Chapter 06
Planning, Strategy,
and Competitive
Advantage
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Planning and Strategy
• Planning: Identifying and selecting 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.
• Strategy: A cluster of decisions about what goals to
pursue, what goals to pursue, what actions to take, and
how to use resources to achieve goals
• Mission statement: Broad declaration of an
organization’s purpose that identifies the organization’s
products and customers and distinguishes the
organization from its competitors
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Planning
• 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 importance of the organization’s
products to its employees and customers and
distinguishes the organization from its competitors.
• The second step is formulating strategy
• The third step is implementing strategy.
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Figure 6.1 - Three Steps in Planning
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The Nature of the Planning Process
• To perform the planning task, managers should:
•
Establish and discover where an organization is at
the present time
•
Determine where it should be in the future, its
desired future state
•
Decide how to move it forward to reach that future
state
6-8
Why Planning is Important
• Planning is necessary to give the organization a
sense of direction and purpose
• Planning is a useful way of getting managers to
participate in decision making about the
appropriate goals and strategies for an organization
• A plan helps coordinate managers of the different
functions and divisions of an organization to ensure
that they all pull in the same direction and work to
achieve its desired future state
• A plan can be used as a device for controlling
managers within an organization
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Why Planning is Important
• Henri Fayol said that effective plans should have
four qualities:
• 1. Unity means that at any time only one central
plan is put into operation.
• 2. Continuity means that planning is an ongoing
process.
• 3. Accuracy means that managers should attempt
to collect and use all available information.
• 4. The planning process should have enough
flexibility so that the plans can be altered and
changed if the situation changes.
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Levels and Types of Planning
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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, the CEO, other top managers, and their
support staff determine the organization’s mission and goals,
overall corporate strategy and organizational structure.
• At the business level, the managers of each division create a
business-level plan detailing long-term divisional goals that
will allow the division to meet corporate goals and the
division’s business-level strategy and structure.
• A functional-level plan states the goals that the managers of
each function( Accounting, R&D, Operations, Finance,
Marketing) will pursue to help the division attain its businesslevel goals.
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Levels of Planning at General Electric
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Time Horizons of Plans
• Time horizon: Intended duration of a plan
•
•
•
Long-term plans are usually 5 years or more
Intermediate-term plans are 1 to 5 years
Short-term plans are less than 1 year
• Corporate- or business-level plan that extends over
several years is typically treated as a rolling plan
•
Rolling plan is updated and amended every year to
take account of changing conditions in the external
environment
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Types of Plans
• Standing plans
•
Used in situations when programmed decision
making is appropriate
•
When the same situations occur repeatedly,
managers develop policies, rules, and standard
operating procedures (SOPs)
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Types of Plans
• Single-use plans
•
Developed to handle nonprogrammed decision
making in unusual or one-of-a-kind situations
• Programs: Integrated sets of plans for achieving
certain goals
• Projects: Specific action plans created to complete
various aspects of a program
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Corporate-Level Planning
• Vision
• An inspirational statement of an organization’s
purpose
• Mission
• Overall goal that unifies efforts toward its vision,
stretches and challenges, and possesses a finish
line and time frame. Flows from vision.
• Strategic Plans
• Clarify how the company will serve customers and
position itself against competitors
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Determining the Organization’s
Mission and Goals
• 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
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Three Mission Statements
6-19
Determining the Organization’s Goals
• Once the business is defined(mission statement),
managers must then establish a set of primary goals to
which the organization is committed.
• Establishing major goals
•
•
•
Provides the organization with a sense of direction
Stretches the organization to higher levels of
performance
Goals must be challenging but realistic
• Strategic leadership: Ability of the CEO and top
managers to convey a compelling vision of what they
want the organization to achieve to their subordinates
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*
S.M.A.R.T.
Specific
Measurable
Attainable
Realistic
Timely
2.1
21
*
* Starbucks: “In fiscal 2006, we
* Wrigley: “In 2005, the
plan to open approximately
1,800 net new stores
globally.”
* Walgreen: “Second is to hire a
significant number of people
with disabilities in our South
Carolina distribution center,
scheduled to open in 2007,
and achieve 20% productivity
gains there.”
* UPS: “65% of drivers will
have access to the new
technology (implemented in
2004) by the end of 2005.”
and “In 2005, we will increase
operating profit in each of our
3 key businesses: domestic,
int’l, supply chain.”
company will decrease the
long-term rate of return
assumption for the assets of
its U.S. (pension) plans from
8.75 % to 8.5%.”
* Halliburton: “We estimate that
74% of the backlog existing
on 12/31 will be eliminated the
following fiscal year.”
* Martha Stewart Living
Omnimedia: “In 2004 we will
discontinue the Catalog for
Living and its online product
options, and sell remaining
inventory in early fiscal
2005.”
22
Formulating Strategy
• Development of a set of corporate, business, and
functional strategies that allow an organization to
accomplish its mission and achieve its goals
• SWOT analysis
•
Planning exercise in which managers identify:
• Organizational strengths and weaknesses
• Environmental opportunities and threats
• Based on a SWOT analysis, managers at each
level of the organization identify strategies
that will best position the organization to
achieve its mission and goals.
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Planning and Strategy Formulation
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Levels of Planning
• Corporate-level strategy indicates in which
industries and national markets an organization
intends to compete and why.
• Business-level strategy states the methods a division
or business intends to use to compete against its
rivals in an industry.
• Functional-level strategy is a plan of action to
improve the ability of each of an organization’s
functions to perform its task-specific activities in
ways that add value to an organization’s goods and
services.
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Corporate-Level Strategies
• Grand Strategies
• Growth
• Stability
• Retrenchment
• Portfolio Strategies
• Acquisitions
• Related diversification
• Unrelated diversification
• Concentration on a single business
• Vertical integration
• BCG Matrix
• Global Expansion
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A broad strategic plan used to help an organization achieve its
strategic goals
3.2
Growth
Strategy
focuses on increasing profits,
revenues, market share, or number
of places to do business
Stability
Strategy
focuses on improving the way the
company sells the same products
or services to the same customers
Retrenchment
Strategy
(Recovery)
focuses on turning around very poor
company performance by shrinking
the size or27scope of the business
Corporate-Level Strategies
• Portfolio Strategies(Diversification)
• Acquisitions
• Related diversification
• Unrelated diversification
• Concentration on a single business
• Vertical integration
• BCG Matrix
• Global Expansion
6-28
Diversification
• The strategy of expanding operations into a new business or industry in
order to produce new goods or services There are two main types of
diversification: related and unrelated.
• Related Diversification: It 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.
•
•
a. 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.
b. To pursue related diversification successfully, managers seek new businesses
in which existing skills and resources can be used to create synergies.
• Unrelated Diversification: Managers pursue unrelated diversification when
they establish divisions or buy companies in new industries that are not
related to their current businesses or industries.
•
•
a. By pursuing unrelated diversification, managers can buy a poorly performing
company and use their management skills to turn around its business, thereby
increasing its performance.
b. Unrelated diversification allows managers to engage in portfolio strategy,
which is the practice of apportioning financial resources among divisions to
increase financial returns and spread risks among different businesses.
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Formulating Corporate-Level Strategies
• Concentration on a single industry: Reinvesting a
company’s profits to strengthen its competitive
position in its current industry
• It is an appropriate strategy when managers see
the need to reduce the size of their organizations
to increase performance.
• Vertical integration: Expanding a company’s
operations either backward into a new industry
that produces inputs for its products or forward
into an industry that uses, distributes, or sells its
products
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Corporate-Level Strategies
• 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 of making
and selling them.
• Although vertical integration can increase an
organization’s performance, it can also reduce an
organization’s flexibility to respond to changing
environmental conditions.
• Vertical integration may sometimes reduce a company’s
ability to create value when the environment changes.
Therefore, many companies outsource the production of
component parts to other companies and exit the
components industry–by vertically disintegrating
backwards.
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Stages in a Vertical Value Chain
6-32
Market Growth
*
3.1
High
Question Marks
Stars
Low
Dogs
Cash Cows
Small
Large
Relative Market Share
33
3.1
Stars
companies with a large share
of a fast-growing market
Question
Marks
companies with a small share
of a fast-growing market
Cash
Cows
companies with a large share
of a slow-growing market
Dogs
companies with a small share
of a slow-growing market
34
Market Growth
Company A
High

Question Marks
Stars
Company C
Company B

Company G
Low
Company D
Dogs


Company E
Cash Cows
Company F
Company H

Small
3.1
Large
Relative Market Share
35
Adapted from Exhibit 6.3
*Unrelated diversification does not reduce risk.
*Present performance is used to predict future
performance.
*Cash cows fail to aggressively pursue
opportunities and defense themselves from
threats.
*Being labeled a “cash cow” can hurt employee
morale.
*Companies often overpay to acquire stars.
*Acquiring firms often treat stars as “conquered
foes.”
36
International Expansion
• Basic question
•
What extent do organizations need to customize
products and marketing for different national
conditions?
• Global strategy: Selling the same standardized
product and using the same basic marketing
approach in each national market
•
Ignoring national differences, may leave
organizations vulnerable to local competitors
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International Expansion
• Multi-domestic strategy: Customizing products and
marketing strategies to specific national conditions
•
Significant cost savings associated with not having
to customize products and marketing approaches
•
•
Helps gain local market share
Raises production costs thereby leading to higher
prices
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Figure 6.7 - Four Ways of Expanding
Internationally
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Choosing a Way to Expand Internationally
• Importing and Exporting: A company engaged in exporting
makes products at home and sells them abroad. A company
engaged in importing sells products at home that are made
abroad (products it makes itself or buys from other
companies).
• Licensing and Franchising:
a. In licensing, a company allows a foreign
organization to take charge of both manufacturing and
distributing one or more of its products in the licensee’s
country or region of the world in return for a negotiated fee.
b. In franchising, a company sells to a foreign
organization the rights to use its brand name and operating
know-how in return for a lump sum payment and a share of
the franchiser’s profits.
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Choosing a Way to Expand Internationally
• Strategic Alliances: In a strategic alliance, managers pool
or share their organization’s resources and know-how with
those of a foreign company, and the two organizations share
the rewards or risks of starting a new venture in a foreign
company.
• a. A joint venture is a strategic alliance among two or more
companies that agree to jointly establish and share the
ownership of a new business.
• b. Risk is reduced and a capital investment is generally
involved.
• Wholly Owned Foreign Subsidiaries: When managers
decide to establish a wholly owned foreign subsidiary, they
invest in establishing production operations in a foreign
country, independent of any local direct involvement. This
method is much more expensive than the others but also
offers high potential returns.
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The Five Forces Model
• Michael Porter’s five forces model is another wellknown model that helps managers focus on the
most important competitive forces, or potential
threats, in the external environment.
• They are:
•
•
•
•
•
Level of rivalry among organizations in an industry
Potential for entry into an industry
Power of large suppliers
Power of large customers
Threat of substitute products
6-42
*
* Character of the rivalry is a measure of the intensity of
competitive behavior between companies in an
industry.
* Threat of new entrants is a measure of the degree to
which barriers to entry make it easy or difficult for new
companies to get started in an industry.
* Threat of substitute products or services is a measure
of the ease with which customers can find substitutes
for an industry’s products or services.
* Bargaining power of suppliers is a measure of the
influence that suppliers of parts, materials, and
services to firms in an industry have on the prices of
these inputs.
* Bargaining power of buyers is a measure of the
influence that customers have
on the firm’s prices
43
Formulating Business-Level Strategies
• Porter’s Positioning Strategies
• The aim of positioning strategies is to minimize the
effects of industry competition and build a
sustainable competitive advantage
• Cost Leadership(Low-cost) strategy: Driving the
organization’s total costs down below the total costs of
rivals
• Differentiation strategy: Distinguishing an organization’s
products from the competitors’ products on dimensions
such as product design, quality, or after-sales service
• Focused strategy: Aims to serve the needs of customers
in only one or a few market segments.
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Formulating Business-Level Strategies
• “Stuck in the middle”
•
Attempting to simultaneously pursue both a low
cost strategy and a differentiation strategy
•
Difficult to achieve low cost with the added costs of
differentiation
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Formulating Business-Level Strategies
• Focused low-cost: Serving only one segment of the
overall market and trying to be the lowest cost
organization serving that segment
• Focused differentiation: Serving only one segment
of the overall market and trying to be the most
differentiated organization serving that segment
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