For some years now, you've owned a small specialty bookshop in a college town. You sell some textbooks but mainly cater to a broader customer base. Your store always stocks the latest fiction, nonfiction, and children's books. Recent numbers show a steep decline in sales, including of books that would normally be considered best sellers. You suspect this is because of the growing popularity of e-books and e-readers such as the Amazon Kindle and Barnes & Noble Nook. Some of your friends say it's time to close up because your market is dying.

126 CHAPTER 7 Strategy and Strategic Management Strategy Is a Comprehensive Plan for Achieving Competitive Advantage. A strategy is a comprehensive A strategy is a comprehensive action plan for allocating resources to accomplish long-term plan for allocating resources to goals. And importantly, strategy focuses attention on the competitive environment. Whether for achieve long-term organization a government, a large or small business, a nonprofit, or a personal career, a strategy represents goals. a "best guess" about what to do to be successful in the face of rivalry and changing conditions. Leaders crafting strategies in any industry should remember past lessons. There was a time when Henry Ford could say: "The customer can have any color he wants as long as it's black." Those days are gone and customers are taking charge. A senior executive once described this as the "difference between a bus which follows a set route and a taxi which goes where customers tell it to go." Now, we're in an app-driven business world and riding with Uber drivers on journeys mapped by GPS and constantly adjusted by real-time traffic updates. Strategies are journeys too, and those who create them in today's world have to move fast to keep up. Mission is an organization's A good strategy provides a plan for allocating and using resources with a consistent reason for existence. sense of mission-an organization's reason for existence. It also keeps the focus on strategic intent-an organization's aspirational goal.' At the nonprofit Khan Academy, for example, Strategic intent is an the mission is to provide "a free world-class education for anyone anywhere." The strategic organization's aspiration goal. ntent is "to inspire the world to learn." A competitive advantage is the Ultimately, a good strategy helps organizations achieve competitive advantage-being ability to outperform rivals. able to outperform rivals. Think about Apple's iPad. It was first to market with an innovative prod- uct linking design, technology, and customer appeal. And it was all backed by a super-efficient supply chain. As one industry analyst said, "Apple moved the goal posts before most of their Issues "You and your classmates will likely be expected to operate on a more sophisticated level than graduates of past decades." Today's Graduates Must "Jump Right In" quickly evolve and have exceptional soft skills-the ability to write, listen, and communicate effectively." In other words, when the sun is setting it's time to muster all of your learning capacities so that you can greet sunrise ready to conquer a new day Here's a summary of career advice from top CEOs in a variety of industries: "People sniff out BS. . . . No one likes a phony. Don't be a dif- ferent person at work." Mandy Ginzberg, Match Group Inc. "Having the capacity to engage with people and understand their perspectives is really critical." Mark Hoplamazian, Hyatt Hotels Corp. . "Before taking a new role, ask: 'What if I didn't take that job? What if I tried something else?"" Gary Erickson and Kit Crawford, Clif Bar & Co. . "The boss makes all the difference. .. . Pick your early bosses wisely. A good test: Do you even like them?" Barbara Corcoran, Barbara Corcoran Inc. Johannes Kroemer/The Image Bank/Getty Images . "Dig in. Don't treat your job as a temporary stop. . . . Too many people are always thinking about the next job." Laura Alber, When you hear the term sunrise industry, you think of a business Williams Sonoma that is upbeat, on the move, one to watch. When you hear the term sunset industry, you think of a business on the decline and past its prime. Think strategically and picture yourself as an industry. Are you What's Your Take? "sunrise" or "sunset"? How does the advice just given sound to you? What do you A Wall Street Journal survey of employers confirms that tech- self-assess as your "hard skills" and your "soft skills"? What are nical skills are changing fast. It's a bit like the popular TV show the career readiness implications of these lists? Are you a "fast Project Runway: One day you're in and the next day you're out. The learner" prepared for continuous upskilling to stay a step ahead survey report says that employers now want "fast learners who can of changes in our fast-paced environment? Q Result 3 of 10 > XLearning Objective 7.1 Explain the Types of Strategies Used by Organizations 127 competitors even took the field." This is classic competitive advantage. But, the very best strat- egies go a step further and create-sustainable competitive advantage. This doesn't mean A sustainable competitive that the competitive advantage lasts forever, but it does mean that it's difficult for competitors to advantage is achieved in ways imitate... at least for awhile. that are difficult to imitate. What makes strategy so challenging today is that a fast-changing environment is shrinking the period of time that competitive advantage can be maintained. How long does it take one of Apple's competitors to come out with a new smartphone? How long did it take for Uber-like ride-sharing services to pop up? Will one smart watch rule them all? And how about Netflix, Tesla, Zoom... does each operate with a sustainable competitive advantage? And if not, what are their best next moves? Organizations Use Corporate, Business, and Functional Strategies. Corporate strategy provides direction and guides resource use for the organization as a whole. A corporate strategy sets The strategic question for corporate strategy is: In what industries and markets should we compete? long-term direction for the total You may think of CVS as a pharmacy, but after buying Aetna, it's a health insurer as well. You know enterprise. Google as a search company, but its parent company Alphabet owns businesses in life sciences, driverless cars, and business incubation. Leaders of such complex businesses have to make corporate-level strategic decisions allocating resources across many different opportunities. Business strategy focuses on a single business unit or product line. The strategic question A business strategy identi- for business strategy is: How are we going to compete for customers within this industry and fies how a division or strategic in this market? Typical business strategy decisions include choices about product and service business unit will compete in its mix, facilities locations, and new technologies. For smaller, single-business enterprises, the busi- product or service domain. ness strategy and the corporate strategy are one and the same. Panera's move to a "clean" menu is a business strategy shift with a clear social message. Porsche, owned by Volkswagen, was historically a two-door sports car company. Its business strategy now includes a sport utility vehicle, the Cayenne, and a four-door sedan, the Panamera. Functional strategy guides activities to implement higher-level business and corporate A functional strategy guides strategies. This level of strategy unfolds within a specific functional area such as marketing, activities in a specific manufacturing, finance, or human resources. The strategic question for functional strategy is: area of operations. How can we best use resources within the function to support the business strategy? Answers to this question involve a wide variety of practices and initiatives to improve operating effi- ciency, product quality, customer service, or innovativeness. When Starbucks teamed with Arizona State University to provide online educational opportunities for it's employees, this was a functional strategy to improve talent development. And if you notice a robot cleaning the aisles in Walmart, it's a functional strategy shift toward what CEO Doug McMillon calls "tech- empowered stores."10 Growth Strategies Focus on Expansion. We often hear about organizations trying to get bigger. They are pursuing growth strategies A growth strategy involves to increase the size and scope of current operations. Many executives view growth as neces- expansion of the organization's sary for long-run profitability. But you should probably question this assumption and probe current operations. deeper right from the start. Is growth always the best path? And if the strategic choice is to grow, how should it be accomplished? A strategy of growth through concentration seeks expansion within an existing business Growth through concentration area, one in which the firm has experience and presumably expertise. You don't see Chipotle means expansion within an trying to grow by buying bookstores or gas stations; instead, the company keeps opening more existing business area restaurants. You don't see Walmart trying to grow by buying a high-end department store chain or a cell phone company; instead, the company keeps opening more Walmart stores. These are classic growth by concentration strategies. Growth can also take place through diversification, where expansion occurs by entering Growth through diversification new business areas. One way to moderate the risk is to pursue related diversification, expand- means expansion by entering ing into similar or complementary new business areas. PepsiCo did this when it purchased related or new business areas. Tropicana. Although Tropicana's fruit juices were new to Pepsi, the business is related to its expertise in the beverages industry. Q Result 3 of 10 > X128 CHAPTER 7 Strategy and Strategic Management Ethics "Today's global companies are agents of unprecedented change . . . shaping the political, social, and cultural forces that are transforming the world." The Purpose of Companies in the Fourth Here are some excerpts from what the WEF calls "The Univer- Industrial Revolution sal Purpose of a Company in the Fourth Industrial Revolution": . The purpose of a company is to engage all its stakeholders in shared and sustained value creation. . In creating such value, a company serves not only its share- holders, but also all its stakeholders-employees, customers, suppliers, local communities, and society at large . A company serves society at large through its activities, sup- ports the communities in which it works, and pays its fair share of taxes. . A company is more than an economic unit generating wealth. It also fulfills human and societal aspirations as part of the broader social system. . A company that has a multinational scope of activities not only serves all those stakeholders who are directly engaged, but also acts itself as a stakeholder-together with govern- ments and civil society-of our global future. Kevork Djansezian/Getty Images Entertainment/Getty Images Your Decision? In celebration of its 50th anniversary, the World Economic Forum Should this manifesto guide any business of any size and type (WEF) updated the Davos Manifesto which offers principles to and anywhere in the world? Is this manifesto adequate as a guide guide company leaders. The new manifesto recognizes tremen- for businesses to follow in order to act responsibility as local and dous changes in society and the role companies do and should global citizens? What would you add or change to strengthen play in this context. "Today's global companies," the WEF states, it? Is the "fourth industrial revolution" real and can it rally the "are agents of unprecedented change, playing a greater role than power of businesses to solve great problems of our day-global ever before in shaping the political, social, and cultural forces that pandemics, climate change, income inequality and poverty, are transforming the world." health-care disparities, racial injustices, and more? Some firms pursue unrelated diversification by seeking growth in entirely new business areas. Did you know that India's Tata Group owns Eight O'Clock Coffee and Tetley Tea as well as Jaguar and Land Rover? Can you see the risk in this example and understand why growth through unrelated diversification might cause problems? Growth through vertical Diversification can also take the form of vertical integration. This is where a business integration occurs by acquiring acquires its suppliers-backward vertical integration, or its distributors-forward vertical inte- suppliers or distributors. gration. Backward vertical integration is evident at Apple Computer. The firm bought chip manufacturers to give it more privacy and sophistication in developing microprocessors. In beverages, both Coca-cola and PepsiCo have pursued forward vertical integration by purchas- ing major bottlers. Even a trip to the local farmers' market shows forward vertical integration. All those stands of vegetables and fruits are run by farmers moving downstream to distribute their produce directly to customers. Restructuring and Divestiture Strategies Focus on Consolidation. When organizations run into performance difficulties, perhaps because of too much growth A retrenchment strategy and diversification, these problems have to be solved. A retrenchment strategy seeks to changes operations to correct correct weaknesses by making radical changes to an organization's current ways of operating. weaknesses. The most extreme form of retrenchment is liquidation, when a business closes down and Liquidation occurs when a busi- sells its assets to pay creditors. A less extreme and more common form of retrenchment is ness closes and sells its assets to restructuring. This involves making major changes to cut costs and buy time to try new strat- pay creditors. gies to improve future success. Restructuring reduces the scale When a firm is in desperate financial condition and unable to pay its bills, a situation faced or mix of operations. by large numbers of small and large businesses during the Coronavirus pandemic, restructuring Q Result 3 of 10 > XLearning Objective 7.1 Explain the Types of Strategies Used by Organizations 129 Choices The economic damage, "if prolonged, may be problematic for broader racial inequality because of the importance of minority businesses for local job creation." Pandemic Lockdowns Hit Minority Businesses Hard fell 41%. Businesses owned by Latinos fell 35%, and by women 25%. The researchers concluded that prolonged economic dam- age "may be problematic for broader racial inequality because of the importance of minority businesses for local job creation." As "open up" became a rallying cry to get the economy back on track, businesses and governments struggled to come up with policies and practices that could protect employees, customers, and communities while still putting people back to work. Busi- nesses needed cash so owners could pay their bills and workers needed paychecks to fuel consumption any economy relies on. But the ups and downs and uncertainties of Covid-19 created a night- marish planning scenario. While all this was taking place, large and online-friendly busi- nesses prospered as households ordered for home delivery and remote work created new demands for collaboration platforms. As behavior adjusted to the "new normal," "mom and pop" shops, i_am_zews/Shutterstock.com restaurants, and service firms on main streets and in strip malls were left struggling to survive and with owners questioning their The coronavirus pandemic hit hard, fast, and with a vengeance. futures. The health crisis quickly became an economic one. Shelter-in-place orders resulted in skyrocketing unemployment, lost tax revenues for municipalities and states, and "closed" or "out of business" What's Your Take? signs being all too common on storefronts. The Wall Street Journal How can small businesses handle a crisis like this and still sur- called the Covid lockdown "the equivalent, in only weeks, of four vive? Is any strategy capable of withstanding such a blow? great depressions." Some 3.3 million businesses shut down, a loss What is the role of government when something like this hap- of 22% overall. While most everyone suffered, some suffered more pens? Why did minority firms take a such a disproportionately than others. arge hit? What does their suffering mean for racial equality and Small minority-owned businesses were especially hard hit. social justice long term? What can and should be done to help The National Bureau of Economic Research (NBER) reported that them to do well in the future and to keep creating jobs in their in just four months, the number of "active black business owners" communities? by Chapter 11 bankruptcy is an option under U.S. law. This protects the firm from creditors Chapter 11 bankruptcy protects while management reorganizes to restore solvency. The goal is to emerge from bankruptcy as a an insolvent firm from creditors stronger and profitable business. during a period of reorganization Downsizing is a restructuring approach that cuts the size of operations and reduces the to restore profitability. workforce. When you hear about organizations downsizing by across-the-board cuts, however, Downsizing decreases the size you might be a bit skeptical. Downsizing is most successful when cutbacks are done selectively of operation and focused on key performance objectives." Finally, restructuring by divestiture involves selling parts of the organization to refocus Divestiture involves selling off on core competencies, cut costs, and improve operating efficiency. This type of retrenchment parts of the organization to often occurs when organizations have become too diversified. eBay spent $3.1 billion to buy refocus attention on core Skype. But when the expected synergies between Skype and eBay's online auction business business areas. never developed, Skype was sold to private investors." They, in turn, sold it to Microsoft, which is still working to integrate Skype into its business model. Global Strategies Focus on International Business Opportunities. The world's diverse populations and economies offer a variety of growth opportunities for busi- nesses. Many large U.S. firms-including Yum Brands, IBM, and Colgate-Palmolive-now earn the majority of their revenues internationally. But firms address the operating complexities of interna- tional business in different ways. Companies pursuing a globalization strategy tend to view the world as one large mar- A globalization strategy uses ket. They advertise and sell standard products for use everywhere. For example, Gillette sells standardized products and and advertises the same razors to customers around the world by contrast, those pursuing a advertising worldwide. Q Result 3 of 10 > X130 CHAPTER 7 Strategy and Strategic Management A multidomestic strategy cus- multidomestic strategy customize products and advertising to fit local cultures and needs. tomizes products and advertising Bristol Myers, Procter & Gamble, and Unilever all vary their products to match consumer to fit local markets. preferences in different regions, countries and cultures. A transnational strategy Firms using the transnational strategy try to tap business resources and customer integrates global operations markets worldwide. Although managed from one "home" office - think Detroit and Ford for without having a strong national example, they try to operate without a strong national identity while hoping to blend seam- identity. lessly with the global economy. "Ford strives to be a global brand, not just an American one. Its cars and trucks are built with design, manufacturing, and distribution expertise drawn from around the world. Cooperation Strategies Focus on Alliances and Partnerships. In a strategic alliance, organiza- The trend today is toward more cooperation among organizations, often in strategic tions join together in partnership alliances, where organizations join together in partnership to pursue an area of mutual interest. to pursue an area of mutual A common form involves outsourcing alliances, contracting to purchase specialized services interest. from another organization. An example is the organization that outsources its IT function in the belief that these services are better provided by a firm with expertise in this area. Cooperation also takes the form of supplier alliances-which guarantee a smooth and timely flow of quality supplies among alliance partners, and distribution alliances-where firms join together to accomplish product or services sales and distribution. Some cooperation strategies involve strategic alliances with competitors, creating some- Coopetition is the strategy of thing known as coopetition. We saw an example of this when the world at large sought des- working with rivals on projects perately to develop and manufacture a Covid-19 vaccine. The crisis created "frenemies" out of mutual benefit. of drug manufacturers like GlaxoSmithKline, Eli Lilly & Co., and Amgen, Inc. A Glaxo executive said: "We felt this very unusual situation required something that GSK hadn't done before, and something we hadn't seen in the industry before either."14 Quick Case She thinks the idea will be a winner but has come to you for advice and-she hopes-some start-up financing. Kick-Starting a Friend's Business Idea One of your friends just came to you with a business proposal. She took a "walkabout" a trip to Southeast Asia awhile ago and is raving about all the neat fabrics available in places like Cambodia, Thailand, and Vietnam. She's also a great fan of the TV show Project Runway. Her idea is to import fabrics, buy some sewing machines and materials, rent a small storefront, and open a shop called The Design Place. The basic idea is that a customer can come in, find fabrics, use workspace, and then design and sew their own fashions. She's enthusiastic-of course, and thinks her idea will be a winner. But she needs advice and start-up financing. That's where you come in. One of your top concerns is timing. Her idea might have made sense in the "old" pre-Covid economy. But the virus pandemic has changed the environment for business startups. What's a viable strategy for the future? Should she even be thinking of a physical storefront? Radharc Images/Alamy Stock Photo Situation: You've worked hard, made a fair amount of money, and What Do You Do? have a nice stock portfolio. You're also known among your friends What questions will you ask while considering her proposal? as "the guy with the money." As with lottery winners, you've What can you say to help your friend make a good strategic anal- become a bit of a target-some friends want handouts, others want ysis of her business idea? Where might The Design Place a fit in loans, and still others just do their share of freeloading. an economy that is restructuring? Q Result 3 of 10 > XLearning Objective 7.1 Explain the Types of Strategies Used by Organizations 131 E-Business Strategies Use the Web and Apps for Business Success. A common question asked of business executives is "What is your e-business strategy?" This An e-business strategy refers to refers to the strategic use of the Web and mobile apps to gain competitive advantage. Table 7.1 the strategic use of the Web and describes common Web-based business models that employ a variety of the following mobile apps to gain competitive strategies. 15 advantage. B2C strategies link businesses with consumers. Whenever you buy a music download B2C strategies link businesses from Apple's iTunes Store, order a book from Amazon, or shop at Patagonia for the latest out- with consumers door gear, you are the "C" in a B2C strategy. B2B strategies link businesses with members of their supply chains. For example, Alibaba B2B strategies link businesses links manufacturers with retailers and distributors. Dell Computer has special Web services with one another. that allow major corporate customers to manage their accounts online. Walmart ties suppli- ers into its information systems so they can electronically manage inventories for their own products. C2B strategies link consumers with businesses that can supply needed products or ser- C2B strategies link customers to vices. In contrast to B2C, the C2B strategy puts the initiative for the transaction in the hands businesses that can supply what of the potential customer. Elance, for example, links customers needing a special project they need completed-say a Web animation-with businesses who bid for the work. C2B "influencers" on sites like Instagram, Twitch, and YouTube guide viewers to businesses selling their pre- ferred products. C2C strategies link consumers to one another. Transactions take place in online mar- C2C strategies link consumers ketplaces where the host site collects a fee. Examples are eBay, Craigslist, and Etsy. With the together to make business trans- growing power of Web "connections" and "communities" C2C has shifted substantially toward actions in online marketplaces P2P strategies. These are peer-to-peer connections in the sharing economy where apps P2P strategies directly link per- directly link persons needing services with those willing to provide them. Examples are Uber- sons needing services with those matching riders with drivers, TaskRabbit-matching small jobs with "taskers" willing to do willing to provide them. them, and Airbnb-matching travelers with host residences. A social media strategy uses There's a lot of buzz today about social media strategy. Think of this as an organization social media to engage with an using social media such as Facebook or Twitter to engage with customers, clients, and external organization's customers, clients, audiences. How often do you hear or read "Find us on Facebook" or "Follow us on Twitter?" and external audiences. Goals for social media strategies range from direct sales to corporate imaging to relationship A crowdsourcing strategy uses development to product design and development. The latter often involves crowdsourcing the Web to allow customers to to allow existing and potential customers to make suggestions and express opinions on prod- provide opinions and suggestions ucts and their designs. An example is Threadless.com. The firm's online visitors submit designs on products and their designs. TABLE 7.1 Sample Web-Based Business Models Advertising model: Provides free information or services and then generates revenues from paid advertising to viewers (e.g., Yahoo!, Google) Brokerage model: Brings buyers and sellers together for online business transactions and takes a percentage from the sales (e.g., eBay, Priceline) Community model: Provides a meeting point sold by subscription or supported by advertising e.g., eHarmony, Facebook) Freemium model: Offers a free service and encourages users to buy extras (e.g., Skype, Zynga) Infomediary model: Provides a free service while collecting information on users and selling it to other businesses (e.g., Epinions, Yelp) Merchant model: Sells products directly to customers through e-tailing (e.g., Amazon, Apple Tunes Store) Referral model: Provides free listings and gets referral fees from online merchants after directing customers to them (e.g., Shopzilla, PriceGrabber) Subscription model: Sells access to high-value content through a subscription Web site (e.g., Netflix, Wall Street Journal Interactive) Q Result 3 of 10 > XLearning Objective 7.2 Describe How Managers Formulate and Implement Strategies 133 Learning Objective 7.2 | Describe How Managers WileyPLUS See Author Video Formulate and Implement Strategies. Things to Remember . The strategic management process analyzes, formulates, and implements strategies. . SWOT analysis identifies strengths, weaknesses, opportunities, and threats. . Porter's five forces model analyzes industry attractiveness. . Porter's competitive strategies model identifies business or product strategies. . Portfolio planning examines strategies across multiple businesses or products. . Strategic leadership ensures strategy implementation and control. The late, great management guru Peter Drucker once said: "The future will not just happen if one wishes hard enough. It requires decision-now. It imposes risk-now. It requires action- now. It demands allocation of resources, and above all, of human resources-now. It requires work-now.""Drucker's point fits squarely with the chapter subtitle: Insight and hard work deliver results. Let's talk more about the hard work of strategic management The Strategic Management Process Analyzes, Formulates, Strategic management is the process of analyzing, formulating, and Implements Strategies. and implementing strategies Strategic analysis assesses the Figure 7.1 shows strategic management as the process of analyzing, formulating, and organization, its environment, its implementing strategies to accomplish long-term goals and sustain competitive advantage competitive positioning, and its Strategic analysis assesses the organization, its environment, its competitive positioning, and current strategy. its current strategy. Strategy formulation uses the insights of strategic analysis to craft strat- Strategy formulation creating egies to fit mission and strategic intent, objectives, and environmental conditions. It estab- strategies to fit mission and lishes a strategic plan to deliver future competitive advantage. Strategy implementation puts deliver competitive advantage. strategies into action. It activates the entire organization to put strategies to work. And it con- Strategy implementation puts tinuously evaluates strategic accomplishments to ensure high performance strategies into action. Strategic Analysis- Strategy Formulation- Strategy Implementation- Assesssing Competitive Position Creating Strategies Putting Strategies into Action Analyze current Analyze organization Develop new Implement Evaluate situation and external strategies strategies results environment Mission . Organizational Corporate strategy . Management . Strategic Objectives resources and Business strategies systems and control . Strategies capabilities (strengths . Functional strategies practices Renewal of and weaknesses) Strategic strategic Industry and external leadership management environment process opportunities and threats) FIGURE 7.1 What Are the Steps in the Strategic Management Process? Strategic management involves analyzing, formulating, and implementing organizational strategies. The process begins with analyzing the current mission, object lives, and strategies to set a baseline for further action. Next, organizational strengths and weaknesses and environmental opportunities and threats are analyzed. Strategies are then crafted at corporate, business, and functional levels. Finally, the strategies are put into action. This requires strategic leadership and control to ensure all organizational resources and systems fully support strategy implementation. Q Result 3 of 10 > X134 CHAPTER 7 Strategy and Strategic Management Can you see that success is only possible when strategies are both well formulated and well implemented? Success-in business or in one's personal life-doesn't just happen. It is created when good strategies are implemented to full advantage. Strategic management-organizational and personal-must continuously adjust to new conditions. In both cases, strategies and their implementation must be timely, flexible, and adaptive. When done well, strategic success in our personal lives achieves objectives such as family prosperity and career advancement. Strategic success in business achieves objectives such as those listed here. . Profits-operating with revenues greater than costs . Cost efficiency-operating with low costs, finding ways to lower costs . Market share-having a solid and sustainable pool of customers Product quality-producing goods and services that satisfy customers . Talented workforce-attracting and retaining high-quality employees Innovation-using new ideas to improve operations and products . Social responsibility-earning the respect of multiple stakeholders . Sustainability-developing sustainable processes, products, and supply chains SWOT Analysis Identifies Strengths, Weaknesses, Opportunities, and Threats. A SWOT analysis examines A SWOT analysis involves a detailed examination of organizational strengths and weak- organizational strengths and nesses, as well as environmental opportunities and threats. As Figure 7.2 shows, the results weaknesses, as well as environ- of this examination can be portrayed in a straightforward and useful planning matrix. mental opportunities One goal is to identify an organization's core competencies, or special strengths. These and threats. are things the organization does exceptionally well in comparison with its competitors.9 A core competency is a special When an organization's core competencies are unique and costly for others to imitate-say, for strength that gives an organiza example, Amazon's "1-Click" order technology and efficient logistics-they become potential tion a competitive advantage. sources of competitive advantage. Organizational weaknesses are the flip side of the picture. They must also generate a realistic sense of the organization's capabilities. The same analytical discipline holds with conditions in the environment. It's not only the opportunities that count-such as new markets, a strong economy, weak competitors, and emerging technologies. The threats count, too-the emergence of new competitors, resource scarcities, changing customer tastes, and new government regulations. FIGURE 7.2 What is the Pur- Internal Assessment pose of a SWOT Analysis? The of the Organization SWOT analysis is a way of identi- fying organizational strengths and What are our strengths? What are our weaknesses? weaknesses, as well as environ- mental opportunities and threats. Manufacturing efficiency . Outdated facilities? It forces strategists to discover key . Skilled workforce? . Inadequate R&D? Good market share? . Obsolete technologies? facts and conditions with poten Strong financing? Weak management? tial consequences for strategic . Superior reputation? Past planning failures? performance. It also organizes this information in a structured SWOT manner that is useful for making ANALYSIS strategy decisions. Managers using a SWOT analysis should be looking What are our opportunities? What are our threats? for organizational strengths that Possible new markets? New competitors? can be leveraged as core compe Strong economy? . Shortage of resources? tencies to make future gains, as . Weak market rivals? . Changing market tastes? well as environmental opportuni- . Emerging technologies? New regulations? . Growth of existing market? . Substitute products? ties that can be exploited. External Assessment of the Environment Q Result 3 of 10 > XLearning Objective 7.2 Describe How Managers Formulate and Implement Strategies 135 Analytics Fifty-eight percent of surveyed employers plan to boost hiring of part-timers and contract workers. Disposable Workers Are Indispensable It's been the era of the disposable worker. Prior to Covid-19 to Business Profits businesses were enamored with the idea of hiring fewer full-time ers and hiring more part-time or temporary workers who can be added and let go according to demand. There are attractive cost advantages to only having to pay for workers "as needed." Con- sider these pre-pandemic facts. More than 15.5 million Americans working on a part-time, temporary, and contract basis. This represents about 20% of the workforce. . Almost 3 of every 10 retail/wholesale jobs filled part-time. Among those part-timers, 30.6% want full-time work. . Compensation for part-timers in retail/wholesale averaged about $7 per hour less than that for full-timers. Almost half of all jobs at retailers in New York City were filled by part-timers. Only 1 in 10 of them had set work schedules. Your Interpretation? How has the virus pandemic affected the use of disposable work- ers? Has that been a good thing, or a bad one? Looking ahead toward better times, is this switch to employing more disposable workers a good-perhaps necessary-long-term business strat- egy? What are the possible downsides-for the employer, the dis- posable worker, and society at large? Where might the prospect of "disposability" affect your career plan? sturti/E+/Getty Images By the way, don't forget the career planning implications of this discussion. If you were to analyze your strategic readiness for career entry or advancement right now, what would your personal SWOT look like? Porter's Five Forces Model Analyzes Industry Attractiveness. Harvard scholar and consultant Michael Porter says, "A company without a strategy is willing to try anything." With a good strategy in place, by contrast, Porter believes an organization can best focus its resources on its mission and objectives. He suggests that the first step in crafting a good strategy is understanding the nature of competition within an industry. This requires solid analysis, something that benefits from the strategy based on these "five forces": Force 1: Competitors-intensity of rivalry among firms in the industry Force 2: New entrants-threat of new competitors entering the market Force 3: Suppliers-bargaining power of suppliers Force 4: Customers-bargaining power of buyers Force 5: Substitutes-threat of substitute products or services Porter's five forces model of industry attractiveness is shown in Figure 7.3. An unat- tractive industry will have intense competitive rivalries, substantial threats in the form of pos- sible new entrants and substitute products, and powerful suppliers and buyers who dominate bargaining with the firm. As you might expect, this is a challenging environment for strategy formulation. An attractive industry will have little existing competition, few threats from new Q Result 3 of 10 > X136 CHAPTER 7 Strategy and Strategic Management FIGURE 7.3 What Is Porter's Five Forces of Industry Attractiveness Five Forces Model of Industry Attractiveness? Strategic man- Intensity of Threat of Threat of agement is challenging in an unat- industry new substitute tractive industry that has intense competition entrants products competitive rivalries, substantia threats in the form of possible new Bargaining Bargaining entrants and substitute products, power of power of suppliers customers and powerful suppliers and buyers who dominate any bargaining with the firm. Strategy manage ment is less of a problem in an attractive industry that has little Unattractive Attractive existing competition, few threats Industry Industry from new entrants or substitutes, Lots Competition Little and low bargaining power among Easy New entry Hard suppliers and buyers Many 11111 Substitute products Few High Supplier power Low High Customer power Low entrants or substitutes, and low bargaining power among suppliers and buyers. These are much more favorable conditions for strategy formulation. Porter's Competitive Strategies Model Identifies Business or Product Strategies. Once industry forces are understood, attention shifts to how a business or its products can be strategically positioned relative to competitors. Porter believes that competitive strategies can be built around differentiation, cost leadership, and focus. A differentiation strategy offers A differentiation strategy seeks competitive advantage through uniqueness. This means products that are unique from developing goods and services that are clearly different from the competition. The strategic those of the competition. objective is to attract customers who stay loyal to the firm's products and lose interest in those of its competitors. Success with a differentiation strategy depends on customer perceptions of product qual- ity and uniqueness. This requires organizational strengths in marketing, research and develop- ment, and creativity. An example is Polo Ralph Lauren, a retailer of upscale classic fashions and accessories. In Ralph Lauren's words, "Polo redefined how American style and quality is per- ceived. Polo has always been about selling quality products by creating worlds and inviting our customers to be part of our dream." If you've seen any Polo ads, you'll know that the company aggressively markets this perception. A cost leadership strategy seeks A cost leadership strategy seeks competitive advantage by operating with lower costs to operate with lower costs than than competitors. This allows organizations to make profits while selling products or services competitors. at low prices their competitors can't profitably match. The objective is to continuously improve operating efficiencies in purchasing, production, distribution, and other organizational systems. Success with the cost leadership strategy requires tight cost and managerial controls, as well as products or services that are easy to create and distribute. This is what might be called the "Walmart" strategy-do everything you can to keep costs so low that you can offer custom- ers lower prices than competitors and still make a reasonable profit. A focused differentiation Porter describes two forms of the focus strategy, both of which try to serve the needs of strategy offers a unique product a narrow market segment better than anyone else. The focused differentiation strategy to a special market segment. offers a unique product to customers in a special market segment. For example, NetJets offers A focused cost leadership air travel by fractional ownership of private jets to wealthy customers. The focused cost strategy seeks the lowest costs leadership strategy tries to be the low-cost provider for a special market segment. Low-fare of operations within a special airlines, for example, offer heavily discounted fares and "no frills" service for customers who market segment want to travel point to point for the lowest prices. Q Result 3 of 10 > XLearning Objective 7.2 Describe How Managers Formulate and Implement Strategies 137 COST LEADERSHIP DIFFERENTIATION FIGURE 7.4 What Are the Strategic STRATEGY STRATEGY Options in Porter's Competitive Strat- Broad egies Model? Porter's competitive Hyundai Elant Ferrari, Bentley, strategies model asks two basic questions Chevy Spark Aston Martin to identify alternative business and product strategies. First, what is the market scope- Market Scope road or narrow? Second, what is the FOCUSED LOW-COST FOCUSED DIFFERENTIATION STRATEGY expected source of competitive advantage- STRATEGY lower price or product uniqueness? The four Narrow Kia Sportage SUV, Porsche Cayenne possible combinations of answers result Subaru Impreze E-Hybrid SUV, BMW X5 Plug-In Hybrid SUV in differentiation, cost leadership, focused differentiation, and focused cost leadership strategies. The figure uses examples from the Low Price Unique Product sparkling water industry to show how these Source of Competitive Advantage strategies can be used for different products. Can you apply these four competitive strategies to an actual situation-say, alternative automobiles? Porter would begin by asking and answering two questions for each car: What is the market scope-broad or narrow? What is the potential source of competitive advantage- low price or product uniqueness? Figure 7.4 shows how answers to these questions might stra- tegically position some autos with which you might be familiar. After checking our examples, why not fill in others that match well with your tastes? Ferrari, Bentley, and Aston Martin follow a differentiation strategy. These firms' adver- tising tries to convince consumers that their expensive products are high quality, distinct tive, and uniquely desirable. The Hyundai Elantra and Chevy Spark are far less expensive cars. In order to make a profit at the lower selling price, the firms must follow a cost leader- ship strategy emphasizing production and component efficiencies. What about a Porsche Cayenne E-Hybrid SUV or a BMW X5 Plug-in Hybrid? In Porter's model, they represent a strategy of focused differentiation-products with distinctive tastes for customers wanting quality brands. This is quite different from the strategy behind Kia's Sportage SUV and the Subaru Impreze. They are sold with focused cost leadership as products offering a unique option for customers who also want a low price. Portfolio Planning Examines Strategies Across Multiple Businesses or Products. Alphabet's CEO faces a difficult strategic question all the time: How should resources be allo- cated across the firm's diverse mix of businesses, each with its own goals, problems, and oppor- tunities? What started out as a search engine and software company, now includes everything from Google search to YouTube to robotics to smart homes to wind farms to self-driving cars, and more. That's a complex strategic leadership challenge. if you think about it, Alphabet's strategic issues are similar to those we face in our own lives. How, for example, do you create a good mix of cash, stocks, bonds, and real estate invest- ments? What do you buy more of, what do you sell, and what do you hold? Executives ask and try to answer such questions all the time. They are portfolio-planning questions, and they have major strategic implications. Shouldn't they be made systematically rather than randomly? A basic but still insightful portfolio planning approach developed by the Boston Consulting Group is summarized in Figure 7.5. Known as the BCG Matrix, this strategic management frame- The BCG Matrix analyzes busi work analyzes business and product strategies based on market growth rate and market share." ness opportunities according to Stars in the BCG Matrix have high market shares in high-growth markets. They produce large market growth rate and market profits through substantial penetration of expanding markets. The preferred strategy for stars is share. growth. The BCG Matrix recommends making further resource investments in them. Stars are not only high performers in the present, but they also offer future potential to do the same or even better. Cash cows have high market shares in low-growth markets. They produce large profits and a strong cash flow, albeit with little upside potential. Because the markets offer little growth opportunity, the preferred strategy for cash cows is stability or modest growth. Similar to real dairy cows, the BCG Matrix advises firms to "milk" these businesses to generate cash for invest- ing in other more promising areas. Q Result 3 of 10 > X138 CHAPTER 7 Strategy and Strategic Management FIGURE 7.5 Why Is the BCG Matrix Use- QUESTION MARKS STARS ful in Strategic Planning? The BCG Matrix Poor position; growing industry Dominant position; growing industry is useful in situations where managers must make strategic decisions that allocate scarce High Growth or Growth organizational resources among multiple retrenchment strategy and competing uses. This is a typical situa- strategy tion for organizations that have a range of Market Growth Rate businesses or products. The BCG Matrix sorts DOGS CASH COWS businesses or products into four strategic Poor position; low-growth industry Dominant position; low-growth industry types (dogs, stars, question marks, and cash cows) based on market shares held and mar- Low Retrenchment Stability or ket growth rates. Specific master strategies strategy modest growth are recommended for each strategic type. strategy Low High Market Share Question marks have low market shares in high-growth markets. Although they may not gener- ate much profit at the moment, the upside potential is there because of the growing markets. Ques- tion marks make for difficult strategic decision making. The BCG Matrix recommends targeting only the most promising question marks for growth, while retrenching those that are less promising Dogs have low market shares in low-growth markets. They produce little if any profit, and they have low potential for future improvement. The preferred strategy for dogs is straightforward- retrenchment by divestiture. Strategic Leadership Ensures Strategy Implementation and Control. Having a good or even great strategy is one thing; achieving strategic success is quite another. Think of it this way: Strategic Success = Strategy x Implementation. No matter how well or ele- gantly planned, a strategy has to be well executed to achieve success. It requires supporting structures, a good allocation of tasks and work flow designs, and the right people to staff all aspects of operations. The strategy also needs to be enthusiastically supported by leaders at all levels who are capable of motivating everyone, building individual performance commit- ments, and using teams and teamwork. The premium today is on strategic leadership-defined earlier as the capability to identify and communicate a strategic vision, and to inspire people to work hard to help achieve it."To excel at strategic leadership, you must make the right strategic choices. But you must also be alert and confident in recognizing when strategies aren't working and need to be changed. Ultimately, you must be able to rally the entire organization around the twin tasks of strategy implementa- tion and positive change. Michael Porter describes the strategic leadership role this way.24 A strategic leader has to be the guardian of trade-offs. It is the leader's job to make sure the organization's resources are allocated in ways consistent with the strategy. This requires the discipline to sort through many competing ideas and alternatives to stay on course and not get sidetracked. . Astrategic leader needs to create a sense of urgency. The leader must not allow the organization and its members to grow slow and complacent. Even when doing well, the leader keeps the focus on getting better and being alert to conditions that require adjustments to the strategy. A strategic leader must make sure that everyone understands the strategy. Unless strate- gies are understood, the daily tasks and contributions of people lose context and purpose. Everyone might work very hard, but unless efforts are aligned with strategy, the impact is dispersed and fails to advance common goals. . A strategic leader must be a teacher. It is the leader's job to teach the strategy and make it a "cause," says Porter. For a strategy to work, it must become an ever-present commitment throughout the organization. This means that a strategic leader must be a great communi- cator. Everyone must understand the strategy and how it makes the organization different from others.Learning Objective 7.2 Describe How Managers Formulate and Implement Strategies 139 To Porter's list, we must add the following: A strategic leader must be the champion of control. One of the lessons business firms learn from economic crisis is that a strategic leader has to maintain strategic control. This means that the CEO and other top managers must stay Strategic control makes sure in close touch with the strategy, stay rigorous with performance measurements, and recognize strategies are well implemented when the strategy needs to be changed or discarded." and poor strategies are tweaked A posting on Patagonia's Web site once said: "During the past thirty years, we've made or scrapped. many mistakes but we've never lost our way for very long." Not only is the firm being hon- est, it is also communicating an important point about the strategic management process: Mis- takes will be made, but strategic leaders both correct and learn from them. Study Guide Learning Objective 7.2 Describe How Managers Formulate and Implement Strategies. Terms to Define BCG Matrix Focused differentiation Strategic management Core competencies strategy Strategy formulation Cost leadership strategy Strategic analysis Strategy implementation Differentiation strategy Strategic control SWOT analysis Focused cost leadership strategy Strategic leadership Rapid Review Strategic management is the process of formulating and implementing strategies to achieve a sus- tainable competitive environment. . A SWOT analysis sets a foundation for strategy formulation by systematically assessing organiza- tional strengths and weaknesses, as well as environmental opportunities and threats Porter's five forces model analyzes industry attractiveness in terms of competitors, the threat of new entrants, substitute products, and the bargaining power of suppliers and buyers. . Porter's competitive strategies model describes business and product strategies based on differenti- ation (distinguishing one's products from the competition), cost leadership (minimizing costs relative to the competition), and focus (concentrating on a special market segment). . The BCG Matrix is a portfolio planning approach that describes strategies for businesses classified as stars, cash cows, question marks, or dogs. . Strategic leadership is the responsibility for activating people, organizational resources, and man- agement systems to continually pursue and fully accomplish strategy implementation. Questions for Discussion 1. Can an organization have a good strategy but a poor sense of mission? 2. Would a monopoly receive a perfect score for industry attractiveness in Porter's five forces model? 3. Does the BCG Matrix oversimplify a complex strategic management problem? Be Sure You Can describe the strategic management process explain Porter's five forces model . explain Porter's competitive strategies model describe the purpose and use of the BCG Matrix explain the responsibilities of strategic leadership Career Situation: What Would You Do? For some years now, you've owned a small specialty bookshop in a college town. You sell some textbooks but mainly cater to a broader customer base. Your store always stocks the latest fiction, nonfiction, and children's books. Recent numbers show a steep decline in sales, including of books that would normally be considered best sellers. You suspect this is because of the growing popularity of e-books and e-read- ers such as the Amazon Kindle and Barnes & Noble Nook. Some of your friends say it's time to close up because your market is dying. Is it hopeless, or is there a business strategy that might save the store