The answer could be P&G. Ratings by the Drucker Institute on overall corporate effectiveness show that P&G is certainly among the most effectively managed firms in the United States. P&G CEO, David Taylor, explains that, “Every day P&G people work to serve consumers with superior brands and reward shareholders with balanced, sustainable long-term growth and value creation. This rec- ognition is further validation that we are on the right track.”
The Drucker Institute analyzes performance of companies across the functional areas of busi- ness, including more than 35 metrics, such as market-share data, patents, and employee ratings.
Information is collected and analyzed to determine how well companies are doing according to Drucker’s core principles: customer satisfaction, financial strength, employee development, inno- vation, and corporate social responsibility. P&G received exceptionally high scores on innovation, social responsibility, and financial strength.
P&G competes in the consumer-products industry. The company’s finance chief, Jon Moeller, explains that P&G wants to focus on product categories that are used daily, such as toothpaste and soap, so of late has narrowed its product mix, disposing of underperforming brands and cutting back from more than 100 brands to around 65. Simultaneously, P&G has cut over 20,000 jobs and trimmed nearly $10 billion in costs. P&G puts its cash to good use and is considered a “dividend king” by some experts. P&G Chief Information Officer, Javier Polit, explained that “What was pre- viously cost-prohibitive is now cost-effective with the use of the cloud. We’re about to forecast now in ways we couldn’t before. We’ve seen improvements in regard to the quantity of raw materials we buy, and the costs associated with ship and restock.”
Midosemsem/123RF
As stated by CEO David Taylor, “it is a combination of a few key capabilities that determine whether any company will be successful, especially “superior products that delight customers,” “ex- emplary technology,” and what underpins it all is “acquiring the best people.”
Questions
1. Consider the following two-dimensional matrix with weights on the y -axis and ratings on the x -axis as given in Figure 4- 4 . What are example strengths and weaknesses that could possibly characterize P&G in the four corners of the matrix? Develop a hypothetical strength and weak- ness for P&G that could be positioned in each of the four corners of the matrix. Give a support- ing rationale for each factor. Which corner of the matrix do you think characterizes factors most commonly in an IFE Matrix? Why? Which corner of the matrix do you think characterizes fac- tors least commonly in an IFE Matrix? Why? What could you say about the middle of the matrix in terms of factors commonly included in an IFE Matrix?
Strength 1 Weakness 1
Strength 2 Weakness 2
Strength 3 Weakness 3
RATINGS High
High
Low
Low
WEIGHTS
Middle
Strength 4 Weakness 4
FIGURE 4- 4
A Weights-by-Ratings Matrix to Exemplify IFE Matrix Logic
Note: A purpose of this mini-case is to give students practice thinking about when, in developing an IFE Matrix, could a particular factor receive the following weights and ratings:
1. a low weight and high rating 2. a high weight and high rating 3. a low weight and low rating 4. a high weight and low rating
Source: Company documents and a variety of sources including Sara Castellanos, “Tech Innovation Isn’t Just for Tech Firms,” Wall Street Journal, (December 6, 2017): R6, and Vanessa Fuhrmans and Yoree Koh, “The Most Effectively Managed U.S. Companies and How They Got That Way,” Wall Street Journal , (December 6, 2017): R1–R2.
Web Resources
1. See Table 4- 8 on page 138.
Current Readings
Arora, Ashish, Sharon Belenzon, and Andrea Patacconi. “The Decline of Science in Corporate R&D.” Strategic Manage- ment Journal 39, Issue 1 (January 2018): 3–32.
Bridoux, Flore, Régis Coeurderoy, and Rodolphe Durand.
“Heterogeneous Social Motives and Interactions: The Three Predictable Paths of Capability Development.”
Strategic Management Journal 38, no. 9 (September 2017): 1755–1773.
Chatain, Oliver and Denisa Mindruta. “Estimating Value Creation from Revealed Preferences: Application to Value- based Strategies.” Strategic Management Journal 38, no. 10 (October 2017): 1964–1985.
David, Fred R., Meredith E. David, and Forest R. David. “The Integration of Marketing Concepts in Strategic Management Courses: An Empirical Analysis.” SAM Advanced
Management Journal 82, no. 1 (Winter 2017): 26–47.
David, Fred R., Meredith E. David, and Forest R. David. “How Important Is Finance Coverage in Strategic Management?
A Content Analysis of Textbooks.” International Journal of Business, Marketing, and Decision Sciences (IJBMDS) 4, no. 1 (Winter 2016): 64–78.
David, Meredith E. and Fred R. David. “Are Key Marketing Topics Adequately Covered in Strategic Management?”
Journal of Strategic Marketing 24, (March 2016): 1–13.
Fleit, Caren. “The Evolution of the CMO.” Harvard Business Review 95, no. 4 (July–August 2017): 60.
Furr, Nathan and Rahul Kapoor. “Capabilities, Technologies, and Firm Exit During Industry Shakeout: Evidence from the Global Solar Photovoltaic Industry.” Strategic Management Journal 39, no. 1 (January 2018): 33–61.
Grigoriou, Konstantinos and Frank T. Rothaermel. “Organizing for Knowledge Generation: Internal Knowledge Networks and the Contingent Effect of External Knowledge
Sourcing.” Strategic Management Journal 38, no. 2 (February 2017): 395–414.
Hoisl, Karin, Marc Gruber, and Annamaria Conti. “R&D Team Diversity and Performance in Hypercompetitive Environments.” Strategic Management Journal 38, no. 7 (July 2017): 1455–1477.
Lee, Joon Mahn, Byoung-Hyoun Hwang, and Hailiang Chen.
“Are Founder CEOs More Overconfident than Professional CEOs? Evidence from S&P 1500 Companies.” Strategic Management Journal 38, no. 3 (March 2017): 751–769.
Menon, Anoop R. and Dennis A. Yao. “Elevating Repositioning Costs: Strategy Dynamics and Competitive Interactions.”
Strategic Management Journal 38, no. 10 (October 2017):
1953–1963.
Morris, Shad S., Sharon A. Alvarez, Jay B. Barney, and Janice C. Mollo. “Firm-Specific Human Capital Investments as a Signal of General Value: Revisiting Assumptions about Human Capital and How It Is Managed.” Strategic Management Journal 38, no, 4 (April 2017): 912–919.
Quigley, Timothy J., Craig Crossland, and Robert J. Campbell.
“Shareholder Perceptions of the Changing Impact of CEOs: Market Reactions to Unexpected CEO Deaths, 1950–2009.” Strategic Management Journal 38, no. 4 (April 2017): 939–949.
Selladurai, Raj and Carraher, Shawn. Servant Leadership:
Research and Practice, 1st edition, Business Science Reference, 2014, 406 pages.
Theeke, Matt and Hun Lee. “Multimarket Contact and Rivalry over Knowledge-Based Resources.” Strategic Management Journal 38, no. 12, (December 2017):
2508–2531.
Vanacker, Tom, Veroniek Collewaert, and Shaker A. Zahra.
“Slack Resources, Firm Performance, and the Institutional Context: Evidence from Privately Held European Firms.”
Strategic Management Journal 38, no. 6 (June 2017):
1305–1326.
Endnotes
1. Robert Grant, “The Resource-Based Theory of Competi- tive Advantage: Implications for Strategy Formulation,”
California Management Review (Spring 1991): 116.
2. Adam Smith, The Wealth of Nations (New York: Modern Library, 1937), 3–4.
3. Peter Drucker, Management Tasks, Responsibilities, and Practice (New York: Harper & Row, 1973), 463.
4. Timothy Aeppel, “Robots Work Their Way into Small Factories,” Wall Street Journal (September 18, 2004): B1.
5. Edgar Schein, Organizational Culture and Leadership (San Francisco: Jossey-Bass, 1985), 9.
6. Quoted in Robert Waterman, Jr., “The Renewal Factor,”
BusinessWeek (September 14, 1987): 108.
7. ____http://www.nasdaq.com/article/the-current-and- future-trends-of-digital-advertising-cm669129
8. J. Van Horne, Financial Management and Policy (Upper Saddle River, NJ: Prentice-Hall, 1974): 10.
9. G. George, M. Haas, and A. Pentland, “Big Data and Management,” Academy of Management Journal 52, no. 2 (April 2014): 321–326. See also P. Barlas, “Data Analytics Gets in the Sports Game,” Investor’s Business Daily (July 11, 2014): A1
10. Vanessa Fuhrmans, “CEOs Make Protecting Data a Top Goal,” Wall Street Journal (October 13, 2017): B4.
11. Stephen Schmidt and Scott Smith, “Where the Cyberthreats Are,” Wall Street Journal (December 19, 2017): R1.
12. Reprinted by permission of the publisher from “Integrating Strength–Weakness Analysis into Strategic Planning,” by William King, Journal of Business Research 2, no. 4: 481.
Copyright 1983 by Elsevier Science Publishing Co., Inc.
154
5
Strategy Formulation
Feedback Loop
Strategy Implementation
Strategy Evaluation Chapter 10: Business Ethics, Environmental Sustainability, and Social Responsibility
Chapter 11: Global and International Issues
Strategy Evaluation
and Governance
Chapter 9 Implementing
Strategies:
Finance and Accounting
Issues Chapter 8 Implementing
Strategies:
Management and Marketing
Issues Chapter 7 Business
Vision and Mission Chapter 2
Strategies in Action Chapter 5
Strategy Analysis and
Choice Chapter 6
The Internal Assessment
Chapter 4 The External
Assessment Chapter 3
FIGURE 5- 1
The Comprehensive, Integrative Strategic-Management Model Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 1 (February 1989): 91. See also Anik Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and
Putu Artama Wiguna, “Balance Scorecard of David’s Strategic Modeling at Industrial Business for National Construction Contractor of Indonesia,” Journal of Mathematics and Technology , no. 4 (October 2010): 20.
155
LEARNING OBJECTIVES
After studying this chapter, you should be able to do the following:
5- 1. Identify and discuss 5 characteristics and 10 benefits of clear objectives.
5- 2. Define and give an example of 11 types of strategies.
5- 3. Identify and discuss the three types of “Integration Strategies.”
5- 4. Give specific guidelines when market penetration, market development, and product development are especially effective strategies.
5- 5. Explain when diversification is an effective business strategy.
5- 6. List guidelines for when retrenchment, divestiture, and liquidation are especially effec- tive strategies.
5- 7. Explain value chain analysis and benchmarking in strategic management.
5- 8. Identify and discuss Porter’s two generic strategies: cost leadership and differentiation.
5- 9. Compare and contrast when companies should “build, borrow, or buy” as key means for achieving strategies.
5- 10. Discuss first-mover advantages and disadvantages.
5- 11. Explain how strategic planning differs in for-profit, not-for-profit, and small firms.
ASSURANCE-OF-LEARNING EXERCISES
The following exercises are found at the end of this chapter:
SET 1: Strategic Planning for Coca-Cola
EXERCISE 5A: Develop Hypothetical Coca-Cola Company Strategies
EXERCISE 5B: Should Coca-Cola Build, Borrow, or Buy in 2020–2021?
SET 2: Strategic Planning for My University
EXERCISE 5C: Develop Alternative Strategies for Your University
SET 3: Strategic Planning for Myself
EXERCISE 5D: The Key to Personal Strategic Planning: Simultaneously Build and Borrow
SET 4: Individual versus Group Strategic Planning
EXERCISE 5E: What Is the Best Mix of Strategies for Coca-Cola Company?
Strategies in Action
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H
undreds of companies today have embraced strategic planning in their quest for higher revenues and profits. Kent Nelson, former chair and CEO of UPS, explains why his com- pany created a new strategic-planning department: “Because we’re making bigger bets on investments in technology, we can’t afford to spend a whole lot of money in one direction and then find out five years later it was the wrong direction.”1 As illustrated in Figure 5-1, long-term objectives are needed before strategies can be generated, evaluated, and selected.This chapter brings strategic management to life with many contemporary examples.
Different types of strategies are defined and exemplified, including Michael Porter’s generic strategies: cost leadership and differentiation. Guidelines are presented for determining when each strategy is most appropriate to pursue. The integral importance of value chain analysis and benchmarking in strategic planning is revealed. An overview of strategic management in non- profit organizations, governmental agencies, and small firms is provided. As showcased next, Tim Cook is arguably the best strategist on the planet; he has led Apple to be the most admired company in the world. Read to see why Cook and Apple are “insanely great.”
Long-Term Objectives
Long-term objectives represent the results expected from pursuing certain strategies. Strategies represent the actions to be taken to accomplish long-term objectives. The time frame for objec- tives and strategies should be consistent, usually from 2 to 5 years. Without long-term objectives, an organization would drift aimlessly toward some unknown end or become too focused on short-term fads and stray away from the firm’s mission.
It is hard to imagine an organization or an individual being successful without clear objec- tives. You probably have worked hard the last few years striving to achieve an objective to gradu- ate with a business degree. Success rarely occurs by accident; rather, it is the result of hard work directed toward achieving certain objectives.
Characteristics and Benefits of Objectives
Objectives should be quantitative, understandable, challenging, compatible (consistent vertically and horizontally in a chain of command), and obtainable. Each objective should also be associ- ated with a timeline. Objectives are commonly stated in terms such as growth in assets, growth LO 5.1
EXEMPLARY STRATEGIST SHOWCASED
Tim Cook, CEO of Apple, Inc.
The editor of Businessweek, Megan Murphy, recently asked the CEO of Apple, Tim Cook, what he thought his legacy at Apple would be. Tim re- sponded: “To be honest I don’t think about it; I think about doing stuff.”
Cook went on to explain how and why Apple’s founder, Steve Jobs, rather than himself, should be the person revered forever as Apple’s supreme strategist extraordinaire. Cook told Megan that Apple in the past, present, and future is all about its founder Jobs. Tim explained that Job’s “DNA” or “ethos” is and always will be Apple’s “Constitution” or guiding set of principles. According to Cook, Jobs’s ethos ingrained into Apple forever include the following items (paraphrased):
1. Pay acute attention to detail.
2. Keep it simple and genuinely care.
3. Focus on the user and user experience.
4. Focus on building the best.
5. Follow the motto “good isn’t good enough”; every product and process must be, as Jobs’s often said, “insanely great.”
6. Apple should own the proprietary technology it uses to control its own quality of product and user experience.
7. Walk away and be honest with yourself when you do something wrong.
8. Never get married to your position or pride.
9. Invest for the long-term rather than striving to be the first to market with a product.
Source: Based on Megan Murphy, “Tim Cook,” Bloomberg Businessweek, June 19, 2017, pp. 52–56.
Ildogesto/Shutterstock
in sales, profitability, market share, degree and nature of diversification, degree and nature of vertical integration, earnings per share, and social responsibility. (Note: Do not emulate many Annual Reports that print really vague objectives for the firm, such as Macy’s Annual Report that states as objectives “to grow sales profitably” and “to improve return on invested capital.” Such statements are useless in strategic planning.
Clearly established objectives offer many benefits. They provide direction, allow synergy, assist in evaluation, establish priorities, reduce uncertainty, minimize conflicts, stimulate exertion, and aid in both the allocation of resources and the design of jobs. Objectives provide a basis for consistent decision making by managers whose values and attitudes differ. Objectives serve as standards by which individuals, groups, departments, divisions, and entire organizations can be evaluated.
Table 5-1 and Table 5-2 summarize the desired characteristics and benefits, respectively, of having clear objectives.
TABLE 5-1 Five Characteristics of Objectives 1. Quantitative: measurable
2. Understandable: clear 3. Challenging: achievable
4. Compatible: consistent vertically and horizontally in a chain of command 5. Obtainable: realistic
TABLE 5-2 10 Benefits of Having Clear Objectives 1. Provide direction by revealing expectations.
2. Allow synergy.
3. Assist in evaluation by serving as standards.
4. Establish priorities.
5. Reduce uncertainty.
6. Minimize conflicts.
7. Stimulate exertion.
8. Aid in allocation of resources.
9. Aid in design of jobs.
10. Provide basis for consistent decision making.
Financial versus Strategic Objectives
Two types of objectives are especially common in organizations: financial and strategic objec- tives. Financial objectives include those associated with growth in revenues, growth in earn- ings, higher dividends, larger profit margins, greater return on investment, higher earnings per share, a rising stock price, improved cash flow, and all other objectives relating to the financial position of the firm, whereas strategic objectives focus on goals for obtaining a competitive advantage, including factors such as a larger market share, quicker on-time delivery than rivals, lower costs than rivals, higher product quality than rivals, wider geographic coverage than rivals, achieving technological leadership, and consistently getting new or improved products to mar- ket ahead of rivals.
Often there is a trade-off between financial and strategic objectives such that crucial deci- sions have to be made. For example, a firm can do certain activities to maximize short-term financial objectives that would harm long-term strategic objectives. To improve financial posi- tion in the short run through higher prices may, for example, jeopardize long-term market share.
The dangers associated with trading off long-term strategic objectives with near-term bottom- line performance are especially severe if competitors relentlessly pursue increased market share at the expense of short-term profitability. Amazon, for example, operated for decades without concern for profits, instead concentrating on gaining market share. There are other trade-offs between financial and strategic objectives, related to riskiness of actions, concern for business ethics, the need to preserve the natural environment, and social responsibility issues. Both fi- nancial and strategic objectives should include annual and long-term performance targets.
Ultimately, the best way to sustain competitive advantage is to relentlessly pursue strategic ob- jectives that strengthen a firm’s business position over rivals.
Avoid Managing by Crisis, Hope, Extrapolation, and Mystery (CHEM)
Derek Bok, former President of Harvard University, once said, “If you think education is expen- sive, try ignorance.” The idea behind this saying also applies to establishing objectives because strategists should avoid managing by CHEM.
• Managing By Crisis—Based on the belief that the true measure of a really good strate- gist is the ability to solve problems. Because there are plenty of crises and problems to go around for every person and organization, strategists ought to bring their time and creative energy to bear on solving the most pressing problems of the day. Managing by crisis is actually a form of reacting, letting events dictate the what and when of management decisions.
• Managing By Hope—Based on the fact that the future is laden with great uncertainty and that if we try and do not succeed, then we hope our second (or third) attempt will suc- ceed. Decisions are predicated on the hope that they will work and that good times are just around the corner, especially if luck and good fortune are on our side.
• Managing By Extrapolation—Adheres to the principle “If it ain’t broke, don’t fix it.” The idea is to keep on doing the same things in the same ways because things are going well.
• Managing By Mystery—Built on the idea that there is no general plan for which way to go and what to do; just do the best you can to accomplish what you think should be done. In short, “Do your own thing, the best way you know how” (sometimes referred to as the mystery approach to decision making because subordinates are left to figure out what is happening and why).2
Types of Strategies
Defined and exemplified in Table 5-3, alternative strategies that an enterprise could pursue can be categorized into 11 actions: forward integration, backward integration, horizontal integration, market penetration, market development, product development, related diversification, unrelated diversification, retrenchment, divestiture, and liquidation. Each alternative strategy has countless variations. For example, market penetration can include adding salespersons, increasing adver- tising expenditures, couponing, and using similar actions to increase market share in a given geographic area. Note for a particular company the strategy is very specific; be specific to the extent possible in all aspects of strategic planning.
Most organizations simultaneously pursue a combination of two or more strategies, but a combination strategy can be exceptionally risky if carried too far. No organization can afford to pursue all the strategies that might benefit the firm; priorities must be established. Difficult deci- sions must be made. Organizations, like individuals, have limited resources. Both organizations and individuals must choose among alternative strategies and avoid excessive indebtedness.
LO 5.2
TABLE 5-3 Alternative Strategies Defined and Recent Examples Given
Strategy Definition Example
Forward Integration Gaining ownership or increased con- trol over distributors or retailers
Nike opening 100 outlet stores and sell- ing 30% more products on its website Backward Integration Seeking ownership or increased con-
trol over suppliers
Boeing building 80% of its wing flap motors in-house
Horizontal Integration Seeking ownership or increased con- trol over competitors
Nestlé purchasing Sweet Earth Foods Market Penetration Seeking increased market share for
present products in present markets through greater marketing
Cristiano Ronaldo and LeBron James sign lifetime endorsement deal with Nike
Market Development Introducing present products into new geographic area
Publix building 20 new supermarkets in North and South Carolina
Product Development Seeking increased sales by improv- ing present products or developing new ones
Ford shifting one-third of its sched- uled R&D budget on gas/diesel en- gines to electric engines