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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 as both planner and as strategist. It discusses various elements 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.
LEARNING OBJECTIVES
1. Identify the three main steps of the planning process and the relationship between
planning and strategy. (LO1)
2. Describe the different levels and types of planning and how they lead to competitive
advantage. (LO2)
3. Differentiate between the main types of business-level strategy and explain how they
lead to competitive advantage. (LO3)
4. Differentiate between the main types of corporate-level strategies and explain how
they are used to strengthen a company’s business-level strategy and competitive
advantage. (LO4)
MANAGERMENT SNAPSHOT: Different Ways to Compete in the Soft Drink Business
To compete in the soft drink industry, both Pepsi and Coke decided to build global brands by
manufacturing soft-drink concentrate and selling it in a syrup form to bottlers throughout the
world. Pepsi and Coke charge a premium price for the syrup and invest part of the proceeds
into advertising to build and maintain brand awareness. The bottlers, who are responsible for
producing and distributing the cola, must sign an exclusive agreement that prohibits them
from distributing competing brands.
Gerald Pencer, CEO of Cott Corporation, used a different strategy to achieve success in this
intensely competitive market. His company manufactured and bottled a low cost cola and sold
it directly to major retail establishments as a private-label “house-brand”. He initiated his
strategy in Canada and quickly expanded to the U.S. Retailers are attracted to Cott’s brand
because it allows them to make 15 percent more profit than they receive from selling Coke or
Pepsi. Pencer spends no money on advertising and takes advantage of the efficient
distribution systems of national retailers such as Wal-Mart. So successful has Cott been in
capturing the low price end of the market that his product has squeezed the profit margins of
its giant rivals. Pepsi and Coke find it difficult to raise prices and often offer their products at
sale prices, for fear that customers will switch to lower cost private label colas.
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LECTURE OUTLINE
I. PLANNING AND STRATEGY
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 cluster of 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.
The Nature of the Planning Process (LO1)
To perform the planning task, managers:
1. establish and discover when an organization is at the present time’
2. determine where it should be in the future, and
3. decide how to move it forward to rech that future state.
Why Planning Is Important
Planning is the activity of determining 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. Planning is often
difficult because managers must often deal with a complex and uncertain external
environment, incomplete information, and bounded rationality.
Planning is important for four main reasons:
1. It is necessary to give the organization a sense of direction and purpose.
2. It is a useful way of getting managers to participate in decision-making about the
appropriate goals and strategies for an organization.
3. It helps coordinate managers of the different functions and divisions to ensure that
they all are pulling the same direction.
4. A plan can be used as a device for controlling managers within an organization.
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Henri Fayol, the originator of the model of management discussed in Chapter One, 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.
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 or business units that compete in
distinct industries. of the company, usually led by a divisional manager. Each
division or business unit has its own set of divisional managers who control planning
strategy for their particular division of unit.

Each division has its own set of functions or departments, such as manufacturing,
marketing, R&D, human resources, etc.
Levels and Types of Planning (LO2)
 The corporate-level plan contains top management’s decisions pertaining to the
organization’s mission and goals, overall strategy, and structure. Corporate-level
strategy indicates in which industries and national markets an organization intends to
compete and why.

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. Business-level strategy
states the methods a division or business intends to use to compete against its rivals in
an industry.
Time Horizons of Plans
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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. Short-term plans have a horizon of one year or
less.
A corporate-level or business-level plan that extends over five years is typically
treated as a rolling plan, a plan that is updated and amended every year to take
account of changing in the external environment.
Most organizations have an annual planning cycle, linked to their annual financial
budget.
Standing Plans and Single-Use Plans
Standing plans are used in situations in which programmed decision-making is appropriate.
Standing plans include:



Standing operating procedures, which are used when the same situations occur
repeatedly. In such situations, managers develop policies, rules and to control the way
in which employees perform their tasks.
A policy is a general guide to action and a rule is a formal, written guide to action.
A standard operating procedure is a written instruction describing the exact series of
actions that should be followed in a specific situation.
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.
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?
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Establishing Major Goals
Once the business is defined, managers must then establish a set of primary goals to which the
organization is committed. These goals give the company a sense of direction and
commitment. Strategic leadership, the ability of the CEO and top managers to convey a
compelling vision of what they want subordinates to achieve is an important part of the
process.
Goals typically possess the following characteristics:
 They are ambitious, 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

In strategy formulation, managers work to develop the set of strategies that will
allow an organization to accomplish its mission and achieve its goals. It begins with
managers systematically 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.
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Manager as a Person: Douglas Conant Reheats Campbell 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 Campbell’s. To turn the company around,
Douglas Conant, the company’s 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 both strengths and
weaknesses. Strengths included a first rate R & D department and huge economies of scales,
while weaknesses included a conservative, risk adverse culture, outdated machinery, and
employee levels that were too high.
Based on this analysis, Conant and his management team implemented several new strategies
designed to turn around and revitalize the company. By 2004, analysts acknowledged
improvement in Campbell’s performance but additional work was needed because operating
margins were still shrinking. So the decision was made to introduce “low carb” products and
to lower costs by further shrinking company operations. Conant’s goal is to raise profit
margins to the level of his major competitors by 2007.
The Five Forces Model
Michael Porter’s Five Forces Model is another well known tool that helps managers focus on
the most important external environmental forces that are potential threats. They are:
 the level of rivalry among organizations within an industry,
 the potential for entry into a industry,
 the power of suppliers,
 the power of customers,
 and the threat of substitute products.
The term hypercompetition has be coined to describe those industries that are characterized by
permanent, ongoing, intense, competition brought about by advancing technology or changing
customer tastes, fads and fashions.
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IV. FORMULATING BUSINESS LEVEL STRATEGIES (LO3)
Michael Porter also formulated a theory of how managers can select a business-level strategy
to give them a competitive advantage in a particular market or industry. According to Porter,
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. Based upon those choices, one of the four following strategies must be
selected
Low-Cost Strategy
 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 still make a profit.
Differentiation Strategy
 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.
“Stuck in the Middle”
 According to Porter, a company cannot pursue a low-cost and differentiation strategy
at the same time. He refers to managers who have selected between the two as being
“stuck in the middle”. Exceptions to this rule exist.
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.
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V. FORMULATING CORPORATE-LEVEL STRATEGIES (LO4)

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.
Managers of effective organizations actively seek 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 principal corporate-level strategies that managers use are: 1) concentration on a
single industry, 2) vertical integration, 3) diversification and 4) international
expansion. 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 Industry
A corporate-level strategy aimed at concentrating resources in one business or industry is used
by most organizations as they are beginning to grow and develop. Also, concentration on a
single industry can be an appropriate strategy when managers see the need to reduce the size
of their organization, in order to improve performance.
Vertical Integration
Vertical integration is the corporate-level strategy that involves a company expanding its
business operations either backward into a new industry that produces inputs for the
company’s products (backward vertical integration) or forward into a new industry that uses,
distributes, or sells the company’s products (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.

Some companies have exited the components industry, thus vertically disintegrating,
by outsourcing the production of component parts to other companies.
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Diversification

Diversification is the strategy of expanding operations into a new business or industry
and producing new goods or services. There are two main types of diversification:
related and unrelated.
Related Diversification

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.
Unrelated Diversification
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.

Too much diversification can cause managers to lose control of their
organization’s core business, according to research.
International Expansion
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.
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
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.

Both strategies have their advantages and disadvantages. The major advantage of a
global strategy is the significant cost savings associated with not having to customize
products and marketing approaches to differing national conditions. Its disadvantage is
that by ignoring national differences, managers may leave themselves vulnerable to
local competitors that do differentiate their products.

The advantages and disadvantages of a multidomestic strategy are the opposite of
those of a global strategy.
Choosing a Way to Expand Internationally
A more competitive global environment has proven to be both an opportunity and threat to
organizations. Before setting up foreign operations, managers must analyze the forces in the
environment of a particular country and choose the best method to expand and respond to
those forces in the most appropriate way.
There are four basic ways of operating in the global environment:

Importing and Exporting: This method is least complex, has fewer risks, and has been
made easier by the Internet.

Licensing and Franchising: 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. 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. Primarily manufacturers pursue licensing, whereas franchising is used
primarily by service organizations.

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 and risks of starting a new venture in a foreign company. 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. Risk is reduced and a capital
investment is generally involved.
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
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 investments. This method is much more
expensive than others but also offers the highest potential returns.
VI. SUMMARY AND REVIEW
LECTURE ENHANCERS
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
Weeks 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 a 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 .
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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 fastgrowing 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.
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Lecture Enhancer 6.3
SCENARIO PLANNING
Consider the horrors of 9/11 and the anthrax scares that followed, the Enron scandal, and the
economic jitters caused by heightened tensions in the Middle East. Each of these occurrences
has contributed significantly to the turbulence of the current business environment. If
scenario planning was unable to help managers foresee and prepare for these specific
developments, does that mean that it should be discredited as a managerial activity? Not if
you understand what scenario planning is designed to do, believes Paul Schoemaker, a
research director at the University of Pennsylvania’s Wharton School. He says scenario
planning was never intended to be substitute for crisis planning. It is, in fact, the opposite of a
one-track preparation for a single event. If a company is using scenario planning to prepare
for specific crises, they are missing the point. The purpose of scenario panning is to broaden
the array of possible future paths that are being contemplated by an organization. Those future
paths can hold either opportunities or threats. If a company sees that they are on a different
path that the one they expected to be one, scenario planning provides the option to switch.
Below are a few examples of companies that have engaged in scenario planning. Past events
have taught them to prepare for the future by envisioning a variety of paths that may need to
be traveled, given the uncertainty in which we all live.
WHAT IF your risk profile shifts dramatically? U.S. insurers rethought risk-sharing in the
wake of 1992's Hurricane Andrew, which caused a then-record $16.8 billion in losses.
Primary insurers (think Allstate) began to share risk more broadly among themselves and sell
off more to reinsurers (think Lloyds of London), which provide surplus coverage for major
losses. These insurers upgraded their computer models to predict payouts and avoid
overextending themselves. As a result, the insurance industry expects to fare better today even
though the damages from future attacks could easily surpass those of Hurricane Andrew.
WHAT IF demand suddenly falls off? How can a company quickly find allies who could help
it consolidate the industry and save jobs? Arrow Electronics (Melville, N.Y.), a distributor of
electronic components and computer products, faced just such a dilemma when computer
sales flattened in 1985. Arrow, the industry's scrappy No. 2 player, was able to acquire the
No. 3 player. This swift move catapulted Arrow to the No.1 position, which it still holds.
Chairman Stephen Kaufman says his company's outward focus has enabled it to react more
quickly than its competitors. Companies today should take a cue from Arrow reviewing their
competitive landscape and thinking through merger scenarios.
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WHAT IF global events disrupt your supply chain? Compare General Motors' plight in the
days after September 11th to Dell's. GM had to close down factories in Ontario due to parts
delays at the Canadian border. Dell, which has built one of the world's best supply chain
networks, chartered an airliner to fly parts from Taiwan to its Texas factory, ran factories day
and night, and converted three 18-wheel trucks into mobile technology and support facilities
in order to supply 24,000 computers to New York City and Washington, D.C.
WHAT IF prices drop precipitously? The high-cost producer sets the price during boom
times, and most competitors make money. In difficult times, the low-cost producer sets the
price, thereby controlling the level of competitors' profit margins. Intel has cut
prices on its microprocessors by 35%. Dell halved its prices and still makes money—not so
for some of its competitors. The speed of the economy's decline underscores the importance
of relative cost position. Therefore, firms must scrutinize their purchasing costs and cycle
times relative to their competitors, detect the inefficient processes, and fix them.
Adapted from “Five Reasons why You Still Need Scenario Planning”, Harvard Management Update, June 2002 and “How
to Think Strategically in a Recession, Harvard Management Update, November 2001
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MANAGEMENT IN ACTION
Notes for Topics for Discussion and Action
Discussion
1.
Describe the three steps of planning. Explain how they are related. (LO1)
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.
2. What is the role of divisional and functional managers in the formulation of strategy?
(LO2)
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.
4. Pick an industry and identify four companies in the industry that pursue one of the four
main business-level strategies. (LO3)
Within the commercial airline industry, American Airlines attempts to differentiate itself by
maintaining a reputation of providing superior service on a national level. Jet Blue pursues a
focused differentiation strategy, since it also attempts to distinguish itself by providing
superior service but only in secondary hubs. Southwest has successfully executed a low cost
strategy for many years. Sprint Airlines also is pursuing a low cost strategy, but like Jet Blue,
is restricted to servicing only secondary hubs.
5. What is the difference between vertical integration and related diversification? (LO4)
Related diversification is a strategy that entails entering a new business or industry with the
intention of creating a competitive advantage by capitalizing on a current strength or core
competency. Related diversification adds values to the company when managers can find
ways for its various divisions or business units to share their valuable skills or resources so
that synergy is created. Vertical integration is a strategy that entails entering a new business
that either produces inputs for the company’s products (backward vertical integration) or
assists in the distribution or selling of the company’s products (forward vertical integration).
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Action
6. Ask a manager about the kinds of planning exercises he or she regularly uses. What are
the purposes of these exercises, and what are their advantages or disadvantages? (LO2)
The text discusses two types of strategy planning, SWOT Analysis and the Five Forces
Model. SWOT analysis is the process by which managers identify organizational strengths
(S), and weaknesses (W), and environmental opportunities (O) and threats (T.) Based
upon the results of this analysis, managers at the different levels of the organization then
select the corporate-, business-, and functional-level strategies to best position an
organization to achieve its mission and goals.
Michael Porter created the Five Force Model to help managers identify forces in the
environment that are potential threats. He identified five principal factors that are major
threats because they affect how much profit organizations competing with the same
industry can expect to make. These five forces include:
1.
the level of rivalry among organizations in an industry
2.
the potential for entry into an industry
3.
the power of the suppliers
4.
the power of the customer
5.
substitute products.
Porter emphasizes that managers should pay particular attention to these forces because
they are the major threats that an organization will encounter and must quickly respond to
in order to perform and generate high profits.
7. Ask a manager to identify the corporate-level, business-level, 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 focuseddifferentiation strategy.
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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.
AACSB standards: 1, 3, 6, 9
NOTES FOR BUILDING MANAGEMENT SKILLS (LO 3, 4)
How to Analyze a Company’s Strategy
(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.)
1.
What is the main industry that the company competes in?
2.
What business-level strategy does the company seem to be pursuing in this
industry? Why?
3.
What corporate level strategies is the company pursuing? Why?
4.
Have there been any major changes in its strategy recently? Why?
AACSB standards: 1, 3, 9, 13
Managing Ethically
1. 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 a 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 and unbalanced situation.
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2. 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.
3. 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.
AACSB standards: 1, 2, 3, 5, 7, 9
NOTES FOR SMALL GROUP BREAKOUT EXERCISE (LO3)
Low Cost or Differentiation?
1. Analyze the pros and cons of each of these alternatives.
A. Option #1: Buy abroad, lower prices, and pursue low cost strategy.
PROS:
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.
CONS:
A great deal of time must first be devoted to research, if this strategy is to be implemented
effectively. We must first identify a 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 maintaining 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.
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Option #2: Differentiate and concentrate on high end of market.
PROS:
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.
CONS:
This strategy is expensive. It will probably require that we increase spending on product
design or R&D to differentiate their product, forcing costs upward as a result. 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 that many of these
boutiques enjoy can be hard to overcome.
Option #3: Pursue a low cost and differentiation strategy.
PROS:
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.
.
CONS:
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-themiddle”.
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.
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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
of 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.
AACSB standards: 1, 3, 9, 13
Notes for Be the Manager (LO2, 3)
Questions:
1. 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 Meijers
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.
2. 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 Market
(www.wholefoods.com) are using a differentiation strategy.
3. What kind of supermarket would do best against the competition? What kind of businesslevel strategy should it pursue?
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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.
AACSB standards: 1, 3, 9, 13
BUSINESS WEEK CASES FOR DISCUSSION
Case Synopsis: Lily’s Labs Go Global
Eli Lily is moving much of its research and development work, including clinical trials, to
China, India, and the former Soviet Bloc because it is cheaper. Lily has found the quality of
the work in those nations to be as good as that in the U.S. or western Europe. Like other drug
makers, Lily is getting squeezed by the rising cost of developing drugs. To address this
problem, the company helped start a lab in Shanghai in 2003 that works exclusively for it and
has a staff of 230 chemists. According to the company’s CEO, “The research is less expensive
per patient outside of the U.S., but at the same high quality. It also helps speed up the
development process. In our business, time is money”. There are concerns that the company’s
experimental drugs could be ripped off in countries where intellectual property isn’t always
respected and counterfeit drugs are common. According to the CEO, this has not been a
problem.
Questions:
1. Why is Lilly moving some of its value-creation operations overseas?
The cost of developing drugs is rising. Lilly has found that it can reduce costs by moving
some of its operations overseas. According to the company’s CEO, research is less expensive
per patient outside of the United States.
2. How is this changing its corporate level strategy?
Lilly has sold its products around the globe for several decades. However, by also moving
some components of its operations abroad, it is expanding the breadth of its global operations.
3. How is this changing its business level strategy?
Moving research activities abroad will help Lilly carve and then strengthen a position for
itself in its industry as a low cost competitor.
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Case Synopsis: Toyota: Way, Way Off-Road
While Detroit carmakers have shed almost all of their non-core business assets, Toyota is
doing the opposite. It owns dozens of businesses that have nothing to do with automobile
manufacturing. Examples of unrelated businesses owned by Toyota include a resort
development company (77% interest), its financial services arm (100% interest), a company
that provides consulting services for hotels, wedding halls, and restaurants (100% interest), a
company that offers support services to medical institutions (51% interest), a roof garden
company (70% interest), and a grower and processor of sweet potatoes (90%interest). Toyota
says it has found many synergies among its unrelated businesses, and when possible, it uses
components and processes developed for auto making in its out businesses.
Questions:
1. In owning these different businesses Toyota is pursuing the three kinds of corporate
level strategies discussed in the chapter. What are the strategies? Why is it pursuing
each of them?
Toyota’s 100% ownership of a financial services company and advertising agency are
examples of forward vertical integration. Its 60% ownership in Panasonic EV Energy, which
develops batteries for hybrids, is an example of backward vertical integration. Its partial
ownership of a roof garden company, a resort development company, and manufacturer of
prefab housing are examples of unrelated diversification.
Toyota, a leader in its industry, saw an opportunity to create additional value by producing
some of its inputs (hybrid batteries for its Prius) as well as the marketing and selling of its
outputs (advertising and financing the sale of its autos.) Toyota realizes that few of its nonauto businesses are huge contributors to its bottom line. The company says the aim of such
sidelines is to use its technology and intellectual assets to enrich society.
2. In what ways could Toyota use its skills to enter new businesses and industries to
create a significant amount of value for the company?
Toyota could consider purchasing a controlling interest in additional companies that provide it
with the inputs needed to manufacture autos (backward vertical integration). Increased control
over such companies might help Toyota drive down costs of some of its component parts,
thereby contributing to value creation. It should also pursue opportunities for related
diversification by entering new businesses that would take advantage of current
manufacturing and/or marketing strengths.
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AACSB standards: 1, 3, 9, 13
Chapter 6 Video Case Teaching Note
Has the U.S. Auto Industry Lost Its Way?
Teaching Objective: Illustrate the difficulty of remaining a strong contender in a highly
competitive industry. Also, illustrate the significance of effective strategic planning.
Video Summary: This video focuses upon General Motors, the tremendous losses it has
sustained, and the impact on various stakeholder groups as the company tries to deal with
those losses. How foreign automakers, especially Toyota, have influenced the industry is
emphasized. The role of the UAW and what U.S. automakers need to do to regain
competitiveness is also explored.
Questions:
1. Why is planning important at American auto manufacturing companies? What role will
planning play in efforts to turn these firms around?
.
Essentially, planning is ascertaining where an organization is at present, determining where it
should be in the future, and then deciding how to move it forward. The absence of a plan
often results in hesitations, false steps, and mistaken changes of direction that can hurt an
organization or even lead to disaster. Planning that emphasizes innovation and keen market
assessment is a critical component of any effort to turn American auto manufacturers around.
2. Could SWOT analysis be used by Ford or GM? How? Should they diversify?
Because SWOT analysis is the first step in strategy formation, both Ford and GM should use
it. Both companies are painfully aware of their weaknesses and threats. Perhaps a SWOT
analysis would help executives focus more closely on strengths and opportunities that could
be further exploited for gain. Because both companies are engaged in a struggle to regain a
position of strength in their existing business and may need to downsize their organizations to
do so, a diversification strategy is inappropriate at the present time. Both Ford and GM should
continue to concentrate on strengthening their core business of automobile manufacturing.
3. Why is it important for the firms to differentiate themselves from competition?
Managers use a differentiation strategy as a means of establishing and maintaining a
competitive advantage. Differentiating their vehicles from those of competitors like Toyota
and Honda could help U.S. automakers regain sales.
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