Exam 2 study guide- notes from the textbook for mgt 2010. PDF

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MGT 2010 lecture notes from textbook for exam 2. Chapters 5-10 in textbook....

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In an era of management fads, strategic planning is still Tops. Strategic planning is concerned with developing a comprehensive program for long term success. Mission Statements describe the organizations purpose and vision statements describe its intended long-term goal. Successful managers know how to use all of them. In a world of discontinuous change Managers must always be prepared to make large, painful decisions and radically alter their business design- exiting businesses, firing people, admitting you were wrong. So, the future will demand ever more people with the golden trait the fortitude to accept and even seek psychic pain- Geoffrey Colvin Managers see truth as a moving target, always facing the hard facts avoiding falling prey to halftruths and being willing to admit when there wrong and change their ways. Strategic positioning attempts to achieve sustainable competitive advantage by preserving what is distinctive about a company. It is based on the principles that a strategy is the creation of a unique and valuable position, requires trade-offs in competing, and involves creating a “fit” among activities.

According to Michael Porter, strategic positioning attempts to achieve sustainable competitive advantage by preserving what is distinctive about a company. Performing different activities from rivals, or performing similar activities in different ways Harvard Business School professor Michael Porter suggests that every company is subject to five forces: its current competitors, possible new competitors, the threat of substitutes for its products or services, the bargaining power of its suppliers, and the bargaining power of its customers. Operating within that five-forces framework, a company must choose the right strategy—or be beaten by competitors.

Three key principles underlie strategic positioning:10

1. Strategy Is the Creation of a Unique & Valuable Position position emerges from three sources: Strategic 

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Few needs, many customers. Strategic position can be derived from serving the few needs of many customers. Example: Jiffy Lube provides only lubri- cants, but it provides them to all kinds of people with all kinds of motor vehicles. Broad needs, few customers. A strategic position may be based on serving the broad needs of just a few customers. Example: Wealth

management and investment advisory firm Bessemer Trust focuses exclusively on high–net worth clients. 

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Broad needs, many customers. Strategy may be oriented toward serving the broad needs of many customers. Example: National movie theater operator Carmike Cinemas operates only in cities with populations of fewer than 200,000 people.

2. Strategy Requires Trade-offs in Competing As a glance at the preceding choices shows, some strategies are incompatible. Thus, a company has to choose not only what strategy to follow but what strategy not to follow. Example: Neutrogena soap, points out Porter, is positioned more as a medicinal product than as a cleansing agent. In achieving this narrow positioning, the company gives up sales based on de- odorizing, gives up large volume, and accordingly gives up some manufacturing efficiencies. 3. Strategy Involves Creating a “Fit” among Activities “Fit” has to do with the ways a company’s activities interact and reinforce one another. Example: A mutual fund such as Vanguard Group follows a low-cost strategy and aligns all its activities accordingly, distributing funds directly to consumers and minimizing portfolio turn- over. However, when the short-lived (1993–1995) Continental Lite airline tried to match some but not all of Southwest Airlines’ activities, it was not successful because it didn’t apply Southwest’s entire interlocking system.

Does Strategic Management Work for Small as Well as Large Firms? One analysis of several studies found that strategic planning was appropriate not just for large firms—indeed, companies with fewer than 100 employees could benefit as well, although the improvement in financial performance was small. Never- theless, the researchers concluded, “it may be that the small improvement in perfor- mance is not worth the effort involved in strategic planning unless a firm is in a very competitive industry where small differences in performance may affect the firm’s survival potential.”12

Big-Company Ways. That is, the idea is to get consumers tied not just to a brand or device or platform but to make them captive of the company’s ecosystem—and to get them connected “as tightly as possible so they and their content are locked into one system,” says analyst Michael Gartenberg.14 Thus, Amazon, for example, sells the Kindle e-book readers at a low price so that it can then sell e-books. “Amazon is in a race to embed itself into the fabric of world-wide commerce in a way that would make it indispensable to everyone’s shopping habits,” says one colum- nist, “and to do so before its rivals wise up.” 15 Similarly, Apple enables users to easily create book content on its iBook Authors bookcreation tool, but authors will only be able to sell the results through Apple. Google attempted to promote its Google Nexus smartphone as a platform for selling Google Wallet, a cell-phone payment system.

Small-Company Ways. “I don’t feel they behave in a way that I want to support with my consumer dollars,” says Chicago profes- sor Harold Pollack about big Internet retailers like Amazon.16 So instead, Pollack started buying from small online retailers. Their prices are often higher, but he says he now has a clear conscience. Whereas the strategy of big e-commerce companies is to try to tightly connect consumers with discounted prices, free ship- ping, and easy-to-use apps, the strategy of small retailers —like Hello Hello Books in Maine—is to discourage price comparisons (as in creating “buy it where you try it” campaigns or refusing to carry popular items carried by big retailers), offer freebies, and attempt to establish a personal or emotional connection with customers. They also try to exploit the sympathies of shoppers to “support the little guy,” as Pollack is doing. The strategic-management process has five steps: Establish the mission and the vision. Assess the current reality. Formulate the grand strategy. Implement the strategy. Maintain strategic control. All the steps may be affected by feedback that enables the taking of constructive action.

The strategic-management process has five steps, plus a feedback loop,

Step 1: Establish the Mission & the Vision We discussed mission and vision in Chapter 5 and explain them further in the next section. The mission, you’ll recall, is the organization’s purpose or reason for being, and it is expressed in a mission state- ment. An organization’s vision is its long-term goal describing what it wants to be- come, and it is expressed in a vision statement, which describes its long-term direction and strategic intent.

Step 2: Assess the Current Reality The second step is to do a current reality assessment, or organizational assessment—to look at where the organization stands and see what is working and what could be different so as to maximize efficiency and effectiveness in achieving the organization’s mission.27 Among the tools for assessing the current reality are SWOT

analysis, forecasting, benchmarking, and Porter’s model for industry analysis, all of which we discuss in Section 6.4.

Step 3: Formulate the Grand Strategy The next step is to translate the broad mission and vision statements into a grand strategy, which, after the assessment of

the current reality, explains how the organization’s mission is to be accomplished. Three com- mon grand strategies are growth, stability, and defensive, as we’ll describe. Strategy formulation is the process of choosing among different strategies and al- tering them to best fit the organization’s needs. Formulating strategy is a time-consum- ing process both

because it is important and because the strategy must be translated into more specific strategic plans, which determine what the organization’s long-term goals should be for the next 1–5 years. In Section 6.5, we consider the three common grand strategies (growth, stability, and defensive); Porter’s four competitive strategies, single-product strategy versus di- versification strategy, and the BCG matrix.

Step 4: Implement the Strategy

Putting strategic plans into effect is strategy

implementation.

Strategic planning isn’t effective, of course, unless it can be translated into lower-level plans. This means that top managers need to check on possible roadblocks within the organization’s structure and culture and see if the right people and control systems are available to execute the plans.28

Step 5: Maintain Strategic Control: The Feedback Loop

Strategic control consists of monitoring the execution of strategy and making adjustments, if necessary. To keep

strategic plans on track, managers need control systems to monitor progress and take corrective action—early and rapidly—when things start to go awry. Corrective action constitutes a feedback loop in which a problem requires that managers return to an earlier step to rethink policies, redo budgets, or revise personnel arrangements.

Why am I here? What am I trying to do? What do I want to become? These are bedrock questions that you should ask about your education. They are also the kind that top managers should ask about their organizations, whether profit or not-for-profit, as expressed in the mission statement and vision statement. The mission, we said, is the organization’s purpose or reason for being; it is expressed in a mission statement. For example, the mission statement of McGrawHill, publisher of this book, is as follows: To serve the worldwide need for knowledge at a fair profit by gathering, evalu- ating, producing, and distributing valuable information in a way that benefits our customers, employees, authors, investors, and our society.

An organization’s vision, its long-term goal of what it wants to become, is expressed in a vision statement, which describes its long-term direction and strategic intent. For example, Walt Disney’s original vision for Disneyland went in part like this:

Disneyland will be something of a fair, an exhibition, a playground, a commu- nity center, a museum of living facts, and a showplace of beauty and magic. It will be filled with the accomplishments, the joys and hopes of the world we live in. And it will remind us and show us how to make those wonders part of our own lives.30

Although a vision statement can be short, it should be positive and inspiring, and it should stretch the organization and its employees to achieve a desired future state that appears beyond its reach. Google’s vision, for example, is “to organize the world’s information and make it universally accessible and useful.” Former Google CEO Eric Schmidt estimated that it might take 300 years to achieve the company’s vision, which would require Google to have strategic patience and to develop a grand strategy that is broad in focus.31 “Visions that have these properties challenge and inspire people in the organization and help align their energies in a common direction,” says Burt Nanus of the University of Southern California’s School of Business Administra- tion. “They prevent people from being overwhelmed by immediate problems because they help distinguish what is truly important from what is merely interesting.” 32

To develop a grand strategy, you need to gather data and make projections, using the tools of competitive intelligence, SWOT analysis, forecasting, benchmarking, and Porter’s five competitive forces.

The second step in the strategic-management process, assess the current reality, looks at where the organization stands internally and externally—to determine what’s working and what’s not, to see what can be changed so as to increase efficiency and effectiveness in achieving the organization’s vision. An assessment helps to create an objective view of everything the organization does: its sources of

revenue or funding, its work-flow processes, its organizational structure, client satisfaction, employee turnover, and other matters.33 Among the tools for assessing the current reality are competitive intelligence, SWOT analysis, forecasting, benchmarking, and Porter’s model for industry analysis. Practicing competitive intelligence means gaining information about one’s competi- tors’ activities so that you can anticipate their moves and react appropriately. Gaining competitive intelligence isn’t always easy, but there are several avenues— and, surprisingly, most of them are public sources 

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The public prints and advertising. A product may be worked on in secret for several years, but at some point it becomes subject to announcement— through a press release, advertising piece, news leak, or the like. Much of this is available free through the Internet or by subscription to certain specialized databases, such as Nexus, which contains hundreds of thousands of news stories. Investor information. Information about new products and services may also be available through the reports filed with the Securities and Exchange Com- mission and through corporate annual reports. Informal sources. People in the consumer electronics industry every year look forward to major trade shows, such as the International Consumer Electronics Show in Las Vegas, when companies roll out their new products.34 At such times, people also engage in industry-gossip conversation to find out about future directions. Finally, salespeople and marketers, who are out calling on corporate clients, may return with tidbits of information about what competitors are doing.

After competitive intelligence, the next point in establishing a grand strategy is environmental scanning, careful monitoring of an organization’s internal and exter- nal environments to detect early signs of opportunities and threats that may influ- ence the firm’s plans. The process for doing such scanning is SWOT analysis—also known as a situational analysis—which is a search for the Strengths, Weaknesses, Opportunities, and Threats affecting the organization. A SWOT analysis should pro- vide you with a

realistic understanding of your organization in relation to its inter- nal and external environments so you can better formulate strategy in pursuit of its mission.

The SWOT analysis is divided into two parts: inside matters and outside matters— that is, an analysis of internal strengths and weaknesses and an analysis of external opportunities and threats.

Inside Matters: Analysis of Internal Strengths & Weaknesses Does your organization have a skilled workforce? a superior reputation? strong financing? These are examples of organizational strengths—the skills and capabilities that give the or-

ganization special competencies and competitive advantages in executing strategies in pursuit of its vision.

Or does your organization have obsolete technology? outdated facilities? a shaky marketing operation? These are examples of organizational weaknesses—the drawbacks that hinder an organization in executing strategies in pursuit of its vision.

Outside Matters: Analysis of External Opportunities & Threats Is your organization fortunate to have weak rivals? emerging markets? a booming economy? These are instances of organizational opportunities—environmental factors that the organization may exploit for competitive advantage.

Alternatively, is your organization having to deal with new regulations? a shortage of resources? substitute products? These are some possible organizational threats— environmental factors that hinder an organization’s achieving a competitive advantage.

Toyota’s U.S. sales fell 9% that month because of safety- related recalls of millions of vehicles

Internal strengths : mandates planning for the long term; highlighting problems instead of hiding them; encouraging teamwork with colleagues and suppliers; and, perhaps most important, instilling a self-critical culture that fosters continuous and un- relenting improvement. attention to detail and a noble frugality that shunned waste of every kind.” 40 Said its top engineer, “Basi- cally, Toyota’s growth has been underpinned by QDR [quality, dependability, reliability Internal Weaknesses: when Toyota was forced to recall 6.4 million vehicles for five poten- tial hazards, including faulty power-window switches, possibly unstable steering column brackets, and potential hin- drances to deployment of driver’s-side airbags.50 The External Opportunities. Although slow to awaken to its quality problems in 2009– 2010, the company went into full PR battle mode, moving to discredit critics who blamed accelerator problems on faulty electronics and stressing its commitment to its millions of U.S. customers.51 Today, under the new president’s di- rection, the 1950s-style traditional organization has been mod- ernized, with layers of management removed and with Akio meeting weekly with five top advisors to make on-the-spot deci- sions. The company has also reorganized its vehicle-development system to speed decision making, cut costs, and generate more world-wide appeal.52 In addition, Toyota moved to give its cars more exciting de- signs, taking initiatives to “improve upon the emotion of cars” with better styling and high-quality interiors.5 The External Threats. Toyota was able to work past its accelerator-sticking troubles of 2009–2010, which presented its American and European rivals with a chance to cut into the Japanese automaker’s market share.56 Toyota also faced the worldwide Great Recession, which damaged auto spending. In addition, Toyota had to face setbacks brought about by the 2011 deadly earthquake and tsunami, which devastated plants in the north of Japan and disrupted the supply of over 500 parts; flooding in Thailand, which led to new supply difficulties; and currency prob- lems of a strong yen against a weak U.S. dollar, which further re- duced revenues.57 Finally, Toyota competitors began to close the quality gap, with the

Ford Fusion, Hyundai Sonata, Volkswagen Passat, and other midsize vehicles severely impacting sales of the Toyota Camry. 58

Once they’ve analyzed their organization’s Strengths, Weaknesses, Opportunities, and Threats, planners need to do forecasting for making long-term strategy. A forecast is a vision or projection of the future.

Two types of forecasting are trend analysis and contingency planning.

Trend Analysis

A trend analysis is a hypothetical extension of a past series of events into the

future. The

basic assumption is that the picture of the present can be projected into the future. This is not a bad assumption, if you have enough historical data, but it is always subject to surprises. And if your data are unreliable, they will produce erroneous trend projections. An example of trend analysis is a time-series forecast, which predicts future data based on patterns of historical data. Time-series forecasts are used to predict longterm trends, cyclic patterns (as in the up-and-down nature of the business cycle), and sea- sonal variations (as in Christmas sales versus summer sales).

Contingency Planning: Predicting Alternative Futures

Contingency planning—also known as scenario planning and scenario analysis—is the creation of alternative hypothetical but equally likely future conditions. For example, scenarios may be created with

spreadsheet software such as Microsoft Excel to present alternative combinations of different factors—different economic pictures, different strategies by competitors, different budgets, and so on.

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