Study Guide Strategic Business Management By A. J. Cataldo About the Author A. J. Cataldo is currently a professor of accounting at West Chester University, in West Chester, Pennsylvania. He holds a B.S. degree in accounting/finance and a Master of Accounting degree from the University of Arizona. He earned a Ph.D. from the Virginia Polytechnic Institute and State University. He's a certified public accountant and a certified management accountant. He has worked in public accounting as a government auditor and controller, and has provided expert testimony in business litigation engagements. His publications include three Elsevier Science monographs, and his articles have appeared in Journal of Accountancy, National Tax Journal, Research in Accounting Regulation, Journal of Forensic Accounting, and Accounting Historians Journal, among others. Since January 1990, he has also published in and served on editorial review boards for Institute of Management Accounting association journals, including Management Accounting, Strategic Finance, and Management Accounting Quarterly. All terms mentioned in this text that are known to be trademarks or service marks have been appropriately capitalized. Use of a term in this text should not be regarded as affecting the validity of any trademark or service mark. Copyright 2015 by Penn Foster, Inc. All rights reserved. No part of the material protected by this copyright may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without permission in writing from the copyright owner. Requests for permission to make copies of any part of the work should be mailed to Copyright Permissions, Penn Foster, 925 Oak Street, Scranton, Pennsylvania 18515. Printed in the United States of America 1 LESSON ASSIGNMENTS 7 LESSON 1: INTRODUCTION AND OVERVIEW 9 LESSON 2: CORE CONCEPTS AND ANALYTICAL TOOLS 19 LESSON 3: CRAFTING A STRATEGY 31 LESSON 4: EXECUTING THE STRATEGY 61 GRADED PROJECT 75 SELF-CHECK ANSWERS 81 CASE STUDY ANSWERS 87 Contents INSTRUCTIONS TO STUDENTS iii Welcome to Strategic Business Management! This course will provide you with a foundational understanding of the strategic integration of much of the content from prior coursework. The courses you've completed so far have provided you with many models, theories, equations, concepts, and mechanical applications. The purpose has been to assist you in thinking in an organized, disciplined fashion, to better enable you to distill any decision to its least subjective or qualitative level. However, few strategic decisions can be reduced to a completely quantitative level. Each assignment is followed by a Self-Check. In addition, online multiple-choice exams are available for each lesson. Finally, several assignments require you to review and answer questions from cases included in your text. There are 28 illustrative case studies, which are located in \"Part Two: Cases in Crafting and Executing Strategy\" at the end of your textbook. While you're encouraged to read all these cases, the following seven cases are required reading that will help you prepare for the final examination and course project: 1. Assignment 2: Case 4Costco 2. Assignment 4: Case 5Competition in Energy Drinks 3. Assignment 5: Case 15Skype versus AT&T 4. Assignment 7: Case 2Whole Foods Market in 2010 5. Assignment 8: Case 16Sara Lee Corporation 6. Assignment 10: Case 22Herman Miller Inc. 7. Assignment 12: Case 28Countrywide Financial Corporation OBJECTIVES When you complete this course, you'll be able to Explain strategy, and describe the elements of good strategy, good strategy execution, and good management Explain the five phases of the strategy-making, strategyexecuting process Instructions INTRODUCTION 1 List the seven questions to ask when evaluating a company's external environment List the five questions to ask when examining a company's resources and competitive position Explain driving forces, strategic group mapping, and key success factors Define SWOT analysis and benchmarking List the five generic competitive strategies Explain and provide examples for supplemental strategies Define what motivating factors might lead a firm to expand into or choose to compete in foreign markets Discuss a variety of conditions that require tailoring of a strategy to fit specific industries and company situations, including diversification Address ethical and social responsibility considerations, including the three categories of management morality Describe the framework for executing strategy Explain the importance of selective staffing and building core competencies and competitive capabilities to successfully execute strategy Define which resources are essential for successful strategy execution Discuss best practices, total quality management (TQM), Six Sigma, business-process reengineering, benchmarking, and other continuous improvement techniques Explain the importance of a corporate culture that promotes good strategy execution YOUR TEXTBOOK Successfully completing your course depends heavily on the knowledge and understanding you acquire from your primary textbook, Crafting and Executing Strategy: The Quest for 2 Instructions to Students Competitive Advantage: Concepts and Cases. Before beginning your studies, take some time to look through it to see what's in the book and how the material is arranged. Below is a summary of some of the important features of the text. Becoming familiar with them before you begin is a good idea. A preface begins on page viii. It gives you the key concepts that form the authors' approach to strategic management, as well as text updates and a guide to online supplements. The \"Guided Tour,\" beginning on page xxviii, outlines the key features of the textbook and its layout. The brief contents, on pages xxxiii-xxxv, gives you a quick overview of the chapters in the text. The contents, on pages xxxvi-xlvii, give you a detailed outline of the content for each chapter, including the main topic headings. Detailed case studies of strategic management in real-life businesses begin after page 417. Indexes to organizations, names, and subjects found in the book appear at the end. Each chapter begins with an outline of topics to be covered. Scan it to orient yourself to the material ahead. Within the text, topics are divided by major headings and subheadings devoted to particular ideas or concepts. Tables, figures, and boxed features appear throughout the text. All these provide data that's essential to mastering the text material. Do not skip over them. The chapter end matter provides you with key terms, a chapter summary, and questions to challenge your capacity for critical thinking. Use these features to further master the chapter material. This study guide will summarize and emphasize the \"Core Concepts\" in the yellow boxes in the margins of your text and the bold italicized terms in the body of the text. From time to time, you'll be reminded to spend time reviewing and digesting figures and exhibits in your text. Unlike many more-structured courses and texts, organizing materials relating to strategy in a linear fashion is difficult because strategies tend to be multidimensional. While the authors of your text have done an excellent job of organizing these materials, you should progress through the material slowly, allowing yourself time to digest it and truly appreciate the complexities of strategic business management. Instructions to Students 3 COURSE MATERIALS The course includes the following materials: 1. This study guide, which contains an introduction to your course, plus A lesson assignments page with a schedule of study assignments Assignment introductions emphasizing the main points in the textbook Self-checks and answers to help you assess your understanding of the material 2. Your course textbook, Crafting and Executing Strategy: The Quest for Competitive Advantage: Concepts and Cases, Eighteenth Edition, by Arthur A. Thompson, Margaret A. Peteraf, John E. Gamble, and A. J. Strickland III, which contains the assignment reading material A STUDY PLAN Think of this study guide as a blueprint for your course. You should read it carefully. Use the following procedures to receive the maximum benefit from your studies: 1. Set aside a regular time for study. 2. Write down your reading and study schedule. You might want to use a wall calendarthe kind with space to write into show what you need to do and when. Check off assignments as you complete them to see your progress. 3. Read everything twiceor at least review it after reading it carefully. No one gets everything on the first reading. 4. Don't look up the answers in the back of this study guide before you do the self-checks at the end of a chapter. That defeats the purpose of the exercises. However, for any questions in which you answer incorrectly, do make sure to review the relevant material. 4 Instructions to Students 5. Give yourself credit for completing each assignment. Your work and self-discipline will take you through this course. You deserve the credit. So give yourself a pat on the back as you complete each assignment. 6. Note the pages for each assignment and read the assignment in the textbook to get a general idea of its content. Then study the assignment, paying attention to all details, especially definitions and main concepts. 7. Read the corresponding lesson in the study guide to reinforce what you learned in the text and to learn additional tips. 8. Answer the questions provided in the self-checks in the study guide. These questions will serve as a review of the material covered. 9. After answering the self-checks, check your answers with those given at the back of the study guide. 10. Complete each assignment in this manner. If you miss any questions, review the pages of the textbook covering those questions. The self-checks are designed to reveal weak points that you must review. Do not send your self-check answers to the school. They're for you to evaluate your understanding of the material. 11. After you've completed the assignments for Lesson 1, complete the corresponding exam for Lesson 1. Follow this procedure for all four lessons. You're now ready to begin. Good luck with your studies. Remember: If you have any questions during your studies, e-mail your instructor for assistance. Remember to check your student portal regularly. Your instructor may post additional resources that you can access to enhance your learning experience. Instructions to Students 5 NOTES 6 Instructions to Students For: Assignment 1 Assignment 2 Read in this study guide: Read in the textbook: Pages 12-15 Pages 20-47 Pages 9-10 Examination 500633 Pages 2-18 Material in Lesson 1 Lesson 2: Core Concepts and Analytical Tools For: Assignment 3 Assignment 4 Read in this study guide: Read in the textbook: Pages 25-28 Pages 90-132 Pages 20-23 Examination 500635 Pages 48-88 Material in Lesson 2 Lesson 3: Crafting a Strategy For: Read in this study guide: Read in the textbook: Pages 35-38 Pages 166-202 Assignment 5 Pages 32-33 Assignment 7 Pages 39-46 Assignment 6 Assignment 8 Assignment 9 Pages 50-53 Pages 55-58 Examination 500637 Pages 134-165 Pages 204-245 Pages 246-291 Pages 292-326 Material in Lesson 3 Assignments Lesson 1: Introduction and Overview 7 Lesson 4: Executing the Strategy For: Read in this study guide: Read in the textbook: Pages 66-68 Pages 360-388 Assignment 10 Pages 61-63 Assignment 12 Pages 70-72 Assignment 11 Examination 500639 Pages 328-359 Pages 390-417 Material in Lesson 4 Graded Project 50064100 Note: To access and complete any of the examinations for this study guide, click on the appropriate Take Exam icon on your student portal. You should not have to enter the examination numbers. These numbers are for reference only if you have reason to contact Student CARE. 8 Lesson Assignments INTRODUCTION Lesson 1 Introduction and Overview Assignments 1 and 2 introduce strategy by providing an operational definition and the five phases of the strategymaking, strategy-executing process. You'll be asked to review your first case following Assignment 2. OBJECTIVES When you complete this lesson, you'll be able to Define strategy, good strategy, good strategy execution, and good management Explain and describe the five phases of the strategymaking, strategy-executing process ASSIGNMENT 1 Read the following assignment. Then, read Chapter 1 in your textbook, Crafting and Executing Strategy. What Do We Mean by Strategy? A company's strategy is management's action plan for running the business and conducting operations. It consists of the competitive moves and business approaches that managers are employing to grow the business, attract and please customers, compete successfully, conduct operations, and achieve the targeted levels of organizational performance. A company achieves sustainable competitive advantage when an attractive number of buyers prefer its products or services over the offerings of competitors and when the basis for this preference is durable. 9 Changing circumstances and ongoing management efforts to improve the strategy cause a company's strategy to evolve over timea condition that makes the task of crafting a strategy a work in progress, not a one-time event. A company's strategy is shaped partly by management analysis and choice, and partly by the need of adapting and learning by doing. A winning strategy must fit the enterprise's external and internal situation, build sustainable competitive advantage, and improve company performance. Strategy and Ethics A strategy can't be considered ethical just because it involves actions that are legal. To meet the standard of being ethical, actions must be able to pass moral scrutiny in the sense of not being shady, unconscionable, injurious to others, and unnecessarily harmful to the environment. Why Are Crafting and Executing Strategy Important? Excellent execution of an excellent strategy is the best test of managerial excellenceand the most reliable recipe for turning companies into standout performers. Keep in mind the following formula for success: Good Strategy + Good Strategy Execution = Good Management Now that you've finished Assignment 1, complete Self-Check 1. Check your answers with those provided at the back of this study guide. When you're sure that you completely understand the material from Assignment 1, move on to Assignment 2. 10 Strategic Business Management Self-Check 1 At the end of each section of Strategic Business Management, you'll be asked to pause and check your understanding of what you've just read by completing a \"Self-Check\" exercise. Answering these questions will help you review what you've studied so far. Please complete Self-Check 1 now. Online Quiz Go to the following link, where you'll find a multiple-choice quiz for Chapter 1: http://novella.mhhe.com/sites/0078112729/student_view0/chapter1/chapter_test.html The answers will appear when you click the Submit Answers button. 1-6: Indicate whether each of the following statements is True or False. ______ 1. A company's strategy is management's action plan for running the business and conducting operations. ______ 2. A company's strategy consists of the competitive moves and business approaches that managers employ to grow the business, attract and please customers, compete successfully, conduct operations, and achieve the targeted levels of organizational performance. ______ 3. A company achieves sustainable competitive advantage when a modest number of buyers prefer its products or services over the offerings of competitors and when the basis for this preference is durable. ______ 4. Crafting a strategy is a one-time event. ______ 5. A company's strategy is shaped by management analysis and choice, excluding the need for adapting and learning by doing. ______ 6. Having a good strategy and good strategy execution results in good management. (Continued) Lesson 1 11 Self-Check 1 7. In the course of crafting a strategy, what does management commonly do? a. Decide to abandon certain strategy elements that have grown stale or become obsolete b. Modify the current strategy when market and competitive conditions take an unexpected turn or some aspects of the company's strategy hit a stone wall c. Modify the current strategy in response to the fresh strategic maneuvers of rival firms d. All of the above 8. Which of the following is not something with which a company's strategy is concerned? a. b. c. d. Management's choices about how to attract and please customers How quickly and closely to copy the strategies being used by successful rival companies Management's choices about how to grow the business Management's choices about how to compete successfully 9. A winning strategy is one that a. fits the company's internal and external situation, builds sustainable competitive advantage, and improves company performance. b. builds strategic fit, is socially responsible, and maximizes shareholder wealth. c. is highly profitable and boosts the company's market share. d. can pass the ethical-standards test, the strategic-intent test, and the profitability test. Check your answers with those on page 81. ASSIGNMENT 2 Read the following assignment. Then, read Chapter 2 in your textbook, Crafting and Executing Strategy. Assignment 2 illustrates the five interrelated and integrated phases of crafting and executing a company's strategy. Phase 1: Developing a Strategic Vision A strategic vision describes the route a company intends to take in developing and strengthening its business. It lays out the company's strategic course in preparing for the future. 12 Strategic Business Management The distinction between a strategic vision and a mission statement is fairly clear-cut: A strategic vision portrays a company's future business scope (\"where we're going\"), whereas a company's mission typically describes its present business and purpose (\"who we are, what we do, and why we're here\"). An effectively communicated vision is a valuable management tool for enlisting the commitment of company personnel to actions that get the company moving in the intended direction. Strategic visions become real only when the vision statement is imprinted in the minds of organization members and then translated into hard objectives and strategies. A company's values are the beliefs, traits, and behavioral norms that company personnel are expected to display in conducting the company's business and pursuing its strategic vision and strategy. Phase 2: Setting Objectives Objectives are an organization's performance targetsthe results and outcomes management wants to achieve. They function as yardsticks for measuring how well the organization is doing. Setting stretch objectives, which push the envelope of the organization's abilities, is an effective tool for avoiding ho-hum results. Financial objectives relate to the financial performance targets that management has established for the organization to achieve. Strategic objectives relate to target outcomes that indicate a company is strengthening its market standing, competitive vitality, and future business prospects. A company that pursues and achieves strategic outcomes that boost its competitiveness and strength in the marketplace is in a much better position to improve its future financial performance. A company exhibits strategic intent when it relentlessly pursues an ambitious strategic objective, concentrating the full force of its resources and competitive actions on achieving that objective. Lesson 1 13 Phase 3: Crafting a Strategy A strategic plan lays out the company's future direction, performance targets, and strategy. In most companies, crafting and executing strategy is a team effort in which every manager has a role for the area he or she heads. Crafting and executing strategy isn't something only high-level managers do. A company's strategy is at full power only when its many pieces are united, as demonstrated by the following equation: Strategic Vision + Objectives + Strategy = Strategic Plan Phase 4: Implementing and Executing the Strategy Implementing strategy involves the following steps: Staffing the organization Allocating resources Implementing procedures that help, rather than hinder, execution Pushing for continuous improvement Using technology effectively Motivating people Creating a positive work culture Phase 5: Evaluating Performance and Initiating Corrective Adjustments A company's vision, objectives, strategy, and approach to strategy execution are never final. Managing strategy is an ongoing process, not an every-now-and-then task. 14 Strategic Business Management Corporate Governance: The Role of the Board of Directors While executives and senior managers have lead responsibility for crafting and executing a company's strategy, the duty of the board of directors is to exercise strong oversight over their actions. The board is represents the company's shareholders, and makes sure their interests are protected. Now that you've finished Assignment 2, complete Self-Check 2. Check your answers with those provided at the back of this study guide. When you're sure that you completely understand the material from Assignments 1 and 2, complete the exam for Lesson 1. Case 4Costco Read Case 4, pages C-54-C-74. As you read, answer the five questions covered in this assignment. Use this first case to familiarize yourself with the types of questions used in this course. This is your first case, so you're not expected to develop detailed answers. Use these discussion questions to familiarize yourself with the case-analysis process. 1. Do you think Jim Sinegal is an effective CEO? What grades would you give him in leading the process of crafting and executing Costco's strategy? What support can you offer for these grades? Refer to Figure 2.1 in Chapter 2 in developing your answers. 2. Based on the data in case Exhibit 1, is Costco's financial performance superior to that of Sam's Club and BJ's Wholesale? 3. How well is Costco performing from a strategic perspective? Does Costco enjoy a competitive advantage over Sam's Club? Over BJ's Wholesale? If so, what's the nature of its competitive advantage? Does Costco have a winning strategy? Why or why not? 4. Are Costco's prices too low? Why or why not? 5. Summarize your thoughts with respect to Costco. Answers to these questions are provided in the Case Study Answers section at the back of this study guide. Keep in mind that your answers won't be exactly the same; the provided answers are only a guide. Lesson 1 15 Self-Check 2 Online Quiz Go to the following link, where you'll find a multiple-choice quiz for Chapter 2: http://novella.mhhe.com/sites/0078112729/student_view0/chapter2/chapter_test.html The answers will appear when you click the Submit Answers button. 1-5: Indicate whether each of the following statements is True or False. ______ 1. A strategic plan consists of setting objectives and crafting a strategy, but doesn't include developing a strategic vision. ______ 2. The first phase of the strategy-making, strategy-executing process is the development of a strategic vision. ______ 3. Development of a strategic vision is followed by implementing and executing strategy, which is followed by setting strategic objectives. ______ 4. The final phase of the strategy-making, strategy executing process is implementing and executing the strategy. ______ 5. The final phase of the strategy-making, strategy-executing process is the evaluation of performance and the initiation of corrective adjustments. 6. Developing a strategic vision for a company entails which of the following? a. Prescribing a strategic direction for the company to pursue and a rationale for why this strategic path makes good business sense b. Describing its business model and the kind of value that it's trying to deliver to customers c. Putting together a story line of why the business will be a moneymaker d. Coming up with a long-term plan for outcompeting rivals and achieving a competitive advantage (Continued) 16 Strategic Business Management Self-Check 2 7. Which of the following statements is true about a company's overall strategy? a. It determines whether its strategic intent is proactive or reactive. b. It's subject to being changed much less frequently than either its objectives or its mission statement, and thus serves as the base of its strategy-making pyramid. c. It's really a collection of strategic initiatives and actions devised by managers and key employees up and down the whole organizational hierarchy. d. It's customarily reviewed and approved, level-by-level, by the company's board of directors. 8. Which one of the following descriptions is not a characteristic of an effectively worded strategic vision statement? a. Directional (forward-looking, describes the strategic course that management has charted, and the kinds of product-market-customer-technology changes that will help the company prepare for the future) b. Easy to communicate (explainable in 10-15 minutes, can be reduced to a memorable slogan) c. Graphic (paints a picture of the kind of company management is trying to create and the market position the company is striving to stake out) d. Consensus-driven (commits the company to a \"mainstream\" directional path that most all stakeholders will enthusiastically support) Check your answers with those on page 81. Lesson 1 17 NOTES 18 Strategic Business Management INTRODUCTION Lesson 2 Core Concepts and Analytical Tools Assignments 3 and 4 provide a seven-question framework to evaluate a company's external environment and a five-question framework to examine the company's resources and competitive position. You'll review a second case following Assignment 4. OBJECTIVES When you complete this lesson, you'll be able to List the seven questions to ask when evaluating a company's external environment List the five questions to ask when examining a company's resources and competitive position Explain driving forces, strategic group mapping, and key success factors Explain SWOT analysis and benchmarking 19 ASSIGNMENT 3 Read the following assignment. Then, read Chapter 3 in your textbook, Crafting and Executing Strategy. Thinking Strategically about a Company's Industry and Competitive Environment Question 1: Does the Industry Offer Attractive Opportunities for Growth? Analyzing a company's competitive environment begins with analyzing the industry of which the company is a part. Table 3.1 on page 52 of your text gives a list of economic features and questions to ask about them when analyzing an industry. Question 2: What Kinds of Competitive Forces Are Industry Members Facing, and How Strong Are They? Competitive jockeying among industry rivals is ever changing, as rivals initiate fresh offensive and defensive moves and emphasize first one mix of competitive weapons and then another in efforts to improve their market positions. High entry barriers and weak entry threats today don't always translate into high entry barriers and weak entry threats tomorrow. Barriers fall as the industry changes and develops over time. The stronger the forces of competition, the harder it becomes for industry members to earn attractive profits. A company's strategy becomes increasingly effective the more it provides some insulation from competitive pressures and shifts the competitive battle in the company's favor. Question 3: What Factors Are Driving Industry Change, and What Impacts Will They Have? Industry conditions change as forces drive industry participants (competitors, customers, and suppliers) to alter their actions. The drivers of change in an industry are the major underlying 20 Strategic Business Management causes of changing industry and competitive conditionsthey have the biggest influence on how the industry landscape will be altered. Some of these forces originate in the macro environment and some originate from the immediate competitive environment. Some examples of drivers of industry change are Technological change Globalization Product innovation Entry or exit of major firms Manufacturing innovation Marketing innovation New Internet capabilities and applications Regulatory changes Societal changes Table 3.3 on page 76 of your text provides an excellent summary of the most common drivers of industry change. An important part of driving-forces analysis is to determine whether the collective impact of the drivers will be to increase or decrease market demand, make competition more or less intense, and lead to higher or lower industry profitability. Driver analysis, when done properly, pushes company managers to think about what's around the corner and what the company must be doing to get ready for it. The real payoff of driver analysis is to help managers understand what strategy changes are needed to prepare for the impacts of the drivers. Question 4: How Are Industry Rivals Positioned Who Is Strongly Positioned and Who Is Not? A strategic group is a cluster of industry rivals that have similar competitive approaches and market positions. Strategic group mapping is a technique for displaying the different market or competitive positions that rival firms occupy in the industry. Strategic group maps reveal which companies are close competitors, and which are distant competitors. Not all positions on a strategic group map are equally attractive. Lesson 2 21 Illustration Capsule 3.1 on page 79 of your text is an excellent example of a strategic group map. Question 5: What Strategic Moves Are Rivals Likely to Make Next? Good scouting reports on rivals provide valuable assistance in anticipating what moves rivals are likely to make next, and enable a company to outmaneuver its rivals in the marketplace. Managers who fail to study competitors closely risk being caught unprepared when rivals make fresh strategic moves. Today's market leaders don't automatically remain tomorrow's. For example, the major U.S. automakers were caught unprepared when consumer sentiment switched from large, gas-guzzling SUVs to smaller, more efficient vehicles in the early years of the twenty-first century. Japanese firms, meanwhile, were already producing hybrids and other efficient cars, and were thus able to snatch market share. Question 6: What Are the Key Factors for Future Competitive Success? Key success factors are the product attributes, competencies, competitive capabilities, and market achievements with the greatest impact on future competitive success in the marketplace. A sound strategy incorporates the intent to stack up well on all the industry's key success factors and to excel in one or two of those factors. Question 7: Does the Industry Offer Good Prospects for Attractive Profits? The degree to which an industry is attractive or unattractive isn't the same for all industry participants and all potential entrants; the attractiveness of the opportunities an industry presents depends heavily on whether a company has the resource strengths and competitive capabilities to capture those opportunities. 22 Strategic Business Management Now that you've finished Assignment 3, complete Self-Check 3. Check your answers with those provided at the back of this study guide. When you're sure that you completely understand the material from Assignment 3, move on to Assignment 4. Self-Check 3 Online Quiz Go to the following link, where you'll find a multiple-choice quiz for Chapter 3: http://novella.mhhe.com/sites/0078112729/student_view0/chapter3/chapter_test.html The answers will appear when you click the Submit Answers button. 1. Competitive jockeying and market maneuvering among industry rivals a. determines whether the industry's strategic group map will be static or dynamic. b. centers around collaborative efforts to overcome the bargaining power of powerful suppliers and powerful buyers. c. is ever-changing as fresh offensive and defensive moves are initiated, and as rivals emphasize first one mix of competitive weapons and tactics and then another. d. is usually one of the two or three weakest competitive forces because of the close familiarity that rivals have with one another's likely next moves and the ability to make advance preparations for countering such moves. 2. Which of the following statements is true industry-driver analysis? a. It involves identifying the drivers of industry, assessing whether their impact will make the industry more or less attractive, and determining what strategy changes a company must make to prepare for the impacts of the drivers of industry. b. It identifies which strategic group is the most powerful. c. It helps managers identify which industry member is likely to become (or remain) the industry leader and why. d. It helps managers identify which of the five competitive forces will be the strongest driver of industry change. (Continued) Lesson 2 23 Self-Check 3 3. Which one of the following is not a common type of industry driver? a. b. c. d. Technological change and manufacturing-process innovation Changing societal concerns, attitudes, and lifestyles Diffusion of technical know-how across more companies and more countries Increasing efforts on the part of industry members to collaborate closely with their suppliers 4. Factors that tend to result in weak rivalry among competing sellers include which of the following? a. Low buyer switching costs and low barriers to entry b. Rapid growth in buyer demand, high buyer costs to switch brands, and so many industry rivals that any one company's actions have little impact on its rivals' businesses c. Conditions in which outsiders have recently acquired weak competitors and are trying to turn them into major contenders d. Rivals that are quite diverse in terms of their strategies, objectives, and countries of origin 5. Competitive pressures stemming from the threat of entry are weaker when a. there are fewer than 20 potential entry candidates and more than 10 firms already in the industry. b. the industry outlook is risky or uncertain. c. incumbent firms have little ability to leverage distributors, dealers, and/or retailers to retain their business. d. the nature of the industry entails few scale economies. 6. Collaborative relationships between particular sellers and buyers in an industry can represent a source of strong competitive pressure when a. virtually all buyers have strong brand attachments and are highly brand loyal. b. demand for the product is growing rapidly. c. one or more rival sellers form mutually advantageous partnerships with important, or prestigious, buyers such that rivals lacking such partnerships are placed at a competitive disadvantage. d. sellers are racing to add the latest and greatest performance features so as to attract the patronage of important or prestigious buyers. Check your answers with those on page 81. 24 Strategic Business Management ASSIGNMENT 4 Read the following assignment. Then, read Chapter 4 in your textbook, Crafting and Executing Strategy. Evaluating a Company's Resources, Capabilities, and Competitiveness In this assignment, you'll learn how to evaluate a company's resources and competitive strength in comparison to its rivals using five main questions, and many supplemental ones. Question 1: How Well Is the Company's Present Strategy Working? The stronger a company's financial performance and market position, the more likely it has a well-conceived, well-executed strategy. Question 2: What Are the Company's Competitively Important Resources and Capabilities? There are two main categories of resources: tangible and intangible. Table 4.2 on page 97 offers a good explanation these types of company resources. A capability, which is the capacity of a firm to perform some activity proficiently, is a little more complex. Derived from resources, capabilities might include capacities such as creativity, expertise, innovative potential, and adaptability. Overall, they're frequently cross-functional. Question 3: Is the Company Able to Seize Market Opportunities and Nullify External Threats? SWOT analysis is a simple, but powerful, tool for sizing up a company's resource capabilities and deficiencies, its market opportunities, and the external threats to its future wellbeing. A company's resource strengths represent competitive assets and are big determinants of its competitiveness and ability to succeed in the marketplace. Simply making lists of Lesson 2 25 a company's strengths, weaknesses, opportunities, and threats isn't enough; the payoff from SWOT analysis comes from the conclusions about a company's situation and the implications for strategy improvement that flow from the four lists. A company's ability to succeed in the marketplace hinges to a considerable extent on the competitive power of its resourcesthe set of competencies, capabilities, and competitive assets at its command. A competence is an activity that a company has learned to perform well. A core competence is a competitively important activity that a company performs better than other internal activities. A distinctive competence is a competitively important activity that a company performs better than its rivalsit thus represents competitively superior resource strength. A distinctive competence is competitively potent resource strength for three reasons: 1. It gives a company competitively valuable capability that's unmatched by rivals. 2. It can underpin and add real punch to a company's strategy. 3. It's a basis for sustainable competitive advantage. A company's resource strengths represent competitive assets; its resource weaknesses represent competitive liabilities. A company is well advised to pass on a particular market opportunity unless it has, or can acquire, the resources to capture it. Question 4: Are the Company's Prices and Costs Competitive with Those of Key Rivals, and Does It Have an Appealing Customer Value Proposition? The higher a company's costs are above those of close rivals, the more competitively vulnerable it becomes. A company's value chain identifies the primary activities that create customer value and the related support activities. A good way to secure competitive advantage is by performing value-chain activities in ways that give a company the ability to either outmatch the competencies and capabilities of its rivals or beat them on costs. A company's cost-competitiveness depends on not 26 Strategic Business Management only the costs of internally performed activities (its own value chain), but also the costs in the value chains of its suppliers and forward channel allies. Benchmarking is a potent tool for learning which companies are best at performing particular activities, and then using their techniques (or \"best practices\") to improve the cost and effectiveness of a company's own internal activities. Benchmarking the costs of company activities against rivals provides hard evidence of whether a company is cost-competitive. Question 5: Is the Company Competitively Stronger or Weaker than Key Rivals? A weighted competitive-strength analysis is conceptually stronger than an unweighted analysis because of the inherent weakness in assuming that all the strength measures are equally important. High competitive-strength ratings signal competitive position and possession of competitive advantage; low ratings signal a weak position and competitive disadvantage. A company's competitive-strength scores pinpoint its strengths and weaknesses against rivals, and point directly to the kinds of offensive/defensive actions it can use to exploit its competitive-strengths and reduce its competitive vulnerabilities. Question 6: What Strategic Issues and Problems Merit Front-Burner Managerial Attention? Zeroing in on the strategic issues a company faces and compiling a \"worry list\" of problems and roadblocks creates a strategic agenda of problems that merit prompt managerial attention. Actually deciding upon a strategy and what specific actions to take is the result of developing a list of strategic issues and problems. A good strategy must include ways to deal with all the strategic issues and obstacles that stand in the way of the company's financial and competitive success in the years ahead. Lesson 2 27 Case 5Competition in Energy Drinks Read Case 5, pages C-75-C-87, and answer the discussion questions below. As you read, answer the two questions covered in this assignment. 1. What are the strategically relevant components of the global and U.S. beverage industry macro-environment? How do the economic characteristics of the alternative beverage segment of the industry differ from that of other beverage categories? Explain. 2. What is competition like in the alternative beverage industry? Which of the five competitive forces is strongest? Which is weakest? What competitive forces seem to have the greatest effect on industry attractiveness and the potential profitability of new entrants? Answers to these questions are provided in the Case Study Answers section at the back of this study guide. Keep in mind that your answers won't be exactly the same; the provided answers are only a guide. Now that you've finished Assignment 4, complete Self-Check 4. Check your answers with those provided at the back of this study guide. When you're sure that you completely understand the material from Assignments 3 and 4, take the exam for Lesson 2. Self-Check 4 Online Quiz Go to the following link, where you'll find a multiple-choice quiz for Chapter 4: http://novella.mhhe.com/sites/0078112729/student_view0/chapter4/chapter_test.html The answers will appear when you click the Submit Answers button. (Continued) 28 Strategic Business Management Self-Check 4 1-4: Indicate whether each of the following statements is True or False. ______ 1. SWOT analysis is a simple, but powerful, tool for sizing up a company's resource capabilities and deficiencies, its market opportunities, and the external threats to its future well-being. ______ 2. A distinctive competence is a competitively important activity that a company performs better than its rivalsit thus represents competitively superior resource strength. ______ 3. A company's value chain identifies the primary activities that create customer value and the related support activities. ______ 4. Benchmarking is a potent tool for learning which companies are best at performing particular activities, and then using their techniques (or \"best practices\") to improve the cost and effectiveness of a company's own internal activities. 5. The options for remedying an internal cost disadvantage include which of the following? a. Investing in productivity-enhancing, cost-saving technological improvements b. Redesigning the product, or some of its components, to facilitate speedier and more economical manufacture or assembly c. Implementing the use of best practices, particularly for high-cost activities d. All of the above 6. One important indicator of how well a company's present strategy is working is assessing whether a. it's subject to weaker competitive forces and pressures than close rivals (a good sign) or stronger competitive forces and pressures (a bad sign). b. its strategy is built around at least two of the industry's key success factors. c. the company is achieving its financial and strategic objectives, and whether it's an above-average industry performer. d. it's customarily a first-mover in introducing new or improved products (a good sign) or a late-mover (a bad sign). (Continued) Lesson 2 29 Self-Check 4 7. Which of the following is the best example of a company strength? a. Having higher earnings per share and a higher return on shareholders' equity investment than key rivals b. Having proven technological expertise and the ability to churn out new and improved products on a regular basis c. Being totally self-sufficient such that the company doesn't have to rely in any way on key suppliers, partnerships with outsiders, and strategic alliances d. Having a larger number of competitive assets than competitive liabilities 8. One of the most telling signs of whether a company's market position is strong or precarious is a. b. c. d. whether its prices and costs are competitive with those of key rivals. whether its product is strongly or weakly differentiated from rivals. whether it has a lower stock price than key rivals. the opinions of buyers regarding which seller has the best product quality and customer service. Check your answers with those on page 82. 30 Strategic Business Management INTRODUCTION The first two lessons provided you with a strong, basic foundation for Lesson 3, which provides greater structure when examining, developing, and implementing the strategic business-management process. Lesson 3 Crafting a Strategy Assignment 5 provides five generic, competitive strategies while Assignment 6 supplements these strategies with other important choices that must be made. Foreign markets are addressed in Assignment 7, while Assignment 8 explores tailoring strategies to fit specific industries and companies. Diversification strategies are addressed in Assignment 9. Assignment 10 addresses ethical and social responsibility topics. You'll be asked to review the following two cases as part of your homework assignments: Case 15Skype versus AT&T Case 2Whole Foods Market in 2010 Case 16Sara Lee Corporation OBJECTIVES When you complete this lesson, you'll be able to List the five generic competitive strategies Explain and provide examples of the supplemental strategies Define what motivating factors might lead a firm to expand into, or choose to compete in, foreign markets Discuss a variety of conditions that require tailoring these strategies to fit specific industries or company situations, including diversification Address ethical and social responsibility considerations, including the three categories of management morality 31 ASSIGNMENT 5 Read the following assignment. Then, read Chapter 5 in your textbook, Crafting and Executing Strategy. A competitive strategy concerns the specifics of management's game plan for competing successfully and securing a competitive advantage over rivals. The objective of competitive strategy is to best rival companies by doing a better job of satisfying buyer needs and preferences. The Five Generic Competitive Strategies Review Figure 5.1 on the bottom of page 136 of your text, which outlines these five generic competitive strategies: Low-cost provider strategies Broad differentiation strategies Best-cost provider strategies Focused (market niche) strategy based on low costs Focused (market niche) strategy based on differentiation Low-Cost Provider Strategies A low-cost leader's basis for competitive advantage is lower overall costs than competitors. Successful low-cost leaders are exceptionally good at finding ways to drive costs out of their businesses. A low-cost provider is in the best position to win the business of price-sensitive buyers, set the floor on market price, and still earn a profit. Success in achieving a low-cost edge over rivals comes from outmanaging rivals in figuring out how to perform value-chain activities in the most cost-effective manner, and eliminating or curbing nonessential value-chain activities. Remember: A lowcost provider's product offering must always contain enough attributes to be attractive to prospective buyerslow price, by itself, isn't always appealing to buyers. 32 Strategic Business Management Broad Differentiation Strategies The essence of a broad differentiation strategy is to be unique in ways that are valuable to a wide range of customers. Easyto-copy differentiating features can't produce sustainable competitive advantage; differentiation based on competencies and capabilities tends to be more sustainable. A differentiator's basis for competitive advantage is either a product/service offering whose attributes differ significantly from the offerings of rivals, or a set of capabilities for delivering customer value that rivals don't have. Any differentiating feature that works well is a magnet for imitators. For example, consider the many devices that have tried to imitate the iPod and iPhone. Best-Cost Provider Strategies The competitive advantage of a best-cost provider is lower costs than rivals in incorporating upscale attributes, putting the company in a position to underprice rivals whose products have similar upscale attributes. Case 15Skype versus AT&T Read Case 15, pages C-226-C-242. As you read, answer the three questions covered in this assignment. 1. What are the dominant economic characteristics of the VoIP industry? 2. What does the five-forces analysis reveal about the chances for profitability in the VoIP industry? 3. What is Skype's current strategy, and what type of corporate strategy are they employing? Answers to these questions are provided in the Case Study Answers section at the back of this study guide. Keep in mind that your answers won't be exactly the same; the provided answers are only a guide. Now that you've finished Assignment 5, complete Self-Check 5. Check your answers with those provided at the back of this study guide. When you're sure that you completely understand the material from Assignment 5, move on to Assignment 6. Lesson 3 33 Self-Check 5 Online Quiz Go to the following link, where you'll find a multiple-choice quiz for Chapter 5: http://novella.mhhe.com/sites/0078112729/student_view0/chapter5/chapter_test.html The answers will appear when you click the Submit Answers button. 1-6: Indicate whether each of the following statements is True or False. ______ 1. A competitive strategy concerns the specifics of management's game plan for competing successfully and securing a competitive advantage over rivals. ______ 2. A low-cost leader's basis for competitive advantage is higher overall revenues than its competitors. ______ 3. Successful low-cost leaders are exceptionally good at finding ways to drive revenues higher in their businesses. ______ 4. A low-cost provider is in the best position to win the business of price-insensitive buyers, set the ceiling on market price, and still earn a very small profit. ______ 5. Any differentiating feature that works well is likely to be copied by competitors. ______ 6. Easy-to-copy differentiating features can produce sustainable competitive advantage. 7. Which one of the following generic types of competitive strategy is typically the best strategy for a company to employ? a. b. c. d. A low-cost leadership strategy A broad differentiation strategy A best-cost provider strategy There's no such thing as a \"best\" competitive strategy; a company's \"best\" strategy is always one that's customized to fit both its industry and competitive conditions and its own resources and competitive capabilities. (Continued) 34 Strategic Business Management Self-Check 5 8. A low-cost leader's basis for competitive advantage is a. b. c. d. lower prices than rival firms. meaningfully lower overall costs than competitors. high buyer switching costs. using a low cost/low price approach to gain the biggest market share. 9. The essence of a broad differentiation strategy is to a. appeal to the high-end part of the market and concentrate on providing a top-of-the-line product to consumers. b. incorporate a greater number of differentiating features into its product/service than rivals. c. be unique in ways that are valuable and appealing to a wide range of buyers. d. outspend rivals on advertising and promotion to inform and convince buyers of the value of its differentiating attributes. Check your answers with those on page 82. ASSIGNMENT 6 Read the following assignment. Then, read Chapter 6 in your textbook, Crafting and Executing Strategy. Collaborative Strategies: Alliances and Partnerships Strategic alliances are collaborative arrangements in which two or more companies join forces to achieve mutually beneficial strategic outcomes. Company use of alliances is quite widespread. The best alliances are highly selective, focusing on particular value-chain activities and on obtaining a particular competitive benefit. They tend to enable a firm to build on its strengths, and to learn. The competitive attraction of alliances is in allowing companies to bundle competencies and resources that are more valuable in a joint effort than when kept separate. Lesson 3 35 Merger and Acquisition Strategies Combining the operation of two companies, via merger or acquisition, is an attractive strategic option for achieving operating economies, strengthening the resulting company's competencies and competitiveness, and opening up avenues of new market opportunity. These mergers don't always work out as planned, howeverconsider, for example, the AOL-Time Warner and Daimler-Chrysler mergers, both of which led to lower stock prices and few noticeable efficiencies. Vertical Integration Strategies: Operating across More Stages of the Industry Value Chain Vertical integration means extending a company's reach up and down the \"ladder\" of business: from supply lines to the customer. A vertical integration strategy has appeal only if it significantly strengthens a firm's competitive position. There's a danger in trying to be a jack of all tradesspecialized supply companies may be more efficient, and competing with established resellers isn't always easy. For example, when Dell decided to begin selling ready-made computers in addition to custom builds, it partnered with Best Buy and other retailers rather than attempting to build its own stores. Outsourcing Strategies: Narrowing the Boundaries of the Business Outsourcing involves farming out certain value-chain activities to outside vendors. A company generally shouldn't perform any value-chain activity internally that can be performed more efficiently or effectively by outsidersthe chief exception is when a particular activity is strategically crucial and internal control over that activity is deemed essential. For carmakers, for example, buying parts from specialized manufacturers is easier than building the manufacturing facilities for each part in-house. 36 Strategic Business Management Outsourcing has gained a bad reputation in recent years due to many companies sending back-office functions like customer service to call centers overseas and closing manufacturing plants in the United States and building new ones in lowwage countries, both of which led to job losses in the United States. This trend has begun to reverse somewhat recently because of the high cost of fuel and customer backlash at poor service from foreign contractors. Offensive Strategies: Improving Market Position and Building Competitive Advantage Building competitive advantage requires successful offensive strategiesgood defensive strategies can help protect competitive advantage, but rarely are the basis for creating it. The best offensives use a company's resource strengths to attack rivals in those competitive areas in which they're weak. Defensive Strategies: Protecting Market Position and Competitive Advantage Discerning when to fortify a company's present market position with defensive actions is just as important as seizing the initiative and launching strategic offensives. There are many ways to throw obstacles in the path of would-be challengers, which include Developing alternative technology Introducing of new features or models to reach different customers Maintaining low prices or using samples and coupons Offering longer warranties and better customer service Arranging exclusivity deals with distributors or retailers Lesson 3 37 Web Site Strategies Companies today must wrestle with the strategic issue of how to use their Web sites in positioning themselves in the marketplacewhether to use their Web sites just to disseminate product information or to operate an e-store to sell direct to online shoppers. Now that you've finished Assignment 6, complete Self-Check 6. Check your answers with those provided at the back of this study guide. When you're sure that you completely understand the material from Assignment 6, move on to Assignment 7. Self-Check 6 Online Quiz Go to the following link, where you'll find a multiple-choice quiz for Chapter 6: http://novella.mhhe.com/sites/0078112729/student_view0/chapter6/chapter_test.html The answers will appear when you click the Submit Answers button. 1-6: Indicate whether each of the following statements is True or False. ______ 1. Strategic alliances are collaborative arrangements in which two or more companies join forces to achieve mutually beneficial strategic outcomes. ______ 2. The best alliances are rarely selective, focusing on no particular value-chain activities or obtaining any particular competitive benefits. ______ 3. Combining the operation of two companies, via merger or acquisition, is an attractive strategic option for achieving operating economies, strengthening the resulting company's competencies and competitiveness, and opening up avenues of new market opportunity. (Continued) 38 Strategic Business Management Self-Check 6 ______ 4. Outsourcing involves farming out certain value-chain activities to outside vendors. ______ 5. Building competitive advantage requires successful offensive strategies. ______ 6. The best offensives use a company's resource strengths to attack rivals in those competitive areas in which they're weak. 7. A company that elects to use the Internet as its exclusive channel for accessing buyers must address which of the following strategic issues? a. b. c. d. Whether it will have a broad or narrow product offering How it will deliver unique value to buyers How it will draw traffic to its Web site and then convert page views into revenues All of the above 8. Which of the following statements is true of outsourcing strategies? a. They're nearly always a more attractive strategic option than merger and acquisition strategies. b. They involve farming out value-chain activities presently performed in-house to outside specialists and strategic allies. c. They carry the substantial risk of making a company overly dependent on its suppliers. d. They increase a company's risk exposure to changing technology and buyer preferences. Check your answers with those on page 82. ASSIGNMENT 7 Read the following assignment. Then, read Chapter 7 in your textbook, Crafting and Executing Strategy. Why Companies Decide to Enter Foreign Markets The five reasons for expansion outside of the domestic market are 1. Gaining access to new customers 2. Lowering costs and increasing competitiveness Lesson 3 39 3. Capitalizing on core competencies 4. Gaining access to resources and capabilities located in foreign markets 5. Spreading business risk across a wider market base Cross-Country Differences in Cultural, Demographic, and Market Conditions Companies with manufacturing facilities in a particular country are more cost-competitive in exporting goods to world markets when the local currency is weak (or declines in value relative to other currencies); their competitiveness erodes when the local currency grows stronger relative to the currencies of the countries to which the locally made goods are being exported. Fluctuating exchange rates pose significant risks to a company's competitiveness in foreign markets. Exporters win when the currency of the country where goods are being manufactured grows weaker, and they lose when the currency grows stronger. Domestic companies under pressure from lower-cost imports are benefited when their government's currency grows weaker in relation to the countries where the imported goods are being made. The Concepts of Multicountry Competition and Global Competition Multicountry competition exists when competition in one national market isn't closely connected to competition in another national marketthere's no global or world market, just a collection of self-contained country markets. Global competition exists when competitive conditions across national markets are linked strongly enough to form a true international market, and when leading competitors compete head-to-head in many different countries. 40 Strategic Business Management Strategy Options for Entering and Competing in Foreign Markets A localized or multicountry strategy is one in which a company varies its product offering and competitive approach from country to country in an effort to be responsive to differing buyer preferences and market conditions. A global strategy is one in which a company employs the same basic competitive approach in all countries where it operates, sells much of the same products everywhere, strives to build global brands, and coordinates its actions worldwide. Companies that compete multinationally can pursue competitive advantage in world markets by locating their value-chain activities in whatever nations prove most advantageous. Profit Sanctuaries, Cross-Market Subsidization, and Global Strategic Offensives Companies with large, protected profit sanctuaries have competitive advantage over companies that don't have a protected profit sanctuary. Companies with multiple profit sanctuaries have a competitive advantage over companies with only a single sanctuary. A powerful competitive weapon is cross-market subsidization supporting competitive offensives in one market with resources and profits diverted from operations in other markets. Three strategy offensives that are particularly suitable for competing in foreign markets involve 1. Attacking a foreign rival's profit sanctuaries 2. Employing cross-market subsidization 3. Dumping goods at cut-rate prices in the markets of foreign rivals Lesson 3 41 This last strategy can backfire, as the foreign company's government may impose punitive tariffs in retaliation. In addition, the World Trade Organization actively discourages dumping, and allows governments to take action against it. Strategic Alliances and Joint Ventures with Foreign Partners Cross-border alliances have proved to be popular and viable vehicles for companies to edge their way into markets of foreign countries. Cross-border alliances enable a growth-minded company to widen its geographic coverage and strengthen its competitiveness in foreign markets while, at the same time, offering flexibility and allowing a company to retain some degree of autonomy and operating control. Strategic alliances are more effective in helping establish a beachhead of new opportunity in world markets than in achieving and sustaining global leadership. Strategies That Fit the Markets of Emerging Countries Profitability in emerging markets rarely comes quickly or easilynew entrants must adapt their business models and strategies to local conditions and be patient in earning a profit. Strategies for Competing In Emerging Industries Companies in an emerging industry have wide latitude in experimenting with different strategic approaches because the \"rules\" of the industry haven't been established yet. Companies must navigate many uncertainties in emerging markets, from the technology to buyer sentiment. 42 Strategic Business Management In Rapidly Growing Markets In a fast-growing market, a company needs a strategy predicated on growing faster than the market average, so that it can boost its market share and improve its competitive standing vis--vis rivals. Such a strategy may include Decreasing costs Rapid product innovation Accessing new distribution channels Expanding into new geographic areas Expanding the product line In Maturing Industries A maturing industry is one moving from rapid growth to significantly slower growth. This can be a particularly turbulent time for a company, as it must adjust to slower growth patterns without losing market share. Strategies appropriate for maturing markets include Trimming marginal products Improving efficiency Cutting costs Increasing sales to current customers Acquiring rivals Expanding internationally Building new capabilities In Stagnant or Declining Industries An erroneous assumption is that companies in a declining industry are doomed to have declining revenues and profits. Whether or not this holds true depends on how fast the industry market is declining, how strong rival companies are, and whether there are markets within the industry that are stable. Ultimately, however, a company may need to develop an exit strategy. Lesson 3 43 In Turbulent, High-Velocity Markets A sound way to deal with turbulent market conditions is to try to lead change with proactive strategic moves while simultaneously trying to anticipate and prepare for upcoming changes and being quick to react to unexpected developments. This can be done by investing in research and development (R&D), keeping products innovative, and developing strategic partnerships. In Fragmented Industries Fragmented industries are those populated by hundreds, or even thousands, of small- and medium-sized companies. These industries are often of the type that serve local customers, such as restaurants, and that serve people with a wide variety of tastes and interests, such as retail clothing stores. Strategies for Sustaining Rapid Company Growth A portfolio of strategic alternatives is needed to achieve and m