by Vicki Jayne / business excellence Built to Last How to fill performance gaps How do you build a strong performance ethic into your organisational culture? Vicki Jayne talks to two executives who think they have the answer. T he word "improvement" is right there in the company name - but building that ethic into corporate culture is not just a matter of semantics. For Livestock Improvement Corporation, it's become a way of life. In December, the company finished off a record year for profitability by becoming the only agricultural company in Australasia to reach "silver" status in the international ranking of business excellence. But it wasn't an overnight effort - as chief executive Stuart Gordon explains. "We're very proud of this because we've done something we've been working on for seven years." Back then, the company was casting about for a business tool that could track and measure how well it was living up to its vision of world leadership in pastoral livestock solutions. "We'd always been at the forefront of herd improvement around the world but wanted to put the business itself to the test. A staff member brought up the Baldrige criteria [see "Building excellence"] because it's regarded as the most rigorous system for evaluating performance," says Gordon. "So in 2000 we started using that with the view that, at least, the gains would include improved strategy, business processes and customer service - and the very best would be stepping onto the awards podium with some of the best companies in the world." The company earned a "progress" award in itsfirstyear, moved on to pick up "bronze" two years later and can now rank itself amongst just eight New Zealand organisations that have made the "silver" grade. That pretty much confirms its business processes, strategy and company focus are right up there with the world's best companies, says Gordon. "It really is an excellent system for focusing on key areasforimprovement and measuringprogress-andyou also have the ongoing independent validation from external evaluators. "I mean we can't wait to get the feedback every time we [go for an award] so we can look at what else we can do - what gaps need filling." A biggie was the customer feedback loop, says Gordon. "We had a real gap between people working in thefieldand head office processes right across the company. When someone went to see a customer and there was an enquiry or complaint - it is ensuring that is followed up, that others know of it and can use that information. We really didn't have that happening. "This system helped us focus on the major gap we had there and to close it." That gradually started to happen as people understood the value to the company of recording frontline communications with customers. Stuart Gordon: Absolutely committed to having world"If it's recorded then we can learn class business processes. from it and everyone else who deals with the same customer knows about their special we do for the awards - it's someissues," says Gordon. thing we do as an organisation and you "It takes a long time for people across need to have an absolute commitment over the organisation to accept 'Okay, I've been a long period to achieve that." talking to a customer, now 1 have an acThe improvements are now so engrained tion to do'." in the culture, Gordon reckons they're less The company was quite realistic about dependent on specific champions. what it would be able to achieve in any one "Sure, there always have to be some year, says Gordon. mentors around it - but I believe it will "We bedded changes down so they just just carry on." became part of what we do before moving When the company moved from beon to the next one. So it's not something neath the NZ Dairy Board umbrella in FEBRUARY 2005 Management www.management.co.nz 67 business excellence / BUILDING EXCELLENCE The Business Excellence Awards are run by the New Zealand Business Excellence Foundation which started life as the NZ Quality Foundation in 1992. They are based on the best practice framework developed by US business academic Malcolm Baldrige which is updated yearly by the US Department of Commerce. Businesses are assessed and advised on seven categories: leaderstiip, strategic planning, customer and market focus, measurement, analysis and knowledge management, human resources, process management and business results. NZBEF recognises the standards achieved by organisations by awarding in stepped categories from "progress" for those who've made a good start on the excellence journey through to "bronze", "silver" and "gold". Only two local companies have ever made the gold standard - eight have now earned silver This year NZBEF is streamlining the awards evaluation structure to enable more local businesses to use the Baldrige criteria as a business improvement tool. For further information visit www.mbef.org.nz 2002 and became a user-owned farmer cooperative, it made a commitment to its sharebolders tbat it would exceed expectations - and it's lived up to its word. "We'retalking about climbing up from effectively making $2 million a year to making $10 million and there's no doubt that [Business Excellence] is part of that - it's very mucb part of the culture of the organisation." Fired up about excellence If there were more tire fighters, fewer people would die as a result of fire- right? Well no. A thorough analysis of fire statistics shows 90 percent of deaths happen before the fire service is even notified. "The understanding from that is that if we're serious about saving lives and properties what's needed isn't more fire stations but more community education," says Mike Hall, New Zealand Fire Service national commander and chief executive. He cites the above as an example of bow the service is now driven by a more critical appraisal about how it relates to its clients and what it's doing in the fire safety area. "We've got rid of myth and legend and we're better at analysing the data and using it to drive day-to-day operations. Our targets are now based on a rigorous analysis of facts and data. It makes us more professional and businesslike in what we do." When Hall came from Queensland Fire and Rescue to head this country's national fire service nearly five years ago he also brought experience of how the Baldrige criteria had worked as a business improvement tool there - and found an organisation that was ready to embrace it. "The New Zealand Fire Service had had its difficulties over the years and one of my jobs was to fix those difficulties. I guess I was lucky in that when 1 came here, the organisation was looking for a way forward. There was a realisation that what they'd been doing wasn't really working and people were sensitised to do things in a new way." The fact that the Business Excellence framework has international credentials also helped senior management buy in. "Once we looked at the thing in more detail and saw the workload, it was a bit daunting but there was an understanding we needed some structural skeleton there to work to that would bind the organisation together to move forward in a common direction." One of the challenges, says Hall, was integrating the disparate and geographically scattered functions of what is a pretty complex organisational structure. "There was a lack of tie-in between individual business disciplines and the strategic goals and objectives of the organisation. So we put in strategy integration teams, project review teams and technology integration groups to ensure all tbe disparate parts of the organisation were coordinated." Hall owns to being very "anti-silo" and says these initiatives prompted people to work together in groups. 6 8 www,management.co.nz Management FEBRUARY 2006 "It made them, in a coUegial sense, assess the individual element of the organisation from a joint strategy perspective. That was one of the key effects of adopting the business excellence model." Also important is the fact that NZFS is being benchmarked as a business not as a fire service. "There is some validity to benchmarking against other fire services but there are also some real catches because services can be very different in the way they operate." For instance, it would make no sense to compare New Zealand's nationwide service against a city-based service like Melbourne. "Really in my position as CEO I have to understand that I'm running a business that happens to be providing fire and rescue cover for people in New Zealand - and the way we run the business is generic to any business." The process kicked off seriously about three years ago with the introduction of "Firex 500" - with the target of achieving an excellence rating of 500 points by the end of last year. It achieved that goal with the bestowing of a "progress" award - but its progress is not so much a finish line as a state of being, says Hall. "We set out to improve the business using the structure not to win an award per se and it's important for our people to understand that the drivers we got for our business from this framework stand on their own merit and will continue to function as a tool for ongoing business improvement. "It has certainly focused the whole organisation on doing things more efficiently and that is tied into where we're going and what we want to do. We've got rid of the silos and we've just had the best audit report ever in the organisation this year. So there are spin-offs all round. People now have tangible results that our fire service is being well run to contemporary standards - and that's a much better appreciation of where we're at than was the case six years ago when people were trying to pull it apart." M CHAP TER Strategizing 5 FIGURE 5.1 Great strategies require a clear understanding of the competitive landscape. 2010 Jupiterimages Corporation W H A T ' S I N I T F O R M E ? Reading this chapter will help you do the following: 1. 2. 3. 4. 5. 6. See how strategy ts in the planning-organizing-leading-controlling (P-O-L-C) framework. Better understand how strategies emerge. Understand strategy as trade-os, discipline, and focus. Conduct internal analysis to develop strategy. Conduct external analysis to develop strategy. Formulate organizational and personal strategy with the strategy diamond. Strategic management, strategizing for short, is essentially about choicein terms of what the organization will do and won't do to achieve specic goals and objectives, where such goals and objectives lead to the realization of a stated mission and vision. Strategy is a central part of the planning function in P-O-L-C. Strategy is also about making choices that provide an organization with some measure of competitive advantage or even a sustainable competitive advantage. For the most part, this chapter emphasizes strategy formulation (answers to the \"What should our strategy be?\" question) as opposed to strategy implementation (answers to questions about \"How do we execute a chosen strategy?\"). The central position of strategy is summarized in the following gure. In this chapter, you will learn about strategic management and how it ts in the P-O-L-C framework. You will also learn some of the key internal and external analyses that support the development of good strategies. Finally, you will see how the concept of strategy can be applied to you personally, in addition to professionally. 116 PRINCIPLES OF MANAGEMENT FIGURE 5.2 The P-O-L-C Framework FIGURE 5.3 Where Strategy Fits in \"Planning\" CHAPTER 5 STRATEGIZING 1. CASE IN POINT: FLAT WORLD KNOWLEDGE TRANSFORMS TEXTBOOK INDUSTRY Flat World Knowledge Cofounder, Jeff Shelstad Source: Used by permission from Flat World Knowledge Inc. Two textbook publishing industry veterans, Je Shelstad and Eric Frank, started Flat World Knowledge (FWK), a privately held company, in 2007 to be a new and disruptive model for the college textbook market. Traditional business textbook publishers carry a portfolio of 5 to 10 titles per subject and charge premium prices for new textbooks, an average of $1,000 in textbooks for a college student's rst year, according to a recent General Accounting Oce (GAO) report. FWK's strategy aims to turn the traditional model on its head by providing online textbook access free to students (http://www.atworldknowledge.com). FWK earns revenues by selling students the digital textbooks in alternate formats, print and audio initially, and also by selling highly ecient and mobile study aids. Despite the fact that professors have rated the academic quality of FWK textbooks as equal to or higher than that of textbooks from traditional publishers, the cost to students is a fraction of current market prices due to the eciencies of the FWK business model. Moreover, with FWK's open-source platform, instructors who adopt FWK books for their classes are able to pick and choose the material provided to their students, even if it is from earlier versions of textbooks that have since been revised. Shelstad and Frank founded FWK because they believed that big publishers would continue to experiment and innovate, and enjoy the advantages of scale, capital, content, and brand. But the FWK founders also believed that the pace and nature of change by the big publishers of the textbook industry would remain modest and marginal, held back by an inexible go-to market strategy, with a reexive (and shortsighted) exercise of pricing power, outdated business models, intransigent channel partners, existing contracts, and a fear of price cannibalization, as well as the traditional culture and organizational barriers. To seize this perceived market opportunity, FWK designed a strategy based on publishing textbooks around the three main pillars of books that are (1) free, (2) open, and (3) authored by highly respected authors. Ultimately students (or parents) pay for books. Between a publisher and the student is a gatekeeperthe instructor. The rst step to revenue is to convince the gatekeeper to assign (\"adopt\") an FWK textbook instead of other choices. Only then does FWK establish a relationship with the gatekeeper's students and earn the opportunity to monetize those relationships through the sale of print books, study aids, user-generated content, and corporate sponsorship. FWK's strategy, therefore, aims to provide a compelling value proposition to instructors to maximize adoptions and, thus, student relationships. 117 118 PRINCIPLES OF MANAGEMENT Source: Used by permission from Flat World Knowledge Inc. How is FWK's strategy working so far? Through the start of 2010, the FWK strategy has proven eective. New customers and books come online daily and the growth trends are positive. Its rst term (fall of 2009), FWK had 40,000 students using its textbooks. This has continued to rise. Several new projects are under way in international business, entrepreneurship, legal environment, and mathematical economics. Media attention to the edgling FWK has generally been favorable. Social media experts also gave the company accolades. For example, Chris Anderson devoted a page to the FWK business model in his bestselling book Free. Moreover, early user reviews of the product were also very positive. For instance, an instructor who adopted Principles of Management noted, \"I highly recommend this book as a primary textbook for...business majors. The overall context is quite appropriate and the search capability within the context is useful. I have been quite impressed [with] how they have highlighted the key areas.\" At the same time, opportunities to improve the Web interface still existed, with the same reviewer noting, \"The navigation could be a bit more user friendly, however.\" FWK uses user input like this to better adjust the strategy and delivery of its model. This type of feedback led the FWK design squad to improve its custom Web interface, so that instructors can more easily change the book. Only time will tell if the $11 million invested in FWK by 2010 will result in the establishment of a new titan in textbook publishing or will be an entrepreneurial miss. Case written by Mason Carpenter to accompany Carpenter, M., Bauer, T., & Erdogan, B. (2009). Principles of management (1st ed.). New York: Flat World Knowledge. Based on information from United States Government Accountability Oce. (2005, July). College textbooks: Enhanced oering appear to drive recent price increases (GAO-05-806). Retrieved April 22, 2010, from http://www.gao.gov/cgi-bin/getrpt?GAO-05-806; Flat World Knowledge Web site: http://www.atworldknowledge.com; Community College Open Textbook Collaborative. (2009). Business reviews. Retrieved April 22, 2010, from http://www.collegeopentextbooks.org/reviews/business.html; Personal interviews with Je Shelstad and Eric Frank. D I S C U S S I O N Q U E S T I O N S 1. Planning is a key component to the P-O-L-C framework. What type of planning do you think the founders of Flat World Knowledge engaged in? 2. What competitive advantages does Flat World Knowledge possess? 3. What are Flat World Knowledge's key strengths, weaknesses, opportunities, and threats? 4. How might the extensive textbook industry experience the Flat World Knowledge founders possess help or hinder their strategy formulation and ultimate success or failure? 5. Based on Porter's strategies summarized in the gure below, which type of strategy do you see Flat World Knowledge employing? Support your response. Source: Porter, M. E. (1980). Competitive Strategy. New York: Free Press. CHAPTER 5 STRATEGIZING 119 2. STRATEGIC MANAGEMENT IN THE P-O-L-C FRAMEWORK L E A R N I N G O B J E C T I V E S 1. Be able to dene strategic management. 2. Understand how strategic management ts in the P-O-L-C framework. 3. Broadly identify the inputs for strategy formulation. 2.1 What Is Strategic Management? As you already know, the P-O-L-C framework starts with \"planning.\" You might also know that planning is related to, but not synonymous with, strategic management. Strategic management reects what a rm is doing to achieve its mission and vision, as seen by its achievement of specic goals and objectives. A more formal denition tells us that the strategic management process \"is the process by which a rm manages the formulation and implementation of its strategy.\"[1] The strategic management process is \"the coordinated means by which an organization achieves its goals and objectives.\"[2] Others have described strategy as the pattern of resource allocation choices and organizational arrangements that result from managerial decision making.[3] Planning and strategy formulation sometimes called business planning, or strategic planning, have much in common, since formulation helps determine what the rm should do. Strategy implementation tells managers how they should go about putting the desired strategy into action. The concept of strategy is relevant to all types of organizations, from large, public companies like GE, to religious organizations, to political parties. strategic management What an organization does to achieve its mission and vision. strategic management process A comprehensive and ongoing management process aimed at formulating and implementing eective strategies; it is a way of approaching business opportunities and challenges such that the rm achieves its vision and mission. strategy formulation 2.2 Strategic Management in the P-O-L-C Framework If vision and mission are the heart and soul of planning (in the P-O-L-C framework), then strategy, particularly strategy formulation, would be the brain. The following gure summarizes where strategy formulation (strategizing) and implementation t in the planning and other components of P-O-L-C. We will focus primarily on the strategy formulation aspects of strategic management because implementation is essentially organizing, leading, and controlling P-O-L-C components. Synonymous with business planning and strategic planning. The set of processes involved in creating or determining the strategies of the organization; it focuses on the content of strategies. FIGURE 5.7 Strategizing in P-O-L-C strategy implementation The methods by which strategies are operationalized or executed within the organization; it focuses on the processes through which strategies are achieved. You see that planning starts with vision and mission and concludes with setting goals and objectives. In-between is the critical role played by strategy. Specically, a strategy captures and communicates how vision and mission will be achieved and which goals and objectives show that the organization is on the right path to achieving them. 120 corporate strategy The set of strategic alternatives that an organization chooses from as it manages its operations simultaneously across several industries and several markets. PRINCIPLES OF MANAGEMENT At this point, even in terms of strategy formulation, there are two aspects of strategizing that you should recognize. The rst, corporate strategy answers strategy questions related to \"What business or businesses should we be in?\" and \"How does our business X help us compete in business Y, and vice versa?\" In many ways, corporate strategy considers an organization to be a portfolio of businesses, resources, capabilities, or activities. You are probably familiar with McDonald's, for instance, and their ubiquitous golden arches fast-food outlets. However, you may be less likely to know that McDonald's owned the slightly upscale burrito vendor Chipotle for several years as well.[4] The McDonald's corporate strategy helped its managers evaluate and answer questions about whether it made sense for McDonald's set of businesses to include dierent restaurants such as McDonald's and Chipotle. While other food-service companies have multiple outletsYUM! Brands, for example, owns A&W, Taco Bell, Pizza Hut, Long John Silver's, and Kentucky Fried ChickenMcDonald's determined that one brand (McDonald's) was a better strategy for it in the future, and sold o Chipotle in 2006. The following gure provides a graphic guide to this kind of planning. FIGURE 5.8 Corporate and Business Strategy synergy The interaction of two or more activities, creating a combined eect greater than the sum of their individual eorts. diversication The number of dierent businesses that an organization is engaged in and the extent to which these businesses are related to one another. The logic behind corporate strategy is one of synergy and diversication. That is, synergies arise when each of YUM! Brands food outlets does better because they have common ownership and can share valuable inputs into their businesses. Specically, synergy exists when the interaction of two or more activities (such as those in a business) create a combined eect greater than the sum of their individual eects. The idea is that the combination of certain businesses is stronger than they would be individually because they either do things more cheaply or of higher quality as a result of their coordination under a common owner. Diversication in contrast, is where an organization participates in multiple businesses that are in some way distinct from each other, as Taco Bell is from Pizza Hut, for instance. Just as with a portfolio of stock, the purpose of diversication is to spread out risk and opportunities over a larger set of businesses. Some may be high growth, some slow growth or declining; some may perform worse during recessions, while others perform better. Sometimes the businesses can be very dierent, such as when fashion sunglass maker Maui Jim diversied into property and casualty insurance through its merger with RLI Corporation.[5] Perhaps more than a coincidence, RLI was founded some 60 years earlier as Replacement Lens International (later changed to its abbreviation, RLI, in line with its broader insurance products oerings), with the primary business of providing insurance for replacement contact lenses. There are three major diversication strategies: (1) concentric diversication, where the new business produces products that are technically similar to the company's current product but that appeal to a new consumer group; (2) horizontal diversication, where the new business produces products that are totally unrelated to the company's current product but that appeal to the same consumer group; and (3) conglomerate diversication, where the new business produces products that are totally unrelated to the company's current product and that appeal to an entirely new consumer group. CHAPTER 5 STRATEGIZING Whereas corporate strategy looks at an organization as a portfolio of things, business strategy focuses on how a given business needs to compete to be eective. Again, all organizations need strategies to survive and thrive. A neighborhood church, for instance, probably wants to serve existing members, build new membership, and, at the same time, raise surplus monies to help it with outreach activities. Its strategy would answer questions surrounding the accomplishment of these key objectives. In a forprot company such as McDonald's, its business strategy would help it keep existing customers, grow its business by moving into new markets and taking customers from competitors like Taco Bell and Burger King, and do all this at a prot level demanded by the stock market. 121 business strategy The set of strategic alternatives that an organization chooses from as it conducts business in a particular industry or market. 2.3 Strategic Inputs So what are the inputs into strategizing? At the most basic level, you will need to gather information SWOT analysis and conduct analysis about the internal characteristics of the organization and the external market An assessment of strengths, conditions. This means an internal appraisal and an external appraisal. On the internal side, you will weaknesses, opportunities, want to gain a sense of the organization's strengths and weaknesses; on the external side, you will want and threats. to develop some sense of the organization's opportunities and threats. Together, these four inputs into strategizing are often called SWOT analysis which stands for strengths, weaknesses, opportunities, and threats (see the SWOT analysis gure). It does not matter if you start this appraisal process internally or externally, but you will quickly see that the two need to mesh eventually. At the very least, the strategy should leverage strengths to take advantage of opportunities and mitigate threats, while the downside consequences of weaknesses are minimized or managed. SWOT was developed by Ken Andrews in the early 1970s.[6] An assessment of strengths and weaknesses occurs as a part of organizational analysis; that is, it is an FIGURE 5.9 SWOT Analysis audit of the company's internal workings, which are relatively easier to control than outside factors. Conversely, examining opportunities and threats is a part of environmental analysisthe company must look outside of the organization to determine opportunities and threats, over which it has lesser control. Andrews's original conception of the strategy model that preceded the SWOT asked four basic questions about a company and its environment: (1) What can we do? (2) What do we want to do? (3) What might we do? and (4) What do others expect us to do? Strengths and Weaknesses A good starting point for strategizing is an assessment of what an organization does well and what it does less well. In general good strategies take advantage of strengths and minimize the disadvantages posed by any weaknesses. Michael Jordan, for instance, is an excellent all-around athlete; he excels in baseball and golf, but his athletic skills show best in basketball. As with Jordan, when you can identify certain strengths that set an organization well apart from actual and potential competitors, that strength is considered a source of competitive advantage. The hardest thing for an organization to do is to develop its competitive advantage into a sustainable competitive advantage where the organization's strengths cannot be easily duplicated or imitated by other rms, nor made redundant or less valuable by changes in the external environment. Opportunities and Threats On the basis of what you just learned about competitive advantage and sustainable competitive advantage, you can see why some understanding of the external environment is a critical input into strategy. Opportunities assess the external attractive factors that represent the reason for a business to exist and prosper. These are external to the business. What opportunities exist in its market, or in the environment, from which managers might hope the organization will benet? Threats include factors beyond your control that could place the strategy, or the business, at risk. These are also externalmanagers typically have no control over them, but may benet by having contingency plans to address them if they should occur. sustainable competitive advantage A competitive advantage that will exist after all attempts at strategic imitation have ceased. 122 PRINCIPLES OF MANAGEMENT SWOT Analysis of Flat World Knowledge Flat World Knowledge is a new college textbook company (and the publisher of this POM text!) that operates with the tagline vision of \"Free textbooks. Online. Anytime. Anywhere. Anyone.\"[7] Strengths 1. 2. 3. 4. Great management team. Great college business textbooks. Experienced author pool. Proprietary technology. Weaknesses 1. Limited number of books. 2. New technology. 3. Relatively small rm size. Opportunities 1. 2. 3. 4. External pressure to lower higher education costs, including textbook prices. Internet savvy students and professors. Professors and students largely displeased with current textbook model. Technology allows textbook customization. Threats 1. Strong competitors. 2. Competitors are few, very large, and global. 3. Substitute technologies exist. In a nutshell, SWOT analysis helps you identify strategic alternatives that address the following questions: 1. Strengths and Opportunities (SO)How can you use your strengths to take advantage of the opportunities? 2. Strengths and Threats (ST)How can you take advantage of your strengths to avoid real and potential threats? 3. Weaknesses and Opportunities (WO)How can you use your opportunities to overcome the weaknesses you are experiencing? 4. Weaknesses and Threats (WT)How can you minimize your weaknesses and avoid threats? Before wrapping up this section, let's look at a few of the external and internal analysis tools that might help you conduct a SWOT analysis. These tools are covered in greater detail toward the end of the chapter. Internal Analysis Tools Internal analysis tools help you identify an organization's strengths and weaknesses. The two tools that we identify here, and develop later in the chapter, are the value chain and VRIO tools. The value chain asks you, in eect, to take the organization apart and identify the important constituent parts. Sometimes these parts take the form of functions, like marketing or manufacturing. For instance, Disney is really good at developing and making money from its branded products, such as Cinderella or Pirates of the Caribbean. This is a marketing function (it is also a design function, which is another Disney strength). Value chain functions are also called capabilities. This is where VRIO comes in. VRIO stands for valuable, rare, inimitable, and organizationbasically, the VRIO framework suggests that a capability, or a resource, such as a patent or great location, is likely to yield a competitive advantage to an organization when it can be shown that it is valuable, rare, dicult to imitate, and supported by the organization (and, yes, this is the same organization that you nd in P-O-L-C). Essentially, where the value chain might suggest internal areas of strength, VRIO helps you understand whether those strengths will give it a competitive advantage. Going back to our Disney example, for instance, strong marketing and design capabilities are valuable, rare, and very dicult to imitate, and Disney is organized to take full advantage of them. CHAPTER 5 STRATEGIZING 123 External Analysis Tools While there are probably hundreds of dierent ways for you to study an organizations' external environment, the two primary tools are PESTEL and industry analysis. PESTEL, as you probably guessed, is simply an acronym. It stands for political, economic, sociocultural, technological, environmental, and legal environments. Simply, the PESTEL framework directs you to collect information about, and analyze, each environmental dimension to identify the broad range of threats and opportunities facing the organization. Industry analysis, in contrast, asks you to map out the dierent relationships that the organization might have with suppliers, customers, and competitors. Whereas PESTEL provides you with a good sense of the broader macro-environment, industry analysis should tell you about the organization's competitive environment and the key industry-level factors that seem to inuence performance. K E Y T A K E A W A Y Strategy formulation is an essential component of planning; it forms the bridge that enables the organization to progress from vision and mission to goals and objectives. In terms of the P-O-L-C framework, strategy formulation is the P (planning) and strategy implementation is realized by O-L-C. Corporate strategy helps to answer questions about which businesses to compete in, while business strategy helps to answer questions about how to compete. The best strategies are based on a thorough SWOT analysisthat is, a strategy that capitalizes on an organization's strengths, weaknesses, opportunities, and threats. E X E R C I S E S 1. 2. 3. 4. 5. What is the dierence between strategy formulation and strategy implementation? What is the dierence between business strategy and corporate strategy? What are some of the forms of diversication, and what do they mean? What do you learn from a SWOT analysis? In SWOT analysis, what are some of the tools you might use to understand the internal environment (identify strengths and weaknesses)? 6. In SWOT analysis, what are some of the tools you might use to understand the external environment (identify opportunities and threats)? 3. HOW DO STRATEGIES EMERGE? L E A R N I N G O B J E C T I V E S 1. Understand the dierence between intended and realized strategy. 2. Understand how strategy is made. 3. Understand the need for a balance between strategic design and emergence. How do the strategies we see in organizations come into being? In this section, you will learn about intended and realized strategies. The section concludes with discussion of how strategies are made. 124 FIGURE 5.10 Strategy provides managers with an organizational compass and a road map for the future. 2010 Jupiterimages Corporation intended strategy The strategy conceived of by managers and the impetus for initial attempts at strategy implementation. PRINCIPLES OF MANAGEMENT 3.1 Intended and Realized Strategies The best-laid plans of mice and men often go awry. - Robert Burns, \"To a Mouse,\" 1785 This quote from English poet Robert Burns is especially applicable to strategy. While we have been discussing strategy and strategizing as if they were the outcome of a rational, predictable, analytical process, your own experience should tell you that a ne plan does not guarantee a ne outcome. Many things can happen between the development of the plan and its realization, including (but not limited to): (1) the plan is poorly constructed, (2) competitors undermine the advantages envisioned by the plan, or (3) the plan was good but poorly executed. You can probably imagine a number of other factors that might undermine a strategic plan and the results that follow. How organizations make strategy has emerged as an area of intense debate within the strategy eld. Henry Mintzberg and his colleagues at McGill University distinguish intended, deliberate, realized, and emergent strategies.[8] These four dierent aspects of strategy are summarized in the following gure. Intended strategy is strategy as conceived by the top management team. Even here, rationality is limited and the intended strategy is the result of a process of negotiation, bargaining, and compromise, involving many individuals and groups within the organization. However, realized strategythe actual strategy that is implementedis only partly related to that which was intended (Mintzberg suggests only 10%-30% of intended strategy is realized). FIGURE 5.11 Intended, Deliberate, Realized, and Emergent Strategies realized strategy The actual strategy that is implemented and comes to fruition as a consequence of implementation and other internal and external factors. emergent strategy A pattern of action that develops over time in an organization in the absence of vision, mission, and goals, or despite missions and goals, or in addition to what was conceived of in the intended and deliberate strategies. deliberate strategy A plan of action, owing from the intended strategy, that an organization chooses and implements to support its vision, mission, and goals. The primary determinant of realized strategy is what Mintzberg terms emergent strategythe decisions that emerge from the complex processes in which individual managers interpret the intended strategy and adapt to changing external circumstances.[9] Thus, the realized strategy is a consequence of deliberate and emerging factors. Analysis of Honda's successful entry into the U.S. motorcycle market has provided a battleground for the debate between those who view strategy making as primarily a rational, analytical process of deliberate planning (the design school) and those that envisage strategy as emerging from a complex process of organizational decision making (the emergence or learning school).[10] Although the debate between the two schools continues,[11] we hope that it is apparent to you that the central issue is not \"Which school is right?\" but \"How can the two views complement one another to give us a richer understanding of strategy making?\" Let us explore these complementarities in relation to the factual question of how strategies are made and the normative question of how strategies should be made. CHAPTER 5 STRATEGIZING 125 3.2 The Making of Strategy How Is Strategy Made? Robert Grant, author of Contemporary Strategy Analysis, shares his view of how strategy is made as follows.[12] For most organizations, strategy making combines design and emergence. The deliberate design of strategy (through formal processes such as board meetings and strategic planning) has been characterized as a primarily top-down process. Emergence has been viewed as the result of multiple decisions at many levels, particularly within middle management, and has been viewed as a bottom-up process. These processes may interact in interesting ways. At Intel, the key historic decision to abandon memory chips and concentrate on microprocessors was the result of a host of decentralized decisions taken at divisional and plant level that were subsequently acknowledged by top management and promulgated as strategy.[13] In practice, both design and emergence occur at all levels of the organization. The strategic planning systems of large companies involve top management passing directives and guidelines down the organization and the businesses passing their draft plans up to corporate. Similarly, emergence occurs throughout the organizationopportunism by CEOs is probably the single most important reason why realized strategies deviate from intended strategies. What we can say for sure is that the role of emergence relative to design increases as the business environment becomes increasingly volatile and unpredictable. Organizations that inhabit relatively stable environmentsthe Roman Catholic Church and national postal servicescan plan their strategies in some detail. Organizations whose environments cannot be forecast with any degree of certaintya gang of car thieves or a construction company located in the Gaza Stripcan establish only a few strategic principles and guidelines; the rest must emerge as circumstances unfold. What's the Best Way to Make Strategy? Mintzberg's advocacy of strategy making as an iterative process involving experimentation and feedback is not necessarily an argument against the rational, systematic design of strategy. The critical issues are, rst, determining the balance of design and emergence and, second, how to guide the process of emergence. The strategic planning systems of most companies involve a combination of design and emergence. Thus, headquarters sets guidelines in the form of vision and mission statements, business principles, performance targets, and capital expenditure budgets. However, within the strategic plans that are decided, divisional and business unit managers have considerable freedom to adjust, adapt, and experiment. K E Y T A K E A W A Y You learned about the processes surrounding strategy development. Specically, you saw the dierence between intended and realized strategy, where intended strategy is essentially the desired strategy, and realized strategy is what is actually put in place. You also learned how strategy is ultimately made. Ultimately, the best strategies come about when managers are able to balance the needs for design (planning) with being exible enough to capitalize on the benets of emergence. E X E R C I S E S 1. 2. 3. 4. 5. 6. What is an intended strategy? What is a realized strategy? Why is it important to understand the dierence between intended and realized strategies? Why is there not a perfect match-up between realized and intended strategies? What might interfere with the realization of an intended strategy? How might you manage the balance between design and emergence strategizing processes in an organization? 126 PRINCIPLES OF MANAGEMENT 4. STRATEGY AS TRADE-OFFS, DISCIPLINE, AND FOCUS L E A R N I N G O B J E C T I V E S 1. Understand the nature of strategic focus. 2. Strategy as trade-os (Porter). 3. Strategy as discipline (Treacy and Wiersema). FIGURE 5.12 Strategy is ultimately about making choices and making trade-os among alternatives. This section helps you understand that a strategy provides a company with focus. Strategy is ultimately about choicewhat the organization does and does not do. As we've seen, vision and mission provide a good sense of direction for the organization, but they are not meant to serve as, or take the place of, the actual strategy. Strategy is about choices, and that eventually means making trade-os such that the strategy and the rm are distinctive in the eyes of stakeholders. In this section, you will learn about strategic focusthat is, how trade-os are reconciledas well as two frameworks for thinking about what such focus might entail. 4.1 What Is Strategic Focus? 2010 Jupiterimages Corporation strategic focus When an organization is clear about its mission and vision and has a coherent, well-articulated strategy for achieving those. While there are dierent schools of thought about how strategy comes about, researchers generally agree that strategic focus is a common characteristic across successful organizations. Strategic focus is seen when an organization is very clear about its mission and vision and has a coherent, well-articulated strategy for achieving those. When a once high-ying rm encounters performance problems, it is not uncommon to hear business analysts say that the rm's managers have lost focus on the customers or markets where they were once highly successful. For instance, Dell Computer's strategy is highly focused around the ecient sale and manufacture of computers and computer peripheral devices. However, during the mid-2000s, Dell started branching out into other products such as digital cameras, DVD players, and at-screen televisions. As a result, it lost focus on its core sales and manufacturing business, and its performance agged. As recently as mid-2008, however, Dell has realized a tremendous turnaround: \"We are executing on all points of our strategy to drive growth in every product category and in every part of the world,\" said a press release from Michael Dell, chairman and CEO. \"These results are early signs of our progress against our ve strategic priorities. Through a continued focus, we expect to continue growing faster than the industry and increase our revenue, protability and cash ow for greater shareholder value.\"[14] Dell provides an excellent example of what is meant by strategic focus. This spirit of focus is echoed in the following two parts of this section where we introduce you to the complementary notions of strategy as trade-os and strategy as discipline. 4.2 Strategy as Trade-Offs Three of the most widely read books on competitive analysis in the 1980s were Michael Porter's Competitive Strategy, Competitive Advantage, and Competitive Advantage of Nations.[15] In his various books, Porter developed three generic strategies that, he argues, can be used singly or in combination to create a defendable position and to outperform competitors, whether they are within an industry or across nations. The strategies are (1) overall cost leadership, (2) dierentiation, and (3) focus on a particular market niche. CHAPTER 5 STRATEGIZING 127 Cost Leadership, Differentiation, and Scope These strategies are termed generic because they can be applied to any size or form of business. We refer to them as trade-o strategies because Porter argues that a rm must choose to embrace one strategy or risk not having a strategy at all. Overall lower cost or cost leadership refers to the strategy where a rm's competitive advantage is based on the bet that it can develop, manufacture, and distribute products more eciently than competitors. Dierentiation refers to the strategy where competitive advantage is based on superior products or service. Superiority arises from factors other than low cost, such as customer service, product quality, or unique style. To put these strategies into context, you might think about Wal-Mart as pursuing a cost-leadership strategy and Harley Davidson as pursuing a dierentiation strategy. Porter suggests that another factor aecting a company's competitive position is its competitive scope. Competitive scope denes the breadth of a company's target market. A company can have a broad (mass market) competitive scope or a narrow (niche market) competitive scope. A rm following the focus strategy concentrates on meeting the specialized needs of its customers. Products and services can be designed to meet the needs of buyers. One approach to focusing is to service either industrial buyers or consumers but not both. Martin-Brower, the third-largest food distributor in the United States, serves only the eight leading fast-food chains. It is the world's largest distributor of products to the world's largest restaurant companyMcDonald's. With its limited customer list, Martin-Brower need only stock a limited product line; its ordering procedures are adjusted to match those of its customers; and its warehouses are located so as to be convenient to customers. Firms using a narrow focus strategy can also tailor advertising and promotional eorts to a particular market niche. Many automobile dealers advertise that they are the largest volume dealer for a specic geographic area. Other car dealers advertise that they have the highest customer satisfaction scores within their dened market or the most awards for their service department. Another dierentiation strategy is to design products specically for a customer. Such customization may range from individually designing a product for a single customer to oering a menu from which customers can select options for the nished product. Tailor-made clothing and custom-built houses include the customer in all aspects of production, from product design to nal acceptance, and involve customer input in all key decisions. However, providing such individualized attention to customers may not be feasible for rms with an industry-wide orientation. At the other end of the customization scale, customers buying a new car, even in the budget price category, can often choose not only the exterior and interior colors but also accessories such as CD players, rooftop racks, and upgraded tires. By positioning itself in either broad scope or narrow scope and a low-cost strategy or dierentiation strategy, an organization will fall into one of the following generic competitive strategies: cost leadership, cost focus, dierentiation, and focused dierentiation. overall cost-leadership strategy A strategy in which an organization attempts to gain a competitive advantage by reducing its costs below the costs of competing rms. dierentiation The strategy where competitive advantage is based on superior products or service. dierentiation strategy A strategy in which an organization seeks to distinguish itself from competitors through the perceived quality of its products or services. focus strategy A strategy in which an organization concentrates on a specic regional market, product line, or group of buyers in combination with its pursuit of either an overall cost leadership or dierentiation strategy. Cost Leadership/Low Cost FIGURE 5.13 Porter's Generic Cost leadership is a low-cost, broad-based market strategy. Firms pursuing this type of Strategies strategy must be particularly ecient in engineering tasks, production operations, and physical distribution. Because these rms focus on a large market, they must also be able to minimize costs in marketing and research and development (R&D). A low-cost leader can gain signicant market share enabling it to procure a more powerful position relative to both suppliers and competitors. This strategy is particularly eective for organizations in industries where there is limited possibility of product dierentiation and where buyers are very price sensitive. Overall cost leadership is not without potential problems. Two or more rms competing for cost leadership may engage in price wars that drive prots to very low levels. Ideally, a rm using a cost-leader strategy will develop an advantage that others cannot easily copy. Cost leaders also must maintain their investment in state-of-the-art equipment or face the possible entry of more cost-eective competitors. Major changes in technology may drastically change production processes so that previous investments in production technology are no longer advantageous. Finally, rms may become so concerned with maintaining low costs that they overlook needed changes in production Source: Porter, M. E. (1980). Competitive Strategy. New York: Free Press. or marketing. The cost-leadership strategy may be more dicult in a dynamic environment because some of the expenses that rms may seek to minimize are research and development costs or marketing research costsexpenses the rm may need to incur to remain competitive. Focused Low-Cost A cost-focus strategy is a low-cost, narrowly focused market strategy. Firms employing this strategy may focus on a particular buyer segment or a particular geographic segment and must locate a niche market that wants or needs an ecient product and is willing to forgo extras to pay a lower price for 128 PRINCIPLES OF MANAGEMENT the product. A company's costs can be reduced by providing little or no service, providing a low-cost method of distribution, or producing a no-frills product. Differentiation A dierentiation strategy involves marketing a unique product to a broad-based market. Because this type of strategy involves a unique product, price is not the signicant factor. In fact, consumers may be willing to pay a high price for a product that they perceive as dierent. The product dierence may be based on product design, method of distribution, or any aspect of the product (other than price) that is signicant to a broad group of consumers. A company choosing this strategy must develop and maintain a product perceived as dierent enough from the competitors' products to warrant the asking price. Several studies have shown that a dierentiation strategy is more likely to generate higher prots than a cost-leadership strategy, because dierentiation creates stronger entry barriers. However, a costleadership strategy is more likely to generate increases in market share. Focused Differentiation A dierentiation-focus strategy is the marketing of a dierentiated product to a narrow market, often involving a unique product and a unique market. This strategy is viable for a company that can convince consumers that its narrow focus allows it to provide better goods and services than its competitors. Dierentiation does not allow a rm to ignore costs; it makes a rm's products less susceptible to cost pressures from competitors because customers see the product as unique and are willing to pay extra to have the product with the desirable features. Dierentiation can be achieved through real product features or through advertising that causes the customer to perceive that the product is unique. Dierentiation may lead to customer brand loyalty and result in reduced price elasticity. Dierentiation may also lead to higher prot margins and reduce the need to be a low-cost producer. Since customers see the product as dierent from competing products and they like the product features, customers are willing to pay a premium for these features. As long as the rm can increase the selling price by more than the marginal cost of adding the features, the prot margin is increased. Firms must be able to charge more for their dierentiated product than it costs them to make it distinct, or else they may be better o making generic, undierentiated products. Firms must remain sensitive to cost dierences. They must carefully monitor the incremental costs of dierentiating their product and make certain the dierence is reected in the price. Firms pursuing a dierentiation strategy are vulnerable to dierent competitive threats than rms pursuing a cost-leader strategy. Customers may sacrice features, service, or image for cost savings. Price-sensitive customers may be willing to forgo desirable features in favor of a less costly alternative. This can be seen in the growth in popularity of store brands and private labels. Often, the same rms that produce name-brand products produce the private-label products. The two products may be physically identical, but stores are able to sell the private-label products for a lower price because very little money was put into advertising to dierentiate the private-label product. Imitation may also reduce the perceived dierences between products when competitors copy product features. Thus, for rms to be able to recover the cost of marketing research or R&D, they may need to add a product feature that is not easily copied by a competitor. A nal risk for rms pursuing a dierentiation strategy is changing consumer tastes. The feature that customers like and nd attractive about a product this year may not make the product popular next year. Changes in customer tastes are especially obvious in the fashion industry. For example, although Ralph Lauren's Polo has been a very successful brand of apparel, some younger consumers have shifted to Tommy Hilger and other youth-oriented brands. For a variety of reasons, including the dierences between intended versus realized strategies discussed in an earlier section, none of these competitive strategies is guaranteed to achieve success. Some companies that have successfully implemented one of Porter's generic strategies have found that they could not sustain the strategy. Several risks associated with these strategies are based on evolved market conditions (buyer perceptions, competitors, etc.). Straddling Positions or Stuck in the Middle? Can forms of competitive advantage be combined? That is, can a rm straddle strategies so that it is simultaneously the low-cost leader and a dierentiator? Porter asserts that a successful strategy requires a rm to stake out a market position aggressively and that dierent strategies involve distinctly dierent approaches to competing and operating the business. Some research suggests that straddling strategies is a recipe for below-average protability compared to the industry. Porter also argues that straddling strategies is an indication that the rm's managers have not made necessary choices about the business and its strategy. A straddling strategy may be especially dangerous for narrow scope rms that have been successful in the past, but then start neglecting their focus. CHAPTER 5 STRATEGIZING An organization pursuing a dierentiation strategy seeks competitive advantage by oering products or services that are unique from those oered by rivals, either through design, brand image, technology, features, or customer service. Alternatively, an organization pursuing a cost-leadership strategy attempts to gain competitive advantage based on being the overall low-cost provider of a product or service. To be \"all things to all people\" can mean becoming \"stuck in the middle\" with no distinct competitive advantage. The dierence between being \"stuck in the middle\" and successfully pursuing combination strategies merits discussion. Although Porter describes the dangers of not being successful in either cost control or dierentiation, some rms have been able to succeed using combination strategies. Research suggests that, in some cases, it is possible to be a cost leader while maintaining a dierentiated product. Southwest Airlines has combined cost-cutting measures with dierentiation. The company has been able to reduce costs by not assigning seating and by eliminating meals on its planes. It has also been able to promote in its advertising that its fares are so low that checked bags y free, in contrast to the fees that competitors such as American and United charge for checked luggage. Southwest's consistent low-fare strategy has attracted a signicant number of passengers, allowing the airline to succeed. Another rm that has pursued an eective combination strategy is Nike. You may think that Nike has always been highly successful, but it has actually weathered some pretty aggressive competitive assaults. For instance, when customer preferences moved to wide-legged jeans and cargo pants, Nike's market share slipped. Competitors such as Adidas oered less expensive shoes and undercut Nike's price. Nike's stock price dropped in 1998 to half its 1997 high. However, Nike achieved a turnaround by cutting costs and developing new, distinctive products. Nike reduced costs by cutting some of its endorsements. Company research suggested the endorsement by the Italian soccer team, for example, was not achieving the desired results. Michael Jordan and a few other \"big name\" endorsers were retained while others, such as the Italian soccer team, were eliminated, resulting in savings estimated at over $100 million. Laying o 7% of its 22,000 employees allowed the company to lower costs by another $200 million, and inventory was reduced to save additional money. As a result of these moves, Nike reported a 70% increase in earnings for the rst quarter of 1999 and saw a signicant rebound in its stock price. While cutting costs, the rm also introduced new products designed to dierentiate Nike's products from the competition. Some industry environments may actually call for combination strategies. Trends suggest that executives operating in highly complex environments, such as health care, do not have the luxury of choosing exclusively one strategy over another. The hospital industry may represent such an environment, as hospitals must compete on a variety of fronts. Combination (i.e., more complicated) strategies are both feasible and necessary to compete successfully. For instance, reimbursement to diagnosis-related groups, and the continual lowering of reimbursement ceilings have forced hospitals to compete on the basis of cost. At the same time, many of them jockey for position with dierentiation based on such features as technology and birthing rooms. Thus, many hospitals may need to adopt some form of hybrid strategy to compete successfully.[16] 4.3 Strategy as Discipline While Michael Porter's generic strategies were introduced in the 1980s and still dominate much of the dialogue about strategy and strategizing, a complementary approach was oered more recently by CSC Index consultants Michael Treacy and Fred Wiersema. Their value disciplines model is quite similar to the three generic strategies from Porter (cost leadership, dierentiation, focus). However, there is at least one major dierence. According to the value disciplines model, no discipline may be neglected: threshold levels on the two disciplines that are not selected must be maintained. According to Porter, companies that act like this run a risk of getting \"stuck in the middle.\" In their book, The Discipline of Market Leaders, they oered four rules that competing companies must obey with regard to strategy formulation:[17] 1. Provide the best oer in the marketplace, by excelling in one specic dimension of value. Market leaders rst develop a value proposition, one that is compelling and unmatched. 2. Maintain threshold standards on other dimensions of value. You can't allow performance in other dimensions to slip so much that it impairs the attractiveness of your company's unmatched value. 3. Dominate your market by improving the value year after year. When a company focuses all its assets, energies, and attention on delivering and improving one type of customer value, it can nearly always deliver better performance in that dimension than another company that divides its attention among more than one. 4. Build a well-tuned operating model dedicated to delivering unmatched value. In a competitive marketplace, the customer value must be improved. This is the imperative of the market leader. The operating model is the key to raising and resetting customer expectation. 129 130 PRINCIPLES OF MANAGEMENT What Are Value Disciplines? Treacy and Wiersema describe three generic value disciplines: operational excellence, product leadership, and customer intimacy. As with Porter's perspective about the importance of making trade-os, any company must choose one of these value disciplines and consistently and vigorously act on it, as indicated by the four rules mentioned earlier. Operational Excellence The case study that their book uses to illustrate the \"operational excellence\" value discipline is AT&T's experience in introducing the Universal Card, a combined long-distance calling card and general purpose credit card, featuring low annual fees and customer-friendly service. Key characteristics of the strategy are superb operations and execution, often by providing a reasonable quality at a very low price, and task-oriented vision toward personnel. The focus is on eciency, streamlined operations, supply chain management, no frills, and volume. Most large international corporations are operating according to this discipline. Measuring systems are important, as is extremely limited variation in product assortment. Product Leadership Firms that do this strategy well are very strong in innovation and brand marketing. Organization leaders demonstrate a recognition that the company's current success and future prospects lie in its talented product design people and those who support them. The company operates in dynamic markets. The focus is on development, innovation, design, time to market, and high margins in a short time frame. Company cultures are exible to encourage innovation. Structure also encourages innovation through small ad hoc working groups, an \"experimentation is good\" mind-set, and compensation systems that reward success. Intel, the leading computer chip company, is a great example of a rm pursuing a successful product leadership strategy. Customer Intimacy Companies pursuing this strategy excel in customer attention and customer service. They tailor their products and services to individual or almost individual customers. There is large variation in product assortment. The focus is on: customer relationship management (CRM), deliver products and services on time and above customer expectations, lifetime value concepts, reliability, being close to the customer. Decision authority is given to employees who are close to the customer. The operating principles of this value discipline include having a full range of services available to serve customers upon demandthis may involve running what the authors call a \"hollow company,\" where a variety of goods or services are available quickly through contract arrangements, rather than the supplier business having everything in stock all the time. The recent partnership between Airborne Express, IBM, and Xerox is a great example of an eective customer intimacy strategy. Airborne also provides centralized control to IBM and Xerox part-distribution networks. Airborne provides Xerox and IBM with a central source of shipment data and performance metrics. The air-express carrier also manages a single, same-day delivery contract for both companies. In addition, Airborne now examines same-day or special-delivery requirements and recommends a