Due to the changing environment and external triggers, contingency planning is necessary. What qualities make a future issue a ?trigger??

Consider you are on the strategic planning team for a soft drink company. Here is your company?s future trigger: ?merger of our two major competitors next year.? Formulate the three-part trigger/contingency pair. Discuss the three guidelines that good contingency plans should follow.

Must be formatted to APA standards and have at least 3 scholarly sources.

See attachments for materials.

Chapter 6 Creating Strategic-Alternative Bundles A group of people sitting on a couch and looking at a woman holding a display. Image Source/SuperStock Learning Objectives By the time you have completed this chapter, you should be able to do the following: Develop strategic issues from having done a full situational analysis. Understand what it means to develop strategic alternatives and why many companies don't do it. Develop strategic alternatives from the list of key strategic issues. Create strategic-alternative bundles that meet certain criteria. Understand why the key strategic issues and bundle elements should match. This chapter shows how to develop a set of key strategic issues that summarize the most critical elements of the entire situation analysis, and from such issues create a small number of viable strategic alternatives, or bundles, for the company to seriously consider. 6.1 Key Strategic Issues Identifying key strategic issues is an act of synthesis, that is, taking what you know about the organization and its changing environment (the situation analysis) and pinpointing the key questions and concerns the organization must address in its strategic plan. Strategic issues derive from both external and internal sources. The former includes the company's industry, competitors, customers, suppliers, opportunities and threats, and other environmental forces. The latter includes key organizational resources, culture, technology, or strategic decisions that the company must address. For example, consider a medium-sized private university based in the United States. Some critical external strategic issues may include the nature of private higher education in the United States; the attitude toward it of the surrounding community; legislation and policy governing higher education; the pool of graduating PhDs, which represents potential faculty; economic forces influencing education in general and private education more specifically; the comparable universities that prospective students consider; and the profile of students the university attracts. Some internal issues may include the size of the university's financial endowment, scholarship monies available, aspects of the university's history and culture, the relationship between faculty and administration, resources available for faculty research and teaching, and technologies available to students and faculty. Together, these strategic issues form the basis for generating the strategic alternatives. Too often, alternatives are generated from only a subset of these categories, which means leaving out a lot of information that is probably known and should be considered. External issues may take the form of a trend, for example, likely increases in the interest rate, price of a critical raw material, or the frequency and severity of terrorist acts. Another form of external issue is an impending event such as legislation that is about to be enacted or a large competitor about to enter the competitive arena, perhaps with strategic consequences for the firm. Internal issues may present as a strategic decision or choice, something that will have a dramatic impact on the firm and the way it does business. For example, a company may need to decide whether to merge or acquire another firm, go public, form strategic alliances, go international, vertically integrate, change its vision and core character, and so on. Even after identifying a strategic issue, determining whether it is really critical is still difficult. It is useful to think of a strategic issue as something that keeps the CEO up at night. Andy Grove is the author of Only the Paranoid Survive and former chairman and CEO of Intel. In the book's preface, Grove describes himself as a worrier who was concerned with everything from manufacturing issues and competition to the ability to attract and maintain talented employees. While such concerns kept him awake at night, he believed strongly in the "value of paranoia." So when reviewing a list of strategic issues, use this imagery as a way of pruning from the list those that do not merit such obsessive attention. Try also looking at a particular strategic issue in relation to others on the list; is it as important or less important? Ultimately, the final decision is subjective; what one person might consider critical another might cross off the list. More to the point, a CEO or top manager should rely on gut instincts when creating the list of strategic issues: What are the real issues, problems, or dilemmas facing the firm (Roberto, 2009)? Case Study Riverbank University We have just described how the list of strategic issues used by an organization to formulate a plan may be either too limiting or too broad and that to inform strategy effectively, the issues must be thoughtfully generated and edited. The following brief case study summarizes how a recently hired university chancellor and her cabinet wrestled with the strategic issues needing to be faced by a small, private liberal arts college in the Northwest United States. (The identity of both the university and the individuals has been masked.) Riverbank University was situated in a metropolitan area with many public and private higher education institutions. It had a long tradition of excellent undergraduate teaching that primarily attracted local and in-state students. Professors were known for the long hours they spent advising students on both course-related and personal issues, and for their strong mentoring skills. Research was not part of the landscape for either professors or students at this undergraduate-only institution. Faculty at Riverdale regularly invited students to their homes for meals and participated in on-campus events that afforded them informal opportunities to meet and get to know students. Most Riverbank faculty had spent their entire careers there, and turnover among professors and administration was very low. In the late 1990s, as Riverbank's board of trustees and administration designed a strategic plan for the new millennium, there was talk about the desire to become a nationally, rather than regionally, known and respected university. Officials reasoned that attracting a more diverse pool of students as well as benefactors would enhance the university's profile and set the stage for continued growth and competitiveness into the 2000s. With this goal in motion, a search ensued for a qualified chancellor (chief academic officer) that had experience in leading the transformation from a regionally to nationally recognized institution and eventually, one was selected. When Dr. Irene Carson arrived on campus to begin assessing the climate and identifying the critical issues at hand, she quickly became overwhelmed with the internal and external factors that both inhibited and encouraged growth. Professor satisfaction and morale were huge issues: Faculty at Riverbank liked things the way they were and had no experience with an "outside" administrator being hired and setting the agenda for them. University relationships with key stakeholdersdonors, board members, and other "friends" of the schoolwere delicate and needed to be carefully managed. The city where the school was located was resistant to growth of the physical size of the university. The structure of the university's academic schools and departments seemed unbalanced and illogical. Many professors were using outdated and outmoded teaching methods. The university offered no online courses in an era when all other schools did. Physical infrastructure, such as technology and lab space, was lacking. Moreover, Dr. Carson knew that universities don't rise to national prominence based on excellent teaching. She knew that she needed the resources to attract some star researchers. So, Dr. Carson set about having strategic conversations with key constituents: members of faculty senate, deans, board members, students, community members, and other university officials. Through these private meetings, informal conversations, and public town hall events, Dr. Carson and her team began to clarify, prune, and prioritize the list of strategic issues into manageable, realistic, and relevant order. This bundle of strategic issues allowed Riverbank to move forward toward its goal of national recognition. First, Dr. Carson identified structural problems and corrected them by moving some academic departments to different schools within the university where they made more sense and stood a better chance of becoming accredited. For example, a School of Performing Arts was created to house theatre and dance, because Riverbank's dance department's primary barrier to national accreditation was the lack of such a school. Next, the chancellor leveraged important and longstanding relationships with key benefactors and the board of trustees to gain commitments toward new facilities that would enhance the university's goal of attracting high-profile, high-achieving research faculty. With these two critical strategic issues covered, the new chancellor and her team then focused on recruiting "stars." Within five years, Riverbank was home to a growing number of graduate programs, a Nobel laureate, numerous prestigious faculty members recruited from well-known research universities, and a student body that, for the first time, represented all 50 states in the United States. All concerned acknowledged that the university's strategy was working. Questions for Critical Thinking and Engagement When you consider Riverbank's history and the case presented, do you believe that Dr. Carson's eventual list of priorities (key strategic issues) was appropriate? Why or why not? (Note that the question uses the term "appropriate" rather than "successful.") Based on your reading and analysis of this brief case, was the list of critical issues thorough enough? Was anything left off the list that should have been there? Without any additional personal knowledge of this institution, continue writing the case study. The case ends on a note of success, but what "fallout" might you expect based on the background you were given? Be as specific as possible. Comment on Dr. Carson's practice of strategic conversations with key constituents. Based on your reading of this chapter to this point and your own experience, did she do the right thing? Why or why not? The strategy development process is not a time to pull punches or shy away from the truth. As Dennis Rheault, former vice president responsible for corporate strategy and development at Motorola, wrote, "The purpose of an effective strategy-development process is not to avoid but to confront uncertainty: to pose the really tough questions that you do not have the answers tothe issues and opportunities that can make or break the business" (Rheault, 2003, p. 33). This is not a time to parrot what the CEO wants to hear. Unless these issues are real and phrased in plain terms, the resulting strategic alternatives that are designed will likely not be in the company's best interest. Having strategic conversations with colleagues or outside experts over the course of a year will help to unearth the real issues that the company must confront. As has been emphasized earlier, this process is most fruitful if it is undertaken on an ongoing basis rather than as an annual exercise. Strategic Conversations Two people standing in an elevator having a discussion. Comstock Images/Stockbyte/Thinkstock One informal strategic planning process involves "HERs"hallways, elevators and restrooms. These informal meetings can be where the most interesting conversations take place. A strategic conversation is a free-ranging discussion on a topic of strategic interest to an organization. Because of its characteristic "no-holds-barred" freedom to say whatever needs to be said, it invariably produces ideas and thinking that are ultimately useful in the strategic-planning process and that might not be captured in any formal process. All major strategic planning, according to Peter Schwartz, cofounder of the Global Business Network, does not, in fact, take place during the strategic-planning process (Abraham, 2003). What goes on in a formal process is almost always a ratification of what has already happened. A strategic conversation is an attempt to understand the real strategic-planning process and often takes place entirely informally. Schwartz's colleagues at Bell South used to call it the HERs processhallways, elevators, and restrooms because that's where the most interesting conversations take place. While real decisions got made, real issues got confronted, real knowledge was developed, almost all of it took place in this conversational mode. And that is how real learning also takes place. If you are going to have good strategy, it involves good learninglearning about new realities, new facts, new competition, new opportunities, new directionsand challenging old knowledge. Simply writing a strategic plan as an act of listing a set of new objectives for the coming year as if nothing had changed is pointless. The problem is that if everything has changed and you need to come up with a plan, how are you going to learn about those changes? Furthermore, again paraphrasing Schwartz, it is one thing to do this for an individual, but how do you get a group of decision makers, who almost always have to act together, to acquire that knowledge and to develop and implement strategic plans? He maintains that the only way you learn together is through conversations (Abraham, 2003). Whether formal or informal, a strategic conversation is the learning vehicle through which the group adjusts to a new worldview to enable strategic plans to be developed and implemented. The steps in the process often follow this sequence: shared conversations, shared learning, change one's mental models, then develop better strategic plans. Tony Manning echoes Schwartz in endorsing the value of informal dialogue: Strategic conversation is far more than just an occasional practice that can be adopted or abandoned at will: it is without doubt the central and most important executive tool. . . . What senior managers talk aboutclearly, passionately, and consistentlytells me what they pay attention to and how sure they are of what they must do. (Manning, 2002) The viewpoint of most strategic analyses is assumed to be that of the CEO or leader of the organization and may include the top-management team. When examined from the viewpoint of a board of directors, other variables could be added to the list of strategic issues, such as whether to go public, and even whether it is time to replace the CEO. Management team brainstorming. SOMOS/SuperStock When considering strategic issues, lists of 12 items or more should be reduced to 8-10 items by the CEO and/or the top management team. There is one final check on whether you are dealing with the proper set of strategic issues. Because they constitute the critical questions and issues a company should address, they should all be taken into account explicitly when forming strategic alternatives. In the event that the alternatives fail to take into account one of the strategic issues, it could mean that either (a) the strategic alternatives have not been properly formulated and should be further modified to take it into account, or (b) the issue in question is not as important as was initially assumed, and thus could be deleted. While it is possible that a firm could have any number of strategic issues at a given point, the larger the number of issues proposed, the higher the chances are that some of them are not as critical as others. Long lists of over 12 items should be pruned down, eliminating those that are not so critical or combining some of them. If the list cannot be reduced at this stage, another chance to do so will be when the strategic alternatives have been created if it is found that they have still not taken into account every issue. Strategic issues are typically expressed in one of two forms: either as a statement or as a question. For example: Whether the company should acquire XYZ Corporation. Should the company acquire XYZ Corporation? The second is phrased as a question and is the recommended form because, if the outcome is known with certainty"Yes, the company should acquire XYZ Corporation"then the issue is not a strategic issue; it is a decision the company has already taken. It is not sufficient, however, that one simply pose a question on a matter of strategic concern. Consider the following: Should the company try to lower costs? How can the company lower its costs? The strategic issue is not whether to lower costs; the answer to that question is that of course it should. Rather, the strategic issue might be "How can the company lower its costs?" because that answer may be uncertain, so it could be included as a bona fide strategic issue. Thus, one criterion for a strategic issue is that the answer to the issue is uncertain. The way in which that uncertainty is resolved is through the design of strategic alternatives and choosing a preferred one. Given a strategic issue, "Should the company broaden its product line?" one alternative could say, "Broaden it" and another, leave it out altogether (not broaden it). Thus, through deciding which alternative is preferred, the one that is chosen automatically "resolves" the uncertainty inherent in the issue. Discussion Questions Having done a thorough situation analysisboth external and internaldo you agree that it makes sense to synthesize the results? Explain your answer. In your view, would the external analysis previously done be more useful in scenario planning than in forming strategic issues? Why or why not? It's possible that managers don't go through a process of coming up with strategic issues because it involves phrasing questions to which the answers are unclear. Could there be any truth to such a view? Suggest ways of shortening a list of 20 strategic issues to a more manageable number of about 12. 6.2 Strategic Alternatives An ordinary alternative is one of several means by which a goal is attained or a problem solved. A strategic alternative is one of many routes a company might take to gain market advantage, realize its goals, or, if no specific goal has been declared, decide where it might go and what it might accomplish. Notice two things about the definition: (a) The designation "strategic" is necessary because alternatives are fashioned in a competitive environment, where actions and retaliations of competitors must be taken into account; and (b) the alternatives are created at the level of the whole firm and not any one of its functions or units. In addition, they provide choices about marketplace strategy or about configuring the organization, address issues of central importance to the organization, have uncertain outcomes, and require resources to develop before action can be taken (Lyles, 1994). Alternatives are of three general types. "Obvious" alternatives arise from current strategies or simple extrapolations of what the organization is currently doing. For example, utilizing Facebook, Twitter, and a blog to communicate with consumers represents an obvious strategic alternative. "Creative" alternatives take different conceptual approaches than existing strategies do and break away, to some extent, from the assumptions and beliefs underlying current strategies. A training-and-development organization specializing in the creation and facilitation of live, face-to-face, trainer-led instruction might pursue a creative alternative by entering the e-learning market. "Unthinkable" alternatives reflect a radical departure from the organization's historic mindset (Lyles, 1994). For instance, as a result of the organization's organizational culture and values, alcoholic beverages have never been made available for sale within Disney theme parks. The idea that the sale of liquor could enhance profit or attract new customers would represent an unthinkable strategic alternative. As in the Disney example, an unthinkable alternative might be appropriately labeled as such because it violates some demonstrated, effective core value of the organization. However, sometimes alternatives are unthinkable simply because no one before has bothered to break the rules of what is appropriate for how an organization does businesseven when experimenting with such alternatives might be the right move. Typically, such alternatives have little chance of being accepted by management unless arguments for their adoption are persuasive and made by someone who commands respect in the organization. Unthinkable alternatives illuminate the current situation in a radically different light and inspire other managers to propose creative solutions. However, this typology, while insightful, is typically not advocated as a framework to generate alternatives. For some companies, the decision-making about their future may involve tweaking their present strategy slightly. This might be something as simple as adding a distribution channel or starting to advertise on television. Although the company might claim that this represents a change in strategy, it is, in fact, simply a change in implementation. Dutch digital-navigation-equipment developer TomTom recently announced that it would scale back the personal-navigation-device division that had made it famous and shift focus to its built-in automotive-navigation systems. TomTom had consistently lost profit on the small personal-navigation devices since consumers began relying on free or low cost mapping applications on smartphones and tablets. Conversely, financial reports suggested the strategy shift: The built-inautomotive systems is the fastest growing division in the company (TomTom shares, 2011). For other companies, the strategy itself may remain unaltered, but the objectives may change, such as from 10% per year to 15% per year growth in revenues or profits. Companies may mistakenly characterize this as a change in strategy; however, if the basic way in which the company competes has not changed, then this is not a change in strategy. Obstacles to Creating Strategic Alternatives A Pep Boys store. Business Wire via Getty Images Pep Boys, an auto-service firm in Southern California, created a strategic alternative to their business strategy when they decided to start advertising on television. What many companies do when planning ahead, it would appear, involves simpleminded extrapolations of past accomplishments involving no change in strategy, or they make the first change that occurs to them that makes sense at the time. Sometimes it works or works only for a short time, but more often it does not. As nave as this analysis sounds, how else can we account for so many poor decisions made by various companies over the years? Even the best decision made at a given time can lead to a poor result because of unforeseen events and actions. Poor results are notoriously the inevitable byproduct of poor execution, even with an otherwise sound strategy in place. In each of these cases, is the strategy the company chose the best one it could have adopted in the circumstances? The only way to tell, really, is to have analyzed the subset of all plausible alternative strategies and chosen one for very good, defensible reasons. If this is done, then any challenge or question about what else might have been done can be preempted because one can argue convincingly why the chosen strategy is superior or at least preferable to any other that might be proposed. Focus on Perceived Costs Why don't companies develop alternative strategies routinely? Many companies forego developing strategic alternatives because they perceive obstacles, real or imagined. An excuse commonly heard is that it takes a lot of effort and time: "We're in a hurry and can't afford to wait." In fact, to do something well does require time and effort, so claiming to be in a hurry is just a convenient excuse. True, circumstances sometimes demand a quick decision, but even so, making a decision without considering alternatives is foolhardy. Besides, to make any decision at all, one needs at least two alternatives. Another reason offered for not constructing strategic alternatives is that the exercise doesn't guarantee the "right" answer, so it may be a waste of time and resources. It is true that no one can guarantee the correctness of a decision whose consequences play out in the future, but by considering the significant trends and impacts, including the relevant variables, assessing the fit with the company's capabilities and resources, and considering plausible strategic alternatives, the chances of making the "right" decision for the company are substantially enhanced. Only when 3, 5, or even 10 years have passed, can you look back in hindsight and know whether a strategic decision was good or not. Otherwise, one has to make the decision while not knowing how things will actually turn out. All one can do in the circumstances is one's best. But companies that skip the process entirely for lack of certainty do not give themselves a fighting chance to make the best decision they can; they short-change themselves. Focus on the Past A management team brainstorming session. Comstock/Stockbyte/Thinkstock Small groups of managers sometimes brainstorm ideas that later become strategic alternatives. This process must begin with framing a problem and identifying a list of alternatives. Many managers are more comfortable thinking about and analyzing the past than the future. They seem to find nothing wrong about examining past data and then making a decision that will play out in the future. The past is certain; the future is not. In these days of rapid, even discontinuous change, past data are often irrelevant. What we need to examine are trends about everything that is changing and likely future moves of competitors. How are industries changing? What will merging industries become? How will technology affect our lives, what we buy, how we use products, how we think, how we do business? People are less comfortable in the future because they are unable to predict or forecast it, unable to extrapolate, and unused to ambiguity and uncertainty. An oft-repeated joke is that people would rather be certainly wrong than not sure whether they were right. The thought that they might even influence the outcome of future events even escapes them. Many people simply regard the future as something beyond their control. Complacency There are managers who don't take the responsibility for strategic planning seriously enough, or they don't devote enough time to ask themselves really tough questions that might put their companies on a stronger, albeit different course. It is much easier to keep doing what the company has been doing, particularly if the company is performing reasonably well. Setbacks can be blamed on a competitor, an unexpected piece of new legislation, a downturn in the economy, or a rise in supplier prices. True, the unexpected often happens, but in hindsight, many "unexpected' occurrences could have been anticipated and taken into account had strategic planning been properly done. Insufficient Training Many people who don't know how to do strategic planning would rather avoid admitting so to save face and will instead do what they think is strategic planningas they have always done it. This may be a valid reason but, if that is the case, the company is at risk unless and until it has management in place that is trained in strategic planning. While there is no foolproof way of coming up with a good strategy, the process relies to a very large extent on strategic thinking, and the results achieved depend in large part on one's strategic-thinking ability and on experience with and commitment to the approach. Even after a company has decided on a strategy, it must be fully invested in making it succeed. It will require the leaders of the company to provide ideas, motivation, arguments, and skill at implementation that will bring the results desired. So, although it is more convenient to stay in one's comfort zone, it may not be the best way to chart the company's future course. In many companies, staff planners and even some line managers who value the process of strategic planning find only lip service paid to it because of disinterest or a lack of commitment on the part of top management. This might be the product of a tradition or culture of risk avoidance or entrenched and threatened interest groups raising impediments to the process. Finally, top management's reluctance to embrace the process may stem from simple ignorance about what strategic planning really is and is supposed to do. Myopia Companies put a far greater emphasis on short-term financial results than on longer-term strategic performance. While short-term financial performance is important, it should never come at the expense of longer-term performance. CEOs who feel threatened with losing their jobs or whose judgment may be influenced by the value of their stock holdings may tend to focus on the short term. Boards of directors concerned principally with the company's stock price or the company's immediate survival also represent instances where shortterm considerations dominate. In this environment, the company's longterm future and potential are often sacrificed, as when expenditures for R&D, new-product development, advertising, and training programs are slashed to show profits for the quarterly and yearend reports. Clearly, such decisions are suboptimal and not made in the long-term best interests of the company. Such decisions also adversely affect any strategic alternatives the company may consider and the strategic direction the company pursues. Discussion Questions Which of the obstacles to creating viable strategic alternatives are most easily removed? Which ones might be the most difficult to mitigate? Discuss. Think of a personal decision you made for which you actually considered at least one other alternative. Could you have made the decision without considering the alternative? If so, why did you consider the alternative? Was your decision affected by having considered the alternative? If you follow sports, try to imagine your favorite team. As hard as it may be for that team to win games, the real strategic decisions are made away from the arena and probably in the off-season. Which players to trade? Who would improve the team, and could the team acquire that person? How to lower the total payroll and still field a winning team? Describe which people in the organization participate in such strategic decision making and whether in your opinion they go through a systematic process of creating and weighing different alternatives. 6.3 Creating Strategic Alternatives A woman studying multiple charts that are posted on the wall. Blend Images/SuperStock To unlock your imagination and visualize ideal solutions, consider the future needs of your ideal company or industry, the perfect product and packaging, and the ideal service or system for your company. One typical way that strategic planning is conducted is for a small group or team of managers to brainstorm ideas that later become alternatives. Some follow a specific process, some don't. Marjorie Lyles (1994), suggests a process that begins with framing a problem, identifying an initial list of alternatives, extending the list if resources and time permit, then narrowing the list through a process of evaluation and consolidation. However, who is to say that the resulting list contains good rather than mediocre or unimaginative alternatives? Clearly, a worthwhile strategy cannot come from poorly conceived alternatives. Lyles specifies certain criteria as to what makes a list of alternatives useful: The variety of alternatives Differences among them compared to the present situation The costs and difficulties of implementation; if they are all too easy to implement, the organization is not stretching itself or being ambitious enough The degree to which they challenge existing goals, aspirations, long-held assumptions, and beliefs (Lyles, 1994) Edward de Bono (1992) makes the distinction between choosing from alternatives that already exist, such as ties in a closet or menu choices at a restaurant, and alternatives that do not exist and need to be found. In the latter case, one cannot suggest just any alternative and have that alternative make sense. It has to be related to a reference point. For example, what alternatives are there to achieving this purpose or carrying out this function? To help in coming up with alternatives, de Bono suggests thinking of groups, resemblances, similarities, or concepts. For example, as an alternative to an orange, do you search for other citrus fruit, domestic fruit, refreshing beverages, or colors? His technique of lateral thinking is directly concerned with changing concepts and perceptions, especially when used to come up with alternatives in solving problems (de Bono, 1992). It is a systematic way of generating new ideas and new concepts. Besides leading to a defensible strategy, coming up with suitable strategic alternatives is an excellent opportunity to explore whether the organization should be heading in another direction or doing business a different way. Of course, companies that have been operating in a certain way for years experiencing satisfactory results are not inclined to change their way of doing business, because there is no perceived need to do so. One overlooked reason for complacency is that it is almost impossible even to think about doing business in a different way or heading in a different direction when you are an intrinsic part of the organization and have become used to doing things the way you do. In fact, this is an ideal, if somewhat counterintuitive, time to explore other options. Many companies fall into the mindset of "If it ain't broke, don't fix it," and they are difficult to persuade otherwise. They address the issue only when their strategy falters, or when competitors overtake them, or some other threat looms, by which time it's often too late. Opportunities go unrecognized because they are seldom sought or considered, which is yet another reason to be doing strategic thinking all the time. In cases like this, the organization may well benefit from an outside facilitator and specific exercises to stimulate creativity. James Bandrowski offers one of the most powerful techniques for using creative imagination to find alternatives or, more accurately, breakthroughs (Bandrowski, 1990). He suggests visualizing the ideal solution and then "filling in the feasibility" afterwards, that is, figuring out how to achieve that ideal solution (Figure 6.1). The advantages include coming up with something radical, leapfrogging the competition instead of just catching up, getting ready for tomorrow's markets, and injecting new life into a possibly complacent and mentally tired organization. Figure 6.1: The creative leap This figure shows how to create an ideal situation by solving a problem backwards, which is known as "The Creative Leap." Starting with the Current Situation, the process leaps over blocks to the "Ideal Solution." Then the diagram continues through the posed Problems, and eventually arrives at the Improved Situation. The Current Situation progresses through the Strategic Blocks and arrives at the Improved Solution. Rather than just blindly searching for ideal solutions, Bandrowski offers the following suggestions for making a creative leap, all of which will improve your ability to think strategically and supplement the ideas discussed in Chapter 3: A Hyundai car being displayed. Spencer Platt/Getty Images Hyundai's cars were once considered inferior products until the company retooled its strategic intent and upgraded the quality of its cars. It paid off with increasing market share. Year 2020Pick a date in the future such as the year 2020. Call it "Challenge 2020," a technique employed by 3M. Unlock your imagination and visualize what your industry, products, services, markets, and so on will be like then. Bandrowski says, "The future will be invented by those who see it today." Ideal companyWhat would the ideal company look like? Who is the best competitor in the industry? What do you most covet in this competitor? What company would you most like to acquire and why? Bandrowski quotes Lee Iacocca's description of an ideal automobile company: "It would combine German engineering, Japanese production efficiency, and American marketing." Ideal industryReconceptualize your entire industry. How could it become more profitable? How could technology revitalize it? Would it make sense for it to merge with another industry? How could you tilt the playing field in your favor? Sweeping solutionStart with a blank canvas and try to find a total solution, rather than trying to improve various components such as production, marketing, and distribution. Is there a completely different way of doing business that is better? Perfect productWhat ideal products could be provided to either existing or new customers, assuming no fiscal or technical constraints? Customers should be included in this fantasy exploration; in fact, how might customers be persuaded to help co-create value? One place to start might be to list or collect data about all the shortcomings of existing products. Perfect packageHow could packaging most benefit the product? Could it make the product easier to use, last longer, more convenient, more transportable, and the like? Could it be combined with the product or even eliminated? Ideal serviceAsk what customer needs are directly or even indirectly related to the product the customer buys. Any time you can make your product easier to use, save your customer money or time, or increase your customer's sales, it may provide an opportunity to improve your service to that customer. Ideal informationWhat information must you have to win? What don't you know that is hampering your efforts or causing you to be uncompetitive? Include information also about trends and the future. Rank the list in terms of importance to the company, not in terms of what is possible or what costs the least. Ideal systemFocus on new ways of increasing throughput, reducing costs, reducing cycle time, or bringing new products to market faster. This is an area in which business-process reengineering traditionally takes place. But what do you do for an encore after your reengineering has taken place? Discussion Questions De Bono talked about alternatives to an orange being other citrus fruit, domestic fruit, refreshing beverages, or colors. How would you apply this kind of lateral thinking to the problem of how customers buy? What unusual alternatives might this suggest for a company? Which of Bandrowski's suggestions for brainstorming strategic alternatives appeals to you most and why? Which ones would you as a student find most difficult to do? Give your reasons. Companies are often stymied in pursuing different optionseven what they feel they need to do because of some perceived insurmountable obstacle ("just can't be done"). Do you believe that trying to focus on a desirable end-state (taking a "creative leap") and working backward would help managers? If so, what would be most difficult about persuading them to do this? 6.4 Creating Strategic-Alternative Bundles The process proposed here starts with the list of key strategic issues discussed in the previous section. Because these strategic issues represent the most pressing and important problems and issues facing the organization, any subsequent plan or strategy that is developed should address all of them. So, starting with that list, create two to four alternatives that meet certain criteria. Most organizations manage to come up with three; identifying more than four is extremely difficult. You must be wondering, "Surely one can come up with many more than four?" Read on, these are not "ordinary" alternatives. Because of the large number of possible strategies available, my students have always found it extremely difficult to create good strategic alternatives other than the obvious "safe" ones. Consider for a moment the full range of strategies discussed in Section 3.2, which are organizationwide "master" or "grand" strategies, and do not include functional or operational strategies, classified as programs in this book. An organization could choose a particular combination of strategies to adopt, but in order to show that it is the best choice at the time, it would have to compare it to all other combinations of strategies, a Herculean and impractical task. It took several years to make the conceptual leap and ask, "What if there were only a small number, say two to four choices, available? And what if they constituted "either/or" choices such as choosing A or B or C, rather than saying that A + B together was better than A alone, or A + B was better than C + D? As the technique took shape, it seemed to make more and more sense, but making it practical proved to be elusive for a while. What also became clear was that these alternatives did not consist solely of strategies but rather "bundles" that comprise strategies, strategic intent, core competence, programs (which are an operational component of a strategy), financing method, geographic scope, and any other element that would help define and clarify a future course of action to an observer. The bundles would be derived in large part from the key strategic issues that, in turn, were derived from a comprehensive situation analysis of the external and internal environments. This sequence of dependencies gives the method a logic that is easy to grasp and learn. As we shall see later, these bundles are one step away from being business models. That is why creating more than a few is extraordinarily difficultcompanies are hard pressed to come up with one alternative business model, let alone up to four. Strategic Intent Most well-managed companies try to achieve an overall purpose and vision. The strategies it chooses have to be aligned with this purpose and vision. So what is strategic intent? Strategic intent is the market position and market share that a company sets as its goals. Strategic intent is, of course, related to the strategies the firm has decided to pursue. Market position is the position in an industry that a company occupies ranked by market share; the market leader is #1, followed by #2, #3, and so on. It is a given in any industry that the #2 company ranked by market share has a strategic intent of overtaking the leader and becoming #1. Likewise #3 sets a goal of becoming #2. In practice this may take some years depending on the industry, relative market shares, and other factors. However, when a company is ranked #23 in market share, it doesn't set a goal of becoming #22, because at that level, it doesn't even know it's #23. In many industries, market shares are not monitored or known. In such cases, the strategic intent is expressed in terms of either increasing or maintaining market share. What exactly is involved in gaining market share? Figure 6.2 shows a hypothetical industry in which sales are growing at a constant 7% per year. For simplicity this is assumed to grow in a straight line with no seasonal variation. In order to gain market share, a company would have to grow at a rate higher than 7% per year (as Company X in the figure) and at an equal rate to maintain market share. And even though a company in this industry might be growing at 5% per year (Company Y in the figure), it would actually be losing market share. Figure 6.2: Gaining, maintaining, and losing market share This figure shows what it means to be involved in a market share, and where a company will fall on the graph when analyzing their sales ($, X axis) and time (Y axis). In this diagram, there is a hypothetical industry in which sales are growing at a constant 7% per year. In order to gain market share, a company would have to grow at a rate higher than 7% per year (labeled as Company X in the figure) and at an equal rate to maintain market share. Though the company in this industry might be growing at 5%/yr (labeled as Company Y in the figure), it would actually be losing market share. Google's Chrome browser represents a contemporary example of strategy driving market-share gain. Poised to overtake both Firefox and Internet Explorer, Chrome is a byproduct of Google's strategy to draw people into the Internet, then search the Web using Google, thus engaging with the company's profitable advertising system. Chrome offers Internet surfers a simple, clean interface with Google's online empire. Chrome keeps users focused on Google's products including cloud applications (Google Docs, for example) and other offerings (such as Google maps). The marketing strategy (and dollars) behind this push is resulting in the growth of Chrome's market share while Firefox and Explorer remain more static. Again, strategic intent and strategy have to be aligned. If pursuing a particular strategy results in the company just keeping up with industry growth, then it cannot "overtake" a competitor in terms of market position, and it cannot increase market share. Major Programs For purposes of developing a bundle, only the new major programs or operational tasks called for by the strategies in the bundle need be identified. Later, during operational planning, which precedes implementation, the programs and objectives are fleshed out by every operating unit and department in the company. Programs in every alternative bundle can and should include successful and needed programs that the company is currently implementing, usually by inserting a catchall like "continue current programs." Without doing this, the implication is to stop doing everything the company is currently doing in favor of only what is in the bundle, clearly an unrealistic situation. In addition, the company may have to initiate new programs called for by the strategy. Programs implemented the very next year are often called tactics. Every strategy implies a set of programs, shown in general form in Table 6.1. Table 6.1: Program components of common strategies Product development Market expansion Differentiation R&D programs Market research research Acquisition Turnaround Define criteria Control cash Diversification Choose industry Engineering design Hire sales force Search broker lists Develop concept Meet with creditors Develop prototypes Train sales staff Analyze candidates company Invest capital Talk to major customers Testing Mount ad campaign campaign Conduct due diligence Divest assets Quality program Secure distribution channels objectives PR campaign Get financing Consolidate Invest capital Negotiate deal Reduce staff Form new strategy Raise price Redesign product Market Set criteria Acquire Develop ad Negotiate Other common programs include hiring a new CEO or vice president, seeking a strategic alliance with an external organization such as an international distributor, installing an integrated accounting system, or improving product quality. Remember that key programs are already included in the chosen strategicalternative bundle. Bundles should also describe in specific terms the method by which the strategies and associated activities would be financed. An organization can derive funds from three sources: Cashincluding actual cash and assets that can quickly generate cash such as marketable securities, disposing of excess inventories, factoring accounts receivable (i.e., selling them at a discount to a factoring firm for ready cash), or selling assets no longer needed. Taking on debt or additional debtsuch as extending existing lines of credit from banks or certain suppliers (paying late), taking on additional long-term debt, or in more dire circumstances, trying to get customers to prepay for goods not yet received. Getting an infusion of equity capitalsuch as issuing new stock if a public company, or finding an investor. Notice that these sources of funds are available to the firm in cash. To fund anything it does in the future, it needs cash, either what it has or can secure through a loan or equity investment. As previously discussed, a business cannot, for example, spend "retained earnings." It is useful to think of funds available to the business as being of two kinds. The first is baseline funds that are needed to support the firm's current business and ongoing operations, that is, pay current operating expenses, maintain adequate working capital, and maintain current plant and equipment. The second is "strategic" funds that could be invested in new strategic initiatives, that is, purchase assets such as facilities, equipment, and inventory, increase working capital, increase R&D or marketing/promotion expenses, or acquire another company (Rowe, 1987). Increasing market share usually requires strategic funds, while maintaining market share needs only baseline funds. Firms are in serious trouble when they do not even have the level of baseline funds they need to maintain current operations. Discussion Questions Does trying to achieve a strategic intent complicate what a company is trying to do or does it help? Isn't trying to achieve a vision, strategy, and objectives enough? Explain your answer. Increasing or maintaining market share applies only to the industry in which the company competes. What happens when it enters another industry or the boundaries of the current industry change? Discuss developing a strategic intent for a company with markets in several different countries. When one talks about one or two companies in an industry gaining market share over time, must others in the industry lose market share? Is it a zero-sum game? In developing alternative bundles and, naturally, the winning bundle, one has to include not only the strategy that sets each bundle apart but also the major programs needed to implement the strategy. Are such programs enough to do detailed operational planning later, or should more detail be added at this stage? Judging from Table 6.1, coming up with major programs seems straightforward. Would you agree? Or does it require substantial real-world experience? Do you think that knowledge of the major programs in a bundle affects the decision as to which bundle to choose as "best"? Explain your answer. Carmike Cinemas, Inc. A small-town movie theater. Millennium Images/SuperStock If Carmike was to go national as part of its alternative-strategy bundle, it would consider acquiring smalltown theaters starting in the Southeast, then Midwest, then the Southwest and West. The chapter concludes with a case study on Carmike Cinemas, Inc., a movie-theater chain in the Southeast United States in the mid-'80s, which forms a perfect vehicle for illustrating how bundles are formed from key strategic issues and how the strategic issues are modified later to match the bundle elements. In 1986, Carmike Cinemas was the fifth largest movie-theater chain in the United States and the largest in the Southeast region. Carmike was being run confidently and entrepreneurially by CEO Mike Patrick, and he believed that Carmike was not only a strong competitor but also smarter than most of the others. Revenues and NIAT were growing at an average 15.3% per year and 50.2% per year respectively between 1982 and 1985. In 1986, a year in which the major movie studios produced fewer commercially successful pictures, revenues and NIAT dropped 11.6% and 44.4% respectively. Its debt/equity ratio in 1986 was 1.66, down from 6.66 in 1983 when it acquired another movie theater chain principally through debt. The company was well managed and growing aggressively through acquiring failed theater chains throughout the Southeast, staying mainly in small towns where often it would be the only theater; in effect, these small towns represented blue oceans. Like other chains at that time, it was rapidly multiplexing, that is, converting single-screen theaters into multiscreen theaters (Taylor, 1996). Some strategic issues arising from a situation analysis include the following initial list. Should Carmike: Stay regional or expand nationally? How fast and where should it grow? ("Should Carmike grow?" is not an issue as its recent history suggested strong growth, and the CEO's style and characteristics lean toward aggressive growth.) Increase its debt or go public to secure additional capital? Invest in screen/projection/sound technology? Upgrade the quality and amenities of its theaters? Experiment with serving hot food and coffees in its theaters? Sell memorabilia associated with the movies it shows? Show foreign, classic, cult, or other types of movies? Get into domestic or foreign distribution? Stay in small towns or expand into urban areas and cities? Continue to grow through acquisition? If in doubt as to whether or not to include something as a strategic issue, go ahead and include it. Err on the side of having too many strategic issues. Later in the process, you will come to realize which of them are real issues and which are not important enough, so you can then delete them. With experience, you will be able to gauge which strategic issues are meaningful and find yourself adding very few that are later deleted. The process is iterative. After much trial and error (adding, moving, erasing, changing items in each bundle), you can arrive at a set of strategic alternatives; at least two are required, otherwise there can be no decision. Creating two is not difficultthe strategy the company is currently pursuing and a different or potentially better alternative; creating three takes substantially more effort and thought, and four is extremely difficult. The reason is that these are not just strategic alternatives, but rather different business models with alternative visions (Collis & Rukstad, 2008). Echoing Lyle's list, the best set of strategic alternatives should meet six criteria: Be mutually exclusivethe bundles must be either/or choices. Contain significant varietythat is, show that some creative and daring thinking has been done and are not so close to what the firm is doing now, unless one of the bundles embodies the current strategy or the status quo. (Despite Lyle's criterion of variety, using a status quo alternative is quite understandable if the company is currently performing very well.) Be feasiblegiven the circumstances, resources, and capabilities of the firm. Would all lead to successeven though the firm might end up in a very different place with each alternative. Challenge the organization's existing goals, aspirations, long-held assumptions, and beliefsto improve its performance, competitive position, value proposition, and economic value. Have addressed all the strategic issues. Table 6.2 presents three "bundles" for Carmike Cinemas as an illustration. Giving each bundle a label helps distinguish it from the others and underscores how they are mutually exclusive. The first check is for mutual exclusivitydoing any one means not being able to do the others. Although components of one alternative might also be part of another one, the criterion refers to the whole alternative and not just particular components. The check shows the three bundles to be mutually exclusive. However, if it were to reveal that the bundles were not mutually exclusive, and if there were general agreement on that point, then the bundles would have to be reconfigured. Only when the resulting bundles meet all the criteria and do not change any more is this part of the process complete. Do they contain sufficient variety? Because of the subjectivity involved, the question is hard to answer. Imagine a continuum with no variety at one end (same strategy in every bundle, distinguished only by different rates of growth) and bundles quite unlike anything the company is doing at the other. The criterion of variety forces a search for strategies the company may not even be contemplating, while going out too far on a limb probably means the company is unable to implement it. So requisite variety is somewhere on the continuum and should be a balance between trying to be different and yet reasonable. Table 6.2: Alternative strategy bundles for Carmike Cinemas (1986) Bundle Element 1. Go national 2. Stay regional 3. Go international Strategic intent Target #4 ranking near-term and #1 ranking nationally eventually Maintain #5 ranking nationally but continue to dominate the Southeast region Maintain #1 ranking regionally and become a major player internationally Strategies Market expansion Market expansion and differentiation D/E comparison Increase D/E ratio Lower D/E ratio Contrasting purposes recognition Strive for market share Strive for profitability International expansion Maintain D/E ratio Strive for international Different acquisition programs Look for acquisitions in small towns first in the Northeast, then Midwest, then Southwest and West Look for acquisitions in small towns primarily in Florida but also in other Southeast and Southern states Look for acquisitions in United Kingdom and Australia, Canada, European countires (in large cities), and also in the Southeast United States (small towns) Whether to go public Do not go public unless a very large acquisition is contemplated Do not go public Go public to finance international acquisitions Other programs Develop a cost-effective national marketing campaign Experiment with serving hot foods and coffee, and selling movie memorabilia in selected theatres Set up a matrix organizational structure to manage the international company Facility programs 1/5 of all theatres Maintain quality of theatres Maintain quality of theatres Continue to do what the company is doing programs Continue current programs Upgrade facilities and technology of the worst Continue current programs Continue current How to finance Finance through debt and cash Finance through cash and some debt through cash, debt, and proceeds from IPO Finance Are the bundles feasible? Could the company actually implement each one were it to be accepted? People in the company would be in the best position to gauge feasibility, while those analyzing a company they are unfamiliar with have to go with their best educated guess. Would the bundles lead to success? While "success" means different things to different people and companies, assume for the moment that it means becoming a stronger competitor and realizing a strategic intent. We are not concerned yet with organizational objectives. Some firms set objectives first and then find a strategy to meet them. The process described here does it the other way around for good reasons that will soon become clear. Do the bundles challenge the organization's existing goals, aspirations, long-held assumptions, and beliefs? The value of this criterion becomes clear in the case of companies that have been in a rut for a few years and have a culture that is content with "satisficing" and the status quo. However, for companies striving to become a stronger competitor, the alternative bundles it chooses should all meet this criterion. Put another way, if the existing goals, aspirations, and beliefs are challenging to begin with, then the bundles don't have to challenge them. A man sitting on the floor in front of rows of light bulbs. Flirt/SuperStock You must involve key "idea people" in implementing your situational analysis. Your alternatives should challenge existing goals, aspirations, old assumptions, and beliefs. When analyzing a company with which you are unfamiliar, it is important to juxtapose mentally each bundle with the situation analysis and determine whether the bundle is something that the company would implement, is capable of implementing, and would benefit from if implemented. This is why the key people who would be involved in implementing the strategy must be part of this process. They will have a better feel for whether a particular bundle is feasible and what it might take to implement it. At this point it would be premature to argue which is the best bundle; the analysis is simply to determine whether each bundle meets the six previously stated criteria. If not, then the process of tweaking them should continue until they do. So often, particularly in cases when an executive or analyst comes up with one strong strategic bundle, coming up with a second or even third one is very difficult. The strong proposal has preoccupied the person who has chosen it and any other alternative gets added as an afterthought. A common pitfall is deciding on the best strategy before coming up with alternatives. Many companies are guilty of doing this when they decide on the strategy that they will pursue without contemplating or contrasting it with other alternatives. Without generating and considering good alternatives, the company has no way of knowing whether the strategy it will pursue is the best under the circumstances. Let's examine for a moment some strategic alternatives that were suggested but later discarded: Vertical integrationNothing in the case information suggests that vertically integrating backward would benefit the company. Movie production and distribution are very different businesses and demand a level of investment and risk that is beyond the capability of the company to bear. Because it is already the "retail" arm of the movie industry, it cannot vertically integrate forward. Strategic alliancesUnfortunately, the case contains no competitive information. This is similar to the situation of a company whose competitors are privately held and about which no information is available. Only managers experienced in the industry and who can obtain information by "picking up the phone" can get around this obstacle. However, two avenues of thought should be pursued: (1) Which of all considered courses of action might benefit more from, or be done better with, a strategic alliance? (2) What kind of strategic alliance might benefit the company? Both considerations are an important part of strategic thinking. DiversificationRelated diversification means getting into another segment of the entertainment industry. Even though the case gives no information about other segments, that does not mean to say that none of them contains an opportunity. (This sort of thinking comes under the heading of "unthinkable" alternatives mentioned previously. However, suggesting a course of action into another segment such as live theater, broadcasting, TV, professional sports, and the like has to be justified and defended and supported with more information and research.) As you can see, coming up with two to four alternative bundles may mean coming up with five or even six, determining whether they are mutually exclusive, plausible, and would lead to success, and deleting those that do not meet the criteria or combining them with others until they do. Carmike executives, with their additional knowledge of their own and related industries, are perhaps the only group that could mine the above four possibilities for yet another viable bundle. It's a creative and time-consuming process, but ultimately rewarding. Discussion Questions What is the difference between a strategic alternative and other kinds of alternative (e.g., considering alternative media for advertising, alternative ERM software)? Picture a health center trying to raise funds for AIDS research. What types of strategic alternatives might such a group consider? With respect to Question 2, is it possible to come up with strategic alternatives without first knowing what key strategic issues the nonprofit faces? Why or why not? The section argued for six criteria that strategic-alternative bundles should meet for them to be worth considering in choosing the best one. What if you, the analyst, couldn't come up with a set that met all six criteria? Would meeting five be acceptable? Four? If you think a fewer number would be acceptable, give your reasons. Imagine developing and completing a criteria matrix. Some of your criteria would be positively and some negatively correlated. What part of rating your bundles on each criterion would you find most difficult to do? Why? What tips could you offer to cope with such a difficulty? 6.5 Closing the Loop with Strategic Issues Richard B. Hare speaking into microphone. Peter Foley/Bloomberg via Getty Images In 2010, Carmike CFO Richard B. Hare announced a global box-office sales increase of 7.6% to a record $29.9 billion in 2009. One last check nee