Chapter 6 - Planning, Strategy, and Competitive Advantage

Global strategy

Selling the same standardized product and using the same basic marketing approach in each national market. ------------------------------------------------------------- Such companies undertake little, if any, customization to suit the specific needs of customers in different countries. Advantage: - Significant cost savings associated with not having to customize products and marketing approaches to different national conditions. Disadvantage: - Is that by ignoring national differences, managers may leave themselves vulnerable to local competitors that differentiate their products to suit local tastes. E.g. Matsushita, with its Panasonic and JVC brands, has traditionally pursued a global strategy, sell- ing the same basic TVs, camcorders, and DVD and MP3 players in every country in which it does business and often using the same basic marketing approach.

Focused differentiation strategy

Serving only one segment of the overall market and trying to be the most differentiated organization serving that segment. ------------------------------------------------------------- - Table 6.1 Companies pursuing either of these strategies have chosen to specialize in some way by directing their efforts at a particular kind of customer (such as serving the needs of babies or affluent customers) or even the needs of customers in a specific geographic region (customers on the East or West Coast)

Business level strategy

Specific methods a division, business unit, or organization will use to compete effectively against its rivals in an industry. ------------------------------------------------------------- - Fig 6.3 It typically requires long- and intermediate-term plans.

Strategic leadership

The ability of the CEO and top managers to convey a compelling vision of what they want the organization to achieve to their subordinates.

Exporting and importing

1. Making products at home and selling them abroad. 2. Selling products at home that are made abroad. ------------------------------------------------------------- - Fig. 6.7

Mission statement

A broad declaration of an organization's purpose that identifies the organization's products and customers and distinguishes the organization from its competitors. ------------------------------------------------------------- The figure is an examples of it.

Strategy

A cluster of decisions about what goals to pursue, what actions to take, and how to use resources to achieve goals. ------------------------------------------------------------- Thus planning is both a goal-making and a strategy-making process.

SWOT analysis

A planning exercise in which managers identify organizational strengths (S) and weaknesses (W) and environmental opportunities (O) and threats (T). ------------------------------------------------------------- When managers analyze opportunities and threats, they should be aware of the Five Forces Model. - Fig 6.5 Based on a SWOT analysis, managers at the different levels of the organization select the corporate, business, and functional strategies to best position the organization to achieve its mission and goals. see table 6.1 for good questions for the SWOT analysis!

Establishing Major Goals

Developing these goals gives the organization a sense of direction or purpose. In most organizations, articulating major goals is the job of the CEO, although other managers have input into the process.

Diversification

Expanding a company's business operations into a new industry in order to produce new kinds of valuable goods or services. ------------------------------------------------------------- Two types: - Related - Unrelated.

Defining the Business

Managers must ask three related questions about a company's products: 1. Who are our customers? 2. What customer needs are being satisfied? 3. How are we satisfying customer needs? All this information helps managers plan and establish appropriate goals.

Wholly owned foreign subsidiary

Most complex global operations (out of 4): 1. Production operations established in a foreign country independent of any local direct involvement. ------------------------------------------------------------- - Fig. 6.7 1. Details - This method of international expansion is much more expensive than the others because it requires a higher level of foreign investment and presents managers with many more threats - Many Japanese car component companies, for example, have established their own operations in the United States to supply U.S.-based Japanese carmakers such as Toyota and Honda with high-quality car components

Synergy

Performance gains that result when individuals and departments coordinate their actions. ------------------------------------------------------------- Relates to "related diversification". For example, suppose two or more divisions of a diversified company can use the same manufacturing facilities, distribution channels, or advertising campaigns—that is, share functional activities. It can be a major source of cost savings.

Hypercompetition

Permanent, ongoing, intense competition brought about in an industry by advancing technology or changing customer tastes and fads and fashions. ------------------------------------------------------------- Planning and strategy formulation are much more difficult and risky when this term prevails in an industry.

Licensing and franchising

1. Allowing a foreign organization to take charge of manufacturing and distributing a product in its country or world region in return for a negotiated fee. 2. Selling to a foreign organization the rights to use a brand name and operating know-how in return for a lump-sum payment and a share of the profits. ------------------------------------------------------------- - Fig. 6.7 1. Details - The advantage is that the licenser does not have to bear the development costs associated with opening up in a foreign country, the licensee bears the costs. - lose control and company secrets. 2. Details - Hilton Hotels might sell a franchise to a local company in Chile to operate hotels under the Hilton name in return for a franchise payment. The advantage of franchising is that the franchiser does not have to bear the development costs of overseas expansion and avoids the many problems associated with setting up foreign operations. - lose control and product quality may fall

Strategic alliance and joint venture

1. An agreement in which managers pool or share their organization's resources and know-how with a foreign company, and the two organizations share the rewards and risks of starting a new venture. 2. A strategic alliance among two or more companies that agree to jointly establish and share the ownership of a new business. ------------------------------------------------------------- - Fig. 6.7 1. Details - Sharing resources allows a U.S. company, for example, to take advantage of the high-quality skills of foreign manufacturers and the specialized knowledge of foreign managers about the needs of local customers and to reduce the risks involved in a venture. - can result in the creation of a new organization. 2. Details - For example, Coca-Cola and Nestlé formed a joint venture to market their teas, coffees and health oriented beverages in more than 50 countries.

Three steps in planning

1. determining the organization's mission and goals - define the business, establish major goals 2. formulating strategy - analyze current situation and develop strategies 3. implementing strategy - allocate resources and responsibilities to achieve strategies

Vertical integration

A corporate-level strategy in which a company expands operations either backward into an industry that produces inputs for its products or forward into an industry that uses, distributes, or sells its products. ------------------------------------------------------------- - Fig. 6.6 - Backward: The company expands operates back into a new industry that produces inputs for the company's products. - Forward: The company expands into a new industry that uses, distributes, or sells the company's products. (eg. Apple, opening own stores) It can strengthen an organization's competitive advantage and increase its performance, but it can also reduce an organization's flexibility to respond to changing environmental conditions and create threats. Many companies now out- source the production of component parts to other companies and exit the components industry by vertically disintegrating backward.

Functional-level strategy

A plan of action that managers of individual functions (such as manufacturing or marketing) can follow to improve the ability of each function to perform its task specific activities in ways that add value to an organization's goods and services and thereby increase the value customers receive. ------------------------------------------------------------- - Fig 6.3 It typically requires intermediate- and short-term plans. Eg. Consistent with the lighting division's strategy of driving down costs, its manufacturing function might adopt the goal "To reduce production costs by 20% over the next three years," and functional strategies to achieve this goal might include (1) investing in state-of-the-art European production facilities and (2) developing an electronic global business-to-business network to reduce the costs of inputs and inventory holding

Corporate-level strategy

A plan that indicates in which industries and national markets an organization intends to compete. ------------------------------------------------------------- - Fig 6.3 It typically requires long- and intermediate-term plans. Principal strategies to insure growth and top of the industry status: 1. concentration on a single industry 2. vertical integration 3. diversification 4. international expansion Increase the value of goods and services: 1. lower the costs of developing and making products 2. increase product differentiation so more customers want to buy the products even at high or premium prices - Both of these outcomes strengthen a company's competitive advantage and increase its performance.

Five Forces Model

A well-known model that helps managers focus on the five most important competitive forces, or potential threats, in the external environment. ------------------------------------------------------------- When managers analyze opportunities and threats in the SWOT analysis they should be aware of the Five Forces Model. 1. The level of rivalry among organizations in an industry: The more that companies compete against one another for customers—for example, by lowering the prices of their products or by increasing advertising—the lower is the level of industry profits (low prices mean less profit). 2. The potential for entry into an industry: The easier it is for companies to enter an industry—because, for example, barriers to entry, such as brand loyalty, are low—the more likely it is for industry prices and therefore industry profits to be low. 3. The power of large suppliers: If there are only a few large suppliers of an important input, then suppliers can drive up the price of that input, and expensive inputs result in lower profits for companies in an industry. 4. The power of large customers: If only a few large customers are available to buy an industry's output, they can bargain to drive down the price of that output. As a result, industry producers make lower profits. 5. The threat of substitute products: Often the output of one industry is a substitute for the output of another industry (plastic may be a substitute for steel in some applications, for example; similarly, bottled water is a substitute for cola). When a substitute for their product exists, companies cannot demand high prices for it or customers will switch to the substitute, and this constraint keeps their profits low.

Multidomestic strategy

Customizing products and marketing strategies to specific national conditions. ------------------------------------------------------------- Advantage: - Is that by customizing product offerings and marketing approaches to local conditions, managers may be able to gain market share or charge higher prices for their products. Disadvantage: - Is that customization raises production costs and puts the company at a price disadvantage because it often has to charge prices higher than the prices charged by competitors pursuing a global strategy. E.g. Unilever, the European food and household products company, has pursued a multidomestic strategy. Thus, to appeal to German customers, Unilever's German division sells a different range of food products and uses a different marketing marketing approach, they adopt a global strategy. approach than its North American division.

Differentiation strategy

Distinguishing an organization's products from the products of competitors on dimensions such as product design, quality, or after-sales service. ------------------------------------------------------------- - Table 6.1 Differentiation raises costs and thus necessitates premium pricing to recoup those high costs, thus a manager cannot pursue this and a low-cost strategy. This statement i is valid in most cases, however very well managed companies such as Campbell, Toyota, Apple, and McDonald's may have both low costs and differentiated products— and so make the highest profits of any company in an industry.

Business-level plan

Divisional managers' decisions pertaining to divisions' long-term goals, overall strategy, and structure. ------------------------------------------------------------- - Fig 6.3 It typically requires long- and intermediate-term plans. Details: 1. the long-term divisional goals that will allow the division to meet corporate goals and 2. the division's business-level strategy and structure necessary to achieve divisional goals. The corporate-level plan provides the framework within which divisional managers create their business-level plans

Low-cost strategy

Driving the organization's costs down below the costs of its rivals. ------------------------------------------------------------- - Table 6.1 Differentiation raises costs and thus necessitates premium pricing to recoup those high costs, thus a manager cannot pursue this and a differentiation strategy. This statement i is valid in most cases, however very well managed companies such as Campbell, Toyota, Apple, and McDonald's may have both low costs and differentiated products— and so make the highest profits of any company in an industry.

Related diversification

Entering a new business or industry to create a competitive advantage in one or more of an organization's existing divisions or businesses. ------------------------------------------------------------- Managers search for new businesses where they can use the existing skills and resources in their departments and divisions to create synergies, add value to new products and businesses, and improve their competitive position and that of the entire company. For example, suppose two or more divisions of a diversified company can use the same manufacturing facilities, distribution channels, or advertising campaigns—that is, share functional activities. It can be a major source of cost savings.

Unrelated diversification

Entering a new industry or buying a company in a new industry that is not related in any way to an organization's current businesses or industries. ------------------------------------------------------------- One main reason for pursuing unrelated diversification is that sometimes managers can buy a poorly performing company, transfer their management skills to that company, turn around its business, and increase its performance, all of which create value.

Planning process

Essentially, to perform the planning task, managers: 1. Establish and discover where an organization is at the present time 2. Determine where it should be in the future, its desired future state 3. Decides how to move forward to reach that future state. ------------------------------------------------------------- Planning and strategy making are very difficult and risky; if managers' predictions are wrong and strategies fail, organizational performance falls. Planning is important for four main reasons (p.188): 1. Planning is necessary to give the organization a sense of direction and purpose 2. Planning is a useful way of getting managers to participate in decision making about the appropriate goals and strategies for an organization. 3. A plan helps coordinate managers of the different functions and divisions of an organization to ensure that they all pull in the same direction and work to achieve its desired future state. 4. A plan can be used as a device for controlling managers within an organization

Strategy implementation

Five-step process: 1. Allocating responsibility for implementation to the appropriate individuals or groups. 2. Drafting detailed action plans that specify how a strategy is to be implemented. 3. Establishing a timetable for implementation that includes precise, measurable goals linked to the attainment of the action plan. 4. Allocating appropriate resources to the responsible individuals or groups. 5. Holding specific individuals or groups responsible for the attainment of corpo- rate, divisional, and functional goals. ------------------------------------------------------------- Normally the plan for implementing a new strategy requires the development of new functional strategies, the redesign of an organization's structure, and the development of new control systems; it might also require a new program to change an organiza- tion's culture. These are issues we address in the next three chapters (7+8+9)

Functional-level plan

Functional managers' decisions pertaining to the goals that they propose to pursue to help the division attain its business-level goals. ------------------------------------------------------------- - Fig 6.3 It typically requires intermediate- and short-term plans. The business-level plan provides the framework within which functional managers devise their plans.

Levels of planning at General Electric

General Electric has three main levels of management: - corporate level - business or divisional level - functional level - Fig 6.2 Each division has their own set of functional level

Planning

Identifying and selecting appropriate goals and courses of action; one of the four principal tasks of management. ------------------------------------------------------------- The organizational plan that results from the planning process details the goals of the organization and the specific strategies managers will implement to attain those goals. Thus planning is both a goal-making and a strategy-making process. --> the planning process consist of 3 steps: (1) mission & goals, (2) formulating strategies and (3) implementing strategies. Effective plans should have four qualities: - unity: means that at any time only one central, guiding plan is put into operation to achieve an organizational goal - continuity: means that planning is an ongoing process in which managers build and refine previous plans - accuracy: means that managers need to make every attempt to collect and use all available information in the planning process. - flexibility: plans can be altered and changed if the situation changes (no static plan!)

Concentration on a single industry

Reinvesting a company's profits to strengthen its competitive position in its current industry. ------------------------------------------------------------- Most commonly, an organization uses its functional skills to develop new kinds of products, or it expands the number of locations in which it uses those skills.

Focused low-cost strategy

Serving only one segment of the overall market and trying to be the lowest-cost organization serving that segment. ------------------------------------------------------------- - Table 6.1 Companies pursuing either of these strategies have chosen to specialize in some way by directing their efforts at a particular kind of customer (such as serving the needs of babies or affluent customers) or even the needs of customers in a specific geographic region (customers on the East or West Coast)

Strategy formulation

The development of a set of strategies (corporate, business, and functional strategies) that allow an organization to accomplish its mission and achieve its goals. ------------------------------------------------------------- It begins with analyzing the factors or forces inside an organization and outside in the global environment that affect the organization's ability to meet its goals now and in the future. SWOT analysis and the five forces model are two handy techniques managers can use to analyze these factors.

Time horizon

The intended duration of a plan. ------------------------------------------------------------- Managers usually distinguish among: - long-term plans (five years or more) - intermediate-term plans (one to five years) - short-term plans (one year or less)

Corporate-level plan

Top management's decisions pertaining to the organization's mission, overall (corporate-level) strategy, and structure. ------------------------------------------------------------- - Fig 6.3 It typically requires long- and intermediate-term plans. In general, corporate-level planning and strategy are the primary responsibility of top or corporate managers. The corporate-level plan provides the framework within which divisional managers create their business-level plans Eg. One of the goals stated in General Electric's corporate-level plan is that GE should be first or second in market share in every industry in which it competes. A division that cannot attain this goal may be sold to another company. GE Medical Systems was sold to Thompson of France for this reason.