate plan.
At the business level, planning is the responsibility of divisional managers, who also review functional level plans. Functional managers typically participate in business-level planning also.
Similarly, although functional managers bear primary responsibility for functional-level planning, they often involve their subordinates in the process.
Time Horizons of Plans
Plans differ in their time horizon, or intended duration.
Long-term plans have a horizon of five years or more. Intermediate-term plans have a horizon between one and five years. Corporate- and business-level goals and strategies require long- and intermediate-term plans.
Short-term plans have a horizon of one year or less. Functional-level goals and strategies require intermediate- and short-term plans.
Although a corporate- or business-level plan may extend over five years, it is typically treated as a rolling plan, a plan that is updated every year. Rolling plans allow managers to make midcourse corrections and to plan flexibly.
Most organizations have an annual planning cycle, linked to their annual financial budget.
Fed Ex and UPS are now using IT to manage the flow of inputs and distribution of outputs for its customers—global supply chain management. Years ago, Fed Ex was the dominant competitor in the package delivery business but lost its lead by not updating the software that supported its superior tracking system. During the 1990’s, UPS managers realized the tremendous growth potential in the global supply chain management business and responded by developing rolling plans and target that allowed them to continuously improve their levels of customer service and efficiency. Now, both companies are competing to redefine and control the global shipping business, something largely made possible by the growth of new IT systems and the Internet.
Standing Plans and Single-Use Plans
Standing plans are used in situations in which programmed decision-making is appropriate. Standing plans include:
Policies, which are a general guide to action.
Rules, which are formal, written guides to action.
Standing operating procedures, which are written instructions describing the exact series of actions that should be followed.
Single-use plans are developed to handle nonprogrammed decision-making. Single use plans include:
Programs, which are integrated sets of plans for achieving certain goals.
Projects, which are specific action plans created to complete various aspects of a program.
Why Planning Is Important
Essentially, planning is the activity of ascertaining where an organization is at the present time and deciding where it should be in the future. Managers must consider the future and forecast what may happen in order to deal with future opportunities and threats Because the external environment is uncertain and complex and typically must deal with incomplete information and bounded rationality, planning is often complex and difficult.
Planning is important for four main reasons:
It is a useful way of getting managers to participate in decision making about the appropriate goals and strategies for an organization.
It is necessary to give the organization a sense of direction and purpose.
It helps coordinate managers of the different functions and divisions to ensure that they all are pulling the same direction.
A plan can be used as a device for controlling managers within an organization.
Henri Fayol, the originator of the model of management discussed in Chapter 1, said that effective plans should have four qualities: unity, continuity, accuracy, and flexibility.
Unity means that at any one time only one central plan is put into operation.
Continuity means that planning is an ongoing process.
Accuracy means that managers should attempt to collect all available information.
The planning process should have enough flexibility so that plans can be altered and changed if the situation changes.
II. DETERMINING THE ORGANIZATION’S MISSION AND GOALS
Defining the Business
To determine an organization’s mission, managers must first define its business by asking three questions:
Who are our customers?
What customer needs are being satisfied?
How are we satisfying customer needs?
Answering these questions help managers to determine 1) the customer needs that they are presently satisfying, 2) customer needs they should attempt to satisfy in the future, and 3) who their true competitors are.
Management Insight: Mattel Rediscovers Itself
Faced with the growth of electronic toys and computer games in the 1990s, Mattel decided that it needed to redefine itself. Mattel feared that it would lose its customers to the new computer game companies, and therefore decided to become a major player in this new arena by acquiring The Learning Company. Mattel also signed a contract to introduce toys, many of which would be electronic, linked to new movies from companies like Pixar, Dreamworks, and Disney. Buying The Learning Company, however, turned out not to be a bad idea because it did not possess the skills required to develop new toys quickly. Mattel now hires outside specialists to develop new electronic toys and computer games in an effort to respond to the fast-changing needs of they toy market.
Establishing Major Goals
Once the business is defined, managers must then establish a set of primary goals to which the organization is committed. In most organizations, the CEO articulates major goals. These goals give the company a sense of direction and commitment. Goals typically possess the following characteristics:
They are ambitious and stretch the organization and require managers to improve its performance capabilities.
They are challenging but realistic—a goal that is impossible to attain may prompt managers to give up.
The time period in which a goal is expected to be achieved should be stated. This injects a sense of urgency and acts as a motivator.
III. FORMULATING STRATEGY
Strategy formulation involves managers in analyzing an organization’s current situation and then developing strategies to accomplish its mission and achieve its goals.
SWOT analysis is a planning exercise in which managers identify organizational strengths, weaknesses, opportunities, and threats. Based upon a SWOT analysis, managers at each level of the organization identify strategies that will best position the company to achieve its mission and goals.
The first step in SWOT analysis is to identify an organization’s strengths and weaknesses that characterize the present state of the organization.
The next step requires managers to identify potential opportunities and threats in the environment that affect the organization at the present or may affect it in the future.
When SWOT analysis is completed, managers can begin developing strategies. These strategies should allow the organization to attain its goals by taking advantage of opportunities, countering threats, building strengths, and correcting organizational weaknesses.
Management Insight: A Transformation at Campbell’s Soup
Campbell’s Soup is one of the oldest and best known companies in the world. However, as consumers sought healthier food choices, the condensed soup market declined by 20%, leading to a decline in market share and profits for and Campbell’s. To turn the company around, Douglas Conant, the company’s new CEO, initiated a thorough SWOT analysis. This analysis identified three growth opportunities: health and sports drinks, salsas, and chocolate products. Conant then assessed the internal capabilities of the company and found a number of weaknesses. The culture was very conservative, machinery was outdated, employee levels were too high, and there was a lack of willingness to take risks. Based on this analysis, Conant and his management implemented several new strategies designed to turn around and revitalize the company.
IV. FORMULATING CORPORATE-LEVEL STRATEGIES
Corporate-level strategy is a plan of action that determines the industries and countries an organization should invest its resources in to achieve its mission and goals. Most managers have the goal to grow their companies by seeking out new opportunities to use organizational resources to satisfy customer needs. Also, some managers must help their organizations respond to threats due to changing forces in the task or general environment.
The principle corporate-level strategies that managers use are:
Concentration on a single business.
An organization benefits from pursuing any of these only when the strategy helps increase the value of the organization’s goods for customers
Concentration on a Single Business
A corporate-level strategy aimed at concentrating resources in one business or industry by most organizations as they are beginning to grow and develop. Also, concentration on a single business can be an appropriate strategy when managers see the need to reduce the size of their organization, in order to improve performance.
Diversification is the strategy of expanding operations into a new business or industry and producing new goods or services. Companies that have successfully employed this strategy include PepsiCo, Philip Morris, and GE. There are two main types of diversification: related and unrelated.
Related diversification is the strategy of entering a new business or industry to create a competitive advantage in one or more of an organization’s existing divisions or businesses.
Synergy is obtained when the value created by two divisions cooperating is greater than the value that would be created if the two divisions operated separately. In pursuing related diversification, managers seek new businesses in which existing skills and resources can be used to create synergies.
Managers pursue unrelated diversification when they enter new industries or buy companies in new industries that are not related to their current businesses or industries.
By pursuing unrelated diversification, managers can buy a poorly performing company and use their management skills to turn the business around, thereby increasing its performance.
Managers also engage in unrelated diversification to pursue portfolio strategy, which is the practice of apportioning financial resources among divisions in order to increase and financial returns and decrease risks.
Many companies are abandoning the strategy of unrelated diversification because there is evidence that says too much diversification can cause managers to lose control of their organization’s core business.
Corporate-level managers must decide on the appropriate way to compete internationally. If competing in more than one national market, managers must ask themselves to what extent their company should customize its product’s features and marketing plans to suit differing national conditions.
Global strategy is selling the same standardized product and using the same basic marketing approach in each national market.
If managers decide to customize products to specific national conditions, they adopt a multidomestic strategy.
Managing Globally: Gillette’s New International Strategy
Gillette, the well-known razor blade maker, has been a global company for many years. In year 2000, over 60% of its revenues came from global sales, and this percentage is expected to increase. Gillette operates 54 manufacturing facilities in more than 20 countries. It establishes factories in countries where labor and other costs are low, and then distributes and markets its products to countries in that region of the world. So, in this sense, it pursues a global strategy. However, all of Gillette’s research, development, and design take place in the United States. As it develops new kinds of razors, it decides when its foreign customers are ready for the new product and then equips its foreign factories to manufacture it. This is indicative of a multi-domestic strategy. Gillette Chairman and CEO George Kilts says, “I believe that there is a huge opportunity to maximize the potential of Gillette’s global brands by tailoring its products to the needs of different countries.”
Vertical integration is the corporate-level strategy through which an organization becomes involved in producing its own inputs (backward vertical integration) or distributing and selling its own outputs (forward vertical integration).
Managers pursue vertical integration because it allows them to either add value to their products by making them special or unique or to lower the costs associated with the creation of value creation.
Vertical integration can help an organization to grow rapidly, but it can be a problem because it can reduce an organization’s flexibility to respond to changing environmental conditions.
V. FORMULATING BUSINESS LEVEL STRATEGIES
Michael Porter also formulated a theory of how managers can select a business-level strategy. Managers must choose between two basic ways of increasing the value of an organization’s products: differentiating the product to add value or lowering the costs of value creation. Porter also argues that managers must choose between serving the whole market or serving just one segment.
With a low-cost strategy, managers try to gain a competitive advantage by focusing the energy of all the organization’s departments on driving the organization’s costs down. Organizations pursuing a low-cost strategy can sell a product for less than their rivals and yet still make a profit.
With a differentiation strategy, managers try to gain a competitive advantage by focusing all the energies of the organization’s departments on distinguishing the organization’s products from those of competitors. Because the process of making products unique and different is expensive, organizations that successfully pursue a differentiation strategy often charge a premium price for their products.
Focused Low-Cost and Focused Differentiation Strategies
Porter identified two other strategies used by companies wishing to specialize by serving the needs of customers in only one or a few segments of the market.
A company pursuing a focused low-cost strategy serves one or a few segments of the market and aims to be the lowest-cost company serving that segment.
A company pursuing a focused differentiation strategy serves just a few segments and aims to be the most differentiated firm serving that market segment.
VI.FORMULATING FUNCTIONAL-LEVEL STRATEGY
Functional-level strategy is a plan of action to improve the ability of an organization’s departments to create value. It is concerned with the actions that managers of individual departments take to add value to an organization’s goods and services.
The more customers value a product, the more they are willing to pay for it. There are two ways to add value to an organization’s products:
Departmental managers can lower the costs of creating value so that an organization can attract customers by keeping its prices lower.
Departmental managers can add value to a product by finding ways to differentiate it from the products of competitors.
There must be a fit between functional- and business-level strategies if an organization is to achieve its mission and goals. Each organizational function has a role to play in the process of lowering costs or adding value. In trying to add value or lower the costs of creating value, all functional managers should attend to four goals:
Attain superior efficiency. Efficiency is a measure of the amount of inputs required to produce a given amount of outputs. The fewer the inputs required to produce a given amount of output, the higher the efficiency level is and the lower the cost of outputs.
Attain superior quality. Quality means producing goods and services that are reliable.
Providing high-quality products creates a brand name reputation that allows the organization to charge a higher price.
Attain superior innovation. Innovation leads to advances in the kinds of products, production processes, and strategies that an organization develops. This uniqueness may enhance value added and allow the organization to differentiate itself.
Attain superior responsiveness to customers. Attaining superior efficiency, quality, innovation, and responsiveness requires the adoption of state-of-the-art management techniques and practices.
VII PLANNING, IMPLEMENTING STRATEGY, AND CHANGE
After identifying appropriate strategies, managers confront the challenge of putting those strategies into action for the purpose of changing the organization. Strategy implementation is a five-step process:
Allocating responsibility for implementation to the appropriate individuals or groups.
Drafting detailed change plans that specify how a strategy is to be implemented.
Establishing a timetable for implementation that includes precise, measurable goals linked to the attainment of the change plan.
Allocating appropriate resources to the responsible individuals or groups responsible for the attainment of corporate divisional, and functional goals.
VIII. SUMMARY AND REVIEW
Lecture Enhancer 6.1
THE IMPORTANCE OF MISSION STATEMENTS
Mission statements can be defined as “enduring statements of purpose that distinguish one organization from similar enterprises.” A mission statement should define the exact nature of a company’s business for each of its group of stakeholders with which it is involved. Business Week Magazine reports that firms with well-crafted mission statements have a 30% higher return on certain financial measures than firms that lack such documents. In addition, a number of academic studies suggest there is a positive relationship between mission statements and organizational performance.
Researchers suggest that a well-crafted mission statement can insure unanimity of purpose, arouse positive feelings about the firm, provide direction, serve as a focal point, provide a basis for objectives and strategies, and resolve divergent views among managers.
In every organization, there are differing views among managers regarding direction and appropriate strategies. Discussing these issues in the course of developing a mission statement can help resolve these divergent views. This can be especially important to firms facing restructuring, downsizing, or faltering performance.
A mission statement should also be inspiring. The reader should want to be a part of an organization after reading it. It should also be enduring, project a sense of worth, intent, and effectively communicate shared organizational expectations. The intrinsic value of the firm’s product such also be clearly articulated.
Some research suggests that there is a great deal of room for improvement in the mission statements of some companies. The expected payoff from improving its mission statement is enhanced communication, understanding, and commitment among managers and employees. This translates into enhanced individual and organizational performance.
Adapted from “Its Time to Redraft Your Mission Statement”, Journal of Business Strategy, Vol. 24, No.1, p. 11.
Lecture Enhancer 6.2
CEOS, GOALS, AND STRATEGY
To say that CEOs are goal-oriented is an understatement. The best CEOs are driven. Because they are relentless in their pursuit of higher levels of excellence for their companies, they function in a goal-setting cycle. CEOs set aggressive goals, develop strategies that ensure their accomplishment, focus upon achievement until it happens, and then start the process all over again. Each year, Business Week Magazine compiles a list of the year’s top CEOs. Proven ability to meet the aggressive goals set for their organization is what qualifies a CEO for inclusion on this list. Below are the some of the CEOs who made Business Week’s list in 2002 and the lofty goals they achieved that landed them there.
Robert Tillman: In his six years as CEO of Lowe’s, Tillman has transformed this fast-growing hardware retail chain. The value of Lowe’s shares has climbed by more than 80% over the past two years, while rival Home Depot’s shares plummeted by 40% during the same period of time. What strategies did Tillman and his management team employ to achieve these financial goals? Because market research indicated that women initiated 80% of home improvement projects, he targeted women while Home Depot continued to focus upon men and building professionals. And because Lowe’s also has one of the industry’s best inventory systems, it is able to manage its costs effectively.
Michael O’Leary: When Europe’s airline industry deregulated several years ago, Michael O’Leary interpreted this change in the external environment as an opportunity and seized it. O’Leary started Ryanair Holdings, the first airline to offer discount airfares throughout Europe. His company is now the most profitable of its competitors and is expected to post a 49% profit increase in year 2002. What strategies did O’Leary and his management team employ to achieve these financial goals? He offers fares that are half of his rivals, uses small airports that allow planes to get in and out within 20 minutes, does not offer free meals, and even charges customers for a bottle of water.
John Thompson: While many of his competitors have either retrenched or closed their doors, the CEO of Symantec, a manufacturer of corporate software security systems, has been expanding his organization’s operations by acquiring other companies. What strategies has Thompson and his management team employed that allows his company to enjoy consistent growth in the wake of the recent tech crash? He improved his company’s retail channels to better exploit the increasing consumer demand for personal computer anti-virus software, while waiting for demand among corporate IT professionals to rebound.
Adapted from Business Week Magazine, January 13, 2003, pp. 62-72.
MANAGEMENT IN ACTION
Notes for Topics for Discussion and Action
Describe the three steps of planning. Explain how they are related.
The first step in planning involves determining the organization’s mission and goals. The second step is formulating strategy in which managers analyze the organization’s current situation and then conceive and develop the strategies necessary to attain the organization’s mission and goals. The third step is strategy implementation, in which managers decide how to allocate the resources and responsibilities required to put those strategies into action so that change will occur within the organization. The first step, determining the organization’s mission and goals, guides the following two steps in the planning process by defining which strategies are appropriate and which are inappropriate.
What is the role of divisional and functional managers in the formulation of strategy?
While ultimate responsibility for planning may rest with the top managers within an organization, all managers and many non-managers typically participate in the planning process.
Why is it important for functional managers to have a clear grasp of the organization’s mission when developing strategies within their organization?
An organization’s mission and goals guide the next stages in the planning process by defining which strategies are appropriate and which are inappropriate. If managers do not have an understanding of the organization’s mission, the strategies that they formulate most likely will not produce results that are in line with the mission of the company. Nor will they not accomplish the goals that were set. Furthermore, having an awareness of the mission of the organization helps managers plan better and establish appropriate goals.
4. What is the relationship among corporate-, business-, and functional-level strategies and how do they create value for an organization?
(Note to instructors: The following are excerpts from the text on the different level strategies.)
In developing a corporate-level strategy managers should ask: How should the growth and development of a company be managed to increase its ability to create value for its customer over the long run? A corporate-level strategy must help an organization differentiate and add value to its products either by making them unique or special or by lowering the costs of value creation.
In developing a business-level strategy managers must make a choice between the two basic ways of increasing the value of an organization’s products: differentiating the product to add value or lowering the costs of value creation.
In developing a functional-level strategy, managers must devise a plan of action to improve an organization’s departments’ ability to create value. To accomplish, this departmental managers can either (1) lower the costs of creating value so that an organization can attract customers by keeping its prices lower than its competitors to attract customers or (2) find ways to differentiate it from products of other companies.
All three levels of planning include defining ways for the organization to add value to its product by differentiating it from competitors’ products or lowering its cost of production in some way. The text notes that there must be a fit between functional- and business-level strategy if an organization is to achieve its mission and goal of maximizing the amount of value it gives to its customers.
Ask a manager to identify the corporate-, business-, and functional-level strategies used by their organization.
(Note to Instructors: Students’ answers should include the following information.)
A corporate-level strategy is a plan of action concerning which industries and countries an organization should invest its resources in to achieve its mission and goals. Corporate-level strategies that managers use include: (1) concentration on a single business, (2) diversification, (3) international expansion and (4) vertical integration.
A business-level strategy is a plan to gain a competitive advantage in a particular market or industry. Managers choose to pursue one of four basic kinds of business-level strategies: a low-cost strategy, a differentiation strategy, a focused low-cost strategy or a focused-differentiation strategy.
A functional-level strategy involves developing a plan of action to improve an organization’s departments’ ability to create value. It is concerned with the actions that managers of individual departments (such as manufacturing or marketing) can take to add value to an organization’s goods and services, which will then increase the value customers receive. Departments can either lower the costs of creating value to attract customers or add value to a product by finding ways to differentiate it from the products of other companies.
Notes for Building Management Skills
How to Analyze a Company’s Strategy
From the annual reports, identify the main strategies pursued by the company over a ten-year time period.
Try to identify why the company pursued these strategies. What reason was given in the annual reports, press reports, and so on?
Document whether and when any major changes in the strategy of the organization occurred. If changes did occur, try to identify the reason for them.
If changes in strategy occurred, try to determine the extent to which they were the result of long- term plans, and the extent to which they were responses to unforeseen changes in the company’s task environment?
What is the main industry that the company competes in?
What business-level strategy does the company seem to be pursuing in this industry?
What is the company’s reputation with regard to productivity, quality, innovation, and responsiveness to customers in this industry? If the company has attained an advantage in any one of these areas, how has it done so?
What is the current corporate strategy of the company? What is the company’s stated reason for pursuing this strategy?
Has the company expanded internationally? If it has, identify its largest international market. How did the company enter this market? Did its mode of entry change over time?
(Note to Instructors: Prior to assigning this activity, it would be beneficial to ensure that your institution’s library maintains ten years of stockholder reports. Otherwise, it could be an extremely time consuming process for your students to track down this information. An alternative is to reduce the length of time covered by the assignment.)
Students’ answers will vary based on the company that they have chosen.
Notes for Small Group Breakout Exercise
Low Cost or Differentiation?
Analyze the pros and cons of each of these alternatives.
A Option #1: Buy abroad, lower prices, and pursue low cost strategy.
We can effectively compete with Target and Wal-Mart, focus upon attracting a larger volume of customers, and thereby increase our market share. Also, relationships we build with foreign suppliers may serve as means of allowing us to expand our sales into foreign markets.
A great deal of time must first be devoted to research, if this strategy is to be implemented effectively. We must first identify reliable foreign manufacturer capable of producing high quality clothing at a lower cost. We must then build a relationship with them and determine a way of maintain control over a manufacturing process that is occurring in a distant part of the world. Also, our marketing department must develop less expensive ways of effectively reaching our target audience. Sufficient resources (time, money, and knowledge) must be made available to conduct this research.
Option #2: Differentiate and concentrate on high end of market.
We can effectively compete with the mall boutiques that are stealing our high-end customers. We can charge premium prices and justify them with the superior quality of our products. By focusing on the high end of the market, we can build brand image of superiority and quality. Such a brand image can help us build a cadre of loyal consumers, which contributes greatly to long-term viability of the business.
This strategy is expensive. It will probably require that we increase spending on product design or R&D to differentiate their product. Costs will rise as a result. Also, we must spend more money on advertising, in an attempt to create a unique image for our store. In addition, it may prove difficult to develop a competitive advantage that allows the consumer to perceive us as superior and unique, in comparison to well-established boutiques. Even if we match the high quality of their products, we may not be able to provide the individual attention that is found at smaller stores. The entrenched brand loyalty of many of these boutiques enjoy can be hard to overcome.
Option #3: Pursue a low cost and differentiation strategy.
The ability to pursue both strategies simultaneously will result in maximum profitability, since we can justify premium pricing while also enjoying low costs. Also, we can attract two very different categories of consumers – those seeking value and those seeking superior quality.
We may be courting disaster, since it is very difficult to pursue both of these strategies at the same time. Very few companies have successfully done so. Differentiation usually causes costs to rise, which makes discount pricing prohibitive. Porter refers to this as “stuck-in-the-middle.”
2. Think about the various clothing retailers in your local malls and city and analyze the choices they have made concerning how to compete with one another along the dimensions of low cost and differentiation.
One way high-end retailers attempt to differentiate themselves is by providing a great deal of customer service. Salespersons are always available to assist customers and answer their questions. Their return policy is usually very liberal. Other examples of personalized customer service include keeping track of customers’ birthdays and telephoning to alert them to special events or promotions related to their favorite brands. These stores also use attractive physical appearance as a means of differentiating themselves from their low cost competitors. Their stores are brightly lit and attractive, the aisles are wider and carpeted, and soft music is played. Displays are attractive and merchandise is always neatly arranged.
While both types of retailers hold sales to attract customers, low cost retailers engage in this promotional technique much more frequently. The low cost competitors usually have fewer salespersons available to assist customers and their buildings are usually visually less appealing.
Notes for You’re the Management Consultant
List the supermarket chains in your city and identify their strengths and weaknesses.
Answers to this question will vary, depending upon the area of the country in which you reside and the size of your local shopping area. You could recommend using a SWOT approach to compare the various each of the competitors in your specific area. This industry has many different types of competitors, ranging from mass merchandisers such as Meijer (www.meijer.com) and Kmart (www.kmart.com) to small mom-and-pop grocers and farmers' markets. After identifying all of the competitors, students can begin analysis of each using the planning tools presented in the chapter.
What business-level strategies are these supermarkets currently pursuing?
Discounters such as Cub (www.cub.com) and Aldi (www.aldifoods.com) are using a low-cost strategy. Specialty retailers such as Wild Oats (www.wildoats.com) and Whole Foods (www.wholefoods.com) are using a differentiation strategy.
What kind of supermarket would do best against the competition? What kind of business-level strategy should it pursue?
The response to this question depends upon the variety of competitors identified in the first question. Answers should include a rationale that explains why a particular strategy would work. For example, if students feel that a new store should use a focused differentiation strategy to compete effectively, possible justifications may include demographic data that is descriptive of households in the surrounding community or awareness of a potentially lucrative market niche currently untapped by the competition.
Either by yourself or in a group, decide if this business practice of paying bribes is ethical or unethical.
In a market economy, it is assumed that an organization’s ability to generate revenue is the result of its ability to develop a quality product with an attractive price and successfully market it. By distorting free market mechanisms, bribery, over the long run, can impede the ability of nation’s economy to grow. Bribery also impedes economic growth by discouraging foreign direct investment from investors who are unwilling to incur the additional cost of paying a bribe to a middleman who adds no value to the end product. Allowing a small handful of government officials to benefit at the expense of an entire nation and its economy is clearly an unethical is clearly an unbalanced situation.
Should IBM allow its foreign divisions to pay bribes if all other companies are doing so?
The payment of bribes violates the U.S. Foreign Corruption Practices Act, which forbids payment of bribes by U.S. companies to secure contracts abroad. Companies in violation of this law can be prosecuted in the U.S. Also, IBM takes a rigorous stance toward ethical issues. Allowing the practice of bribery would send the wrong message to its employees. Mature ethical development requires that managers remain committed to their organization’s values, regardless of what is going on around them.
If bribery is common in a particular country, what effect would this likely have on its economy and culture?
Bribe-giving by its competitors, according to one U.S. government study, cost American business $11 billion in a single year. In Germany, a legislator estimated that companies in his nation spend as much as $5.6 billion a year on bribes. Clearly, the diversion of such a large amount of any nation’s resources away from production efforts creates inefficiency in its economy and is therefore counterproductive to growth. Bribery also encourages a creeping erosion of honesty, trust, and other human values that rest at the foundation of a healthy culture.
CASE FOR DISCUSSION
Case Synopsis: UPS BATTLES FEDEX
This case discusses the competitive nature of the package delivery industry and the importance of strategy to three of its contenders. In 1971, FedEx turned the package delivery upside down when it began to offer overnight delivery by air. Its efficiency and state-of-the-art tracking system allowed it to quick gain a competitive advantage. For years, no one could match FedEx. Most of its competitors went out of business, while a few, like Airborne Express, managed to survive by serving specific market niches.
Although UPS initiated an overnight air delivery service of its own in 1988, FedEx remained the leader that business segment until 1999 when UPS announced two major IT innovations. By 2000, UPS’s overnight business was growing at a rate of 8 percent, compared to FedEx’s 3.6% growth rate. It appears that major changes in the industry lie ahead as UPS contains to grow and smaller companies, such as Airborne Express, come under increased pressure.
What is FedEx’s business-level strategy?
Fed Ex successfully implemented a differentiation strategy by being the first in its industry to provide overnight air package delivery service. Its customers were willing to pay the premium price FedEx charged because of its ability to meet an unfulfilled need in an innovative manner.
What is Airborne Express’s business-level strategy?
Airborne Express uses a focused, low-cost strategy. They focus solely upon corporate customers and offer lower prices than Fed Ex.
What strategy did UPS use to compete with FedEx?
UPS used related diversification. They were already leaders in package delivery by ground. In 1988, they expanded their business by offering an overnight air delivery service also.
Which company do you think will be the market leader in the next five years?
Student responses to this question will vary.
Case Synopsis: Sorry, Steve: Here’s Why It Won’t Work
Apple Computer’s CEO Steve Jobs is trying to create a more pleasant environment for buying his computers. For many consumers purchasing a computer is now seen as a worse experience than buying a car, according to Jobs. Therefore, Apple plans to open 110 swanky new retail stores to convince would-be buyers of the Mac’s unique advantages. However, most outside strategists believe that Jobs’ strategy is flawed and he has overlooked his company’s fundamental weakness. They feel that the stores are too expensive to build and operate, and that Apple needs to introduce products with broader market appeal.
Why is Steve Jobs opening Apple retail stores? How will this help it build competitive advantage? What is Apple’s business-level strategy?
Jobs realizes that many consumers find the process of purchasing a personal computer distasteful. The new stores are intended to give Apple a competitive advantage by allowing salespeople in the posh stores to convince consumers of the Mac's unique advantages. This is an example of vertical integration (corporate level strategy) and differentiation (business level strategy).
Why does Business Week think these stores will have a problem? Now, search the Internet and find out how well these stores are doing today. Was Business Week correct?
Business Week thinks that Jobs does not understand the true nature of his company’s problem. Jobs thinks that Apple’s small market share stems from consumers’ unpleasant shopping experiences. The article’s author feels that Apple’s problem is that it does not know how to develop a product that appeals to a broad market segment. Outside analysts think that the high cost of building and operating these stories will decimate potential profits. The article’s author thinks that Apple is trying to serve "caviar in a world that seems pretty content with cheese and crackers." You may wish to direct students to Apple’s website at www.apple.com to find out how the company is doing.
Jones, Essentials of Contemporary Management