What are the three sources of a unique and valuable strategic position?

Major Questions You Should Be Able to Answer

6.1

What Is Effective Strategy?

Major Question: What is strategic positioning, and what are the three principles that underlie it?

6.2

The Strategic-Management Process

Major Question: What’s the five-step recipe for the strategic-management process?

6.3

Establishing the Mission & the Vision

Major Question: What are the characteristics of good mission and vision statements?

6.4

Assessing the Current Reality

Major Question: What tools can help me describe where the organization stands from a competitive point of view?

6.5

Formulating the Grand Strategy

Major Question: How can three techniques—Porter’s four competitive strategies, diversification and synergy, and the BCG matrix—help me formulate strategy?

6.6

Implementing & Controlling Strategy: Execution

Major Question: How does effective execution help managers during the strategic-management process?

Page 159

the manager’s toolbox

Being a Successful Manager: Look beyond the Fads, Be Willing to Make Painful Decisions

“How can we build organizations that are as nimble as change itself—not only operationally, but strategically?” asks management professor Gary Hamel.1

Many people deal with uncertainty by succumbing to fads, or short-lived enthusiasms, suggests the author of a book on why smart people fall for fads.2 A fad, he says, “is seen as the way of the future, a genuine innovation that will help solve a big problem. . . . A lot of the attraction of a fad is that if you embrace it early, then you feel that you’re ahead of other people, that you’re hipper and maybe smarter than they are.”3

Fads are evident in the stream of business books touting the newest cure-all. Still, some ideas that started out as management fads survive. Why? Because they’ve been found to actually work. One of these is strategic planning, as we describe in this chapter.

Two lessons of successful managers:

Lesson 1—In an Era of Management Fads, Strategic Planning Is Still Tops

Business consultant Bain & Company annually conducts a survey on the most popular management tools. The 2013 survey found that the most widely used management tool in 2012 was used 12 or even 14 years earlier—namely, strategic planning, thought to be effective by about 80% of the senior managers surveyed. The use of mission and vision statements also continued to be popular, also favored by about 80%.4 Strategic planning is concerned with developing a comprehensive program for long-term success. Mission statements describe the organization’s purpose and vision statements describe its intended long-term goal. Successful managers know how to use all of them.

Lesson 2—Managers Must Be Willing to Make Painful Decisions to Suddenly Alter Strategy

Another lesson is that 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 (or at least not omniscient),” as writer Geoffrey Colvin puts it. “So the future will demand ever more people with the golden trait, the fortitude to accept and even seek psychic pain.”5

For Discussion Earlier we described the importance of practicing evidence-based management, with managers “seeing the truth as a moving target, always facing the hard facts, avoiding falling prey to half-truths, and being willing to admit when they’re wrong and change their ways.”6 Do you think you would have this mind-set when thinking about the overall direction of your organization or work unit?

We begin by discussing strategic positioning and the five steps in the strategic-management process. We then describe competitive intelligence, SWOT analysis, forecasting, benchmarking, and Porter’s model for industry analysis. We next consider Porter’s four competitive strategies, single-product versus diversification strategies, and the BCG matrix. Finally, we discuss execution.

Page 160What Is Effective Strategy?

What is strategic positioning, and what are the three principles underlying it?

THE BIG PICTURE

Strategic positioning attempts to achieve sustainable competitive advantage by preserving what is distinctive about a company. It is based on the principles that strategy is the creation of a unique and valuable position, requires trade-offs in competing, and involves creating a “fit” among activities.

Harvard Business School professor Michael Porter “is the single most important strategist working today, and maybe of all time,” raved Kevin Coyne of consulting firm McKinsey & Co.7 He is “the most famous and influential business professor who has ever lived,” says Fortunewriter Geoffrey Colvin. “He is widely and rightly regarded as the all-time greatest strategy guru.”8

Is this high praise deserved? Certainly Porter’s status as a leading authority on competitive strategy is unchallenged. The Strategic Management Society, for instance, voted Porter the most influential living strategist. We refer to him repeatedly in this chapter.

Strategy guru. 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. Do you think there are other forces that are equally important in forming strategy?

Strategic Positioning & Its Principles

According to Porter, strategic positioning attempts to achieve sustainable competitive advantage by preserving what is distinctive about a company. “It means,” he says, “performing different activities from rivals, or performing similar activities in different ways.”9

Three key principles underlie strategic positioning:10

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

   Few needs, many customers. Strategic position can be derived from serving the few needs of many customers. Example: Jiffy Lube provides only lubricants, 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.

   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 deodorizing, gives up large volume, and accordingly gives up some manufacturing efficiencies.

Page 1613. 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 turnover. 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?

You would expect that a large organization, with its thousands of employees and even larger realm of “stakeholders,” would benefit from strategic management and planning. After all, how can a huge company such as Bank of America run without some sort of grand design?

But what about smaller companies (under 500 employees), which account for about half of private-sector employment and two-thirds of net new jobs in recent years?11 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. Nevertheless, the researchers concluded, “it may be that the small improvement in performance 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

 EXAMPLE

Comparing Strategies: Big-Company “Make the Consumer a Captive” versus Small-Firm “Offer Personal Connections”

Big companies—especially big-tech companies such as Amazon, Google, or Apple—“are no longer content simply to enhance part of your life,” says one report. “The new strategy is to build a device, sell it to consumers, and then sell them the content to play on it. And maybe some ads too.”13

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 columnist, “and to do so before its rivals wise up.”15 Similarly, Apple enables users to easily create book content on its iBook Authors book-creation 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 professor 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 shipping, 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.

YOUR CALL

Considering the proliferation of price comparison sites (Price-grabber.com, Bizrate.com, FreePriceAlerts.com) that will usually direct consumers to big e-commerce retailers, do you think low prices will always win in the end? Is there any strategy a small retailer can take to maintain an advantage?17

Page 162The Strategic-Management Process

What’s the five-step recipe for the strategic-management process?

THE BIG PICTURE

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.

When is a good time to begin the strategic-management process? Often it’s touched off by some crisis.

Back before General Motors recalled 25.69 million vehicles (in the first six months of 2014 alone) with defective ignition switches, Toyota went through its own recall crisis. In 2009 and 2010 the Japanese automaker encountered severe quality problems involving what seemed to be uncontrollable acceleration in its automobiles. Toyota Motor’s President Akio Toyoda concluded that these problems were partly due to the company’s “excessive focus on market share and profits,” requiring that the company reorient its strategy toward quality and innovation.18For Edward Lampert, who in 2005 merged Kmart and Sears into megaretailer Sears Holdings, the pressure was felt in years of underperforming returns despite cost cutting and store closures.19

 EXAMPLE

Crisis Leading to the Strategic-Management Process: Starbucks Reclaims Its Soul

Among the many things that Starbucks has going for it is this: it survived a near-death experience.20

Today’s CEO, Howard Schultz, joined the Seattle-based company as marketing director in 1982, when it was only a small chain selling coffee equipment. Over nearly two decades, he gained control and, inspired by the coffee houses of Europe, transformed the company into a comfortable “third place” between home and work, a place with a neighborhood feel selling fresh-brewed by-the-cup lattes and cappuccinos. By 2000, Starbucks (named for the first mate of the whaling ship in Herman Melville’s Moby Dick) had become the world’s largest specialty coffee retailer, with 3,501 stores, 78% of them in the United States.21

“Starbucks became, for many of us, what we talk about when we talk about coffee,” wrote one reporter. “It changed how we drink it (on a sofa, with Wi-Fi, or on the subway), how we order it (‘for here, grande, two-pump vanilla, skinny extra hot latte’), and what we are willing to pay for it,” such as $4.99 for a Frappuccino.”22

Schultz Steps Down. Schultz stepped down as CEO in 2000 (remaining as chairman), and for a while the business continued to thrive. Then two things happened that provoked a crisis. First, the company “lost a certain soul,” says Schultz, as the management became more concerned with profits than store atmosphere and company values and extended existing product lines rather than creating new ones. Second, as the Great Recession took hold in 2007, tight-fisted consumers abandoned specialty coffees, causing the stock price to nosedive. In January 2008, after an eight-year absence, Schultz returned as CEO.

The Reinvention Begins. “I didn’t come back to save the company—I hate that description,” Schultz told an interviewer. “I came back to rekindle the emotion that built it.”23

Among the risks he took to restore the company’s luster, he closed 800 U.S. stores, laid off 4,000 employees, and let go most top executives. As a morale booster, he flew 10,000 store managers to New Orleans, recently destroyed by Hurricane Katrina. Along with attending strategy sessions, they bonded in community-service activities, contributing thousands of volunteer hours to helping to restore parts of the city. “We wanted to give back to that community post-Katrina,” says Schultz, “and remind and rekindle the organization with the values and guiding principles of our company before we did a stitch of business.” Later he closed all U.S. stores for half a day so baristas could be retrained in how to make espresso.

The Payoff. After a couple of years, the company turned around, the result of better operations, modernized technology, a reinvigorated staff, and innovations such as Via premium instant Page 163coffee. (Since then it has acquired its own Costa Rican farm to develop proprietary coffee varieties; teamed with Oprah Winfrey to introduce Oprah Chai tea; acquired the La Boulange bakery chain; enabled customers to pay for coffee via a mobile-payment app; and even launched alcohol sales.)24 In mid-2014, it was serving more than 70 million customers face to face, in 20,200 stores in 64 countries, and its stock price was nine times what it had been in 2008.25

Starbucks in China. This coffee cafe is located in Chengdu in Sichuan province.

Schultz feels strongly that “there’s an opportunity for businesses to demonstrate a role in society that’s beyond profitability,” providing health insurance even for temps, creating tuition reimbursement, helping to raise loans for small businesses.

YOUR CALL

Some critics feel Starbucks is the symbol of “affordable luxury.” If we can’t afford a McMansion or a Lexus, says one observer, we may be “willing to make that $5 splurge at Starbucks simply because it makes us feel a bit better about ourselves.”26 Thus, despite the innovation in products, attempts to rekindle the cozy neighborhood café, and emphasis on positive social values, do you think another economic downturn could alter Starbucks’s fortunes?

The Five Steps of the Strategic-Management Process

The strategic-management process has five steps, plus a feedback loop, as shown below. (See Figure 6.1 .) Let’s consider these five steps.

FIGURE 6.1 The strategic-management process

The process has five steps.

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 statement. An organization’s vision is its long-term goal describing what it wants to become, 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 Page 164the 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 common grand strategies are growth, stability, and defensive, as we’ll describe.

Strategy formulation is the process of choosing among different strategies and altering them to best fit the organization’s needs. Formulating strategy is a time-consuming 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 diversification 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.

We describe strategic implementation and strategic control in Section 6.6.

We discuss the details of the steps in the strategic-management process in the rest of this chapter.

A public library’s new strategy. As Americans spend more time online, public libraries are having to find new strategies for remaining relevant. After the Skokie Public Library near Chicago put its reference collection online, it turned the newly freed-up space into a “fully functioning, Wi-Fi equipped office suite, capable of accommodating more than 50 people,” according to one report. “Users who can’t afford their own office space reserve it by the hour.”29 Can you think of other public or nonprofit institutions that need to reinvent themselves because information technology has altered their original purpose?

Page 165Establishing the Mission & the Vision

What are the characteristics of good mission and vision statements?

THE BIG PICTURE

A mission statement should express the organization’s purpose or reason for being. A vision statement 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.

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.

If you were called on to write a mission statement and a vision statement, how would you go about it?

Characteristics of a Good Mission 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 McGraw-Hill, publisher of this book, is as follows:

To serve the worldwide need for knowledge at a fair profit by gathering, evaluating, producing, and distributing valuable information in a way that benefits our customers, employees, authors, investors, and our society.

Family business. Do small, family-owned businesses need a mission statement and a vision statement? If no, why not? How many small-business owners with firms of, say, five employees or fewer, would you guess have taken the time to compose such statements?

Page 166

Characteristics of a Good Vision Statement

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 community 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

Guidelines for constructing powerful mission statements and vision statements are shown below. (See Table 6.1 .) “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 Administration. “They prevent people from being overwhelmed by immediate problems because they help distinguish what is truly important from what is merely interesting.”32

TABLE 6.1 Mission Statements and Vision Statements

Sources: F. R. David, “How Companies Define Their Mission,” Long Range Planning, February 1989, pp. 90–97; and B. Nanus, Visionary Leadership: Creating a Compelling Sense of Direction for Your Organization (San Francisco: Jossey-Bass, 1992), pp. 28–29.

Page 167Assessing the Current Reality

What tools can help me describe where the organization stands from a competitive point of view?

THE BIG PICTURE

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.

Competitive Intelligence

Practicing competitive intelligence means gaining information about one’s competitors’ activities so that you can anticipate their moves and react appropriately. If you are a manager, one of your worst nightmares is that a competitor will surprise you with a service or product—as boutique beers did major brewers and mountain bikes did major bicycle makers—that will revolutionize the market and force you to try to play catch-up. Successful companies make it a point to conduct competitive intelligence.

Competitive intelligence venue. Since 1967, the International Consumer Electronics Show (CES) in Las Vegas has traditionally been a place where blockbuster products were introduced. Recently, however, the hottest gadgets from Apple, Amazon, and Microsoft have been unveiled in other, more exclusive venues. Still, CES remains the world’s largest consumer technology convention.

Page 168Gaining competitive intelligence isn’t always easy, but there are several avenues—and, surprisingly, most of them are public sources—including the following:

   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 Commission 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.

SWOT Analysis

After competitive intelligence, the next point in establishing a grand strategy is environmental scanning, careful monitoring of an organization’s internal and external environments to detect early signs of opportunities and threats that may influence 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 provide you with a realistic understanding of your organization in relation to its internal and external environments so you can better formulate strategy in pursuit of its mission. (See Figure 6.2 .)

FIGURE 6.2 Swot Analysis

SWOT stands for Strengths, Weaknesses, Opportunities, Threats.

Page 169The 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. The following table gives examples of SWOT characteristics that might apply to a college. (See Table. 6.2 .)

TABLE 6.2 SWOT Characteristics That Might Apply to a College

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 organization 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.

 EXAMPLE

SWOT Analysis: How Would You Analyze Toyota?

“I fear the pace at which we have grown may have been too quick,” said Akio Toyoda, the grandson of Toyota Motor’s founder, in 2010 testimony before a U.S. congressional committee looking into sudden acceleration problems. “Priorities became confused, and we were not able to stop, think, and make improvements as much as we were able to before.”35 Toyota’s U.S. sales fell 9% that month because of safety-related recalls of millions of vehicles, and by late 2010 journalists were writing that the company had lost its edge.36 By the end of 2011, Toyota Motor, formerly the world’s largest automaker, had slipped to third place in production behind General Motors and Volkswagen.

Page 170Toyota’s new young president, Akio Toyoda, whose motto is “be fast, be flexible,” energetically took on the automaker’s problems, traveling to the United States to fire up dealers, personally taking charge of the sagging Lexus brand, and redesigning the firm’s reporting system and flattening the management hierarchy.37 In late 2013, profits were up 70%, close to their previous record high, and the company had displaced General Motors as the world’s largest automaker; by the following year, net profit was up more than fivefold.38

Still, the challenges have kept on coming. If you were a top Toyota manager, what would be the kinds of things you would identify in a SWOT analysis?

The Internal Strengths. Originally the “Toyota Way,” as practiced from assembly line to boardroom, stressed the values of continuous improvement (“kaizen”) and eliminating waste (“muda”). The Toyota Way, says one report, “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 unrelenting improvement.”39 Developed in the 1950s, these precepts later became the basis for such concepts as lean manufacturing and just-in-time inventory management (discussed in Chapter 2).

“At their core,” says one analysis, “was an attention to detail and a noble frugality that shunned waste of every kind.”40 Said its top engineer, “Basically, Toyota’s growth has been underpinned by QDR [quality, dependability, reliability] that was very high compared with competitors’.”41 As of 2014, Toyota continues to lead most other car companies in quality rankings: All three of its 2011 brands appeared in the top 10 J.D. Power 2014 rankings for reliability, with 15 Toyota, Lexus, and Scion models winning or tied for first place in their vehicle categories.42

The Internal Weaknesses. In the 1990s, Toyota launched an effort to become the world’s largest automaker, embarking on aggressive overseas expansion and doubling its plants in North America, Asia, and Europe. During this time, the focus on cost reduction intensified to the point that the virtue became a vice. Suppliers were continually pushed to design parts that were 10% cheaper and 10% lighter. Common parts were used in most Toyota models, acquired from outside companies instead of trusted traditional suppliers.43 Toyota also began to treat its cars like “transportation appliances,” causing it to fall behind in design leadership, making buyers feel less of an emotional connection with Toyota products. The company was said to have succumbed to “big-company disease,” becoming ponderous and bureaucratic, with every decision tightly controlled in Japan, to the detriment of its managers in the United States.44

Then suddenly, from 2000 to 2010, driver complaints to the National Highway Traffic and Safety Administration about “vehicle speed control” issues soared, with 11.7% of faulty vehicle components identified as Toyota’s.45 Next came widely publicized problems with sticking accelerators, prompting two huge recalls of 10 million vehicles and suspension of the sales and production of eight models in the American market.46 Later it developed that the “unintended acceleration” was probably caused by sticky pedals or floor mats rather than Toyota electronics (although some critics thought it traced to driver error).47 By then, however, the damage to Toyota’s vaunted reputation for quality was severe. “When your whole deal was quality, every mistake is a big deal,” said a manufacturing expert.48

In 2014, Toyota agreed to a $1.2 billion penalty to end a U.S. criminal probe into the sudden-acceleration problems.49 No sooner had it done so, however, than the company’s reputation for reliability and assembly-line mastery took another massive hit, when Toyota was forced to recall 6.4 million vehicles for five potential hazards, including faulty power-window switches, possibly unstable steering column brackets, and potential hindrances 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 direction, the 1950s-style traditional organization has been modernized, with layers of management removed and with Akio meeting weekly with five top advisors to make on-the-spot decisions. 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 designs, taking initiatives to “improve upon the emotion of cars” with better styling and high-quality interiors.53 It joined forces with Ford to develop a gas-electric hybrid fuel system for trucks and sport utility vehicles and has continued to push green technology, as with the plug-in Prius and a new concept car powered by hydrogen fuel cells.54 It launched the sporty $375,000 Lexus LFA, a carbon fiber supercar.

Toyota. How fast, how flexible?

Page 171General Motors’s fatal ignition switch mistakes, described by GM’s own CEO, Mary Barra, as representing “a pattern of incompetence and neglect,” and the recall of 2.6 million 2000–2011 small cars worldwide (for a total of 11.2 million vehicles in 2014) presents Toyota with an unprecedented opportunity to grab its rival’s customers.55 Will Toyota benefit from this development—especially in light of its own 2014 recall announcement?

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 problems of a strong yen against a weak U.S. dollar, which further reduced 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

By 2011, Toyota’s market share in the United States had fallen all the way from 18.3% to 12.9%, recovering to 14.3% in 2013, putting it in third place behind General Motors at 17.9% and Ford at 15.9% (Chrysler had 11.5%).59 According to one source, Toyota was predicted to achieve an American market share of 14.6% in 2015.60

YOUR CALL

“Comfortably preoccupied with rooting out internal weakness,” said one writer in 2010, “the Toyota Way is lost when it comes to contending with outside threats. . . . If a flaw does get through, the company as a whole is loath to admit that the system broke down.”61 Do you agree? How well do you think Akio Toyoda is doing in dealing with Toyota’s threats and opportunities, both internal and external?

Forecasting: Predicting the Future

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.

Lots of people make predictions, of course—and often they are wrong. In the 1950s, the head of IBM, Thomas J. Watson, estimated that the demand for computers would never exceed more than five for the entire world. In the late 1990s, many computer experts predicted power outages, water problems, transportation disruptions, bank shutdowns, and far worse because of computer glitches (the “Y2K bug”) associated with the change from year 1999 to 2000.

Of course, the farther into the future one makes a prediction, the more difficult it is to be accurate, especially in matters of technology. Yet forecasting is a necessary part of planning.

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 long-term trends, cyclic patterns (as in the up-and-down nature of the business cycle), and seasonal 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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Climate change damage? With so much storm damage, such as that in 2012 when Hurricane Sandy hit the New Jersey coast, what kind of contingency planning should insurance companies do?

 EXAMPLE

Contingency Planning for Climate Change: Drought, Rain, & Fire

Several U.S. government agencies have launched contingency planning to prepare for the effects of climate change—from the Navy studying the threat of rising seas to naval operations to the Department of Agriculture’s planning for possible effects of drought and wildfire on agriculture and livestock to the Department of Transportation’s exploration of risk of high temperatures on highways and bridges. Even some governments of coastal cities, such as those in Florida and Virginia, are trying to make plans to anticipate the effect of rising oceans on their infrastructures.62

But what kinds of contingency planning is being done in private industry for the impact of climate change? Many CEOs of energy, food, and food distribution companies, for example, are reportedly not unduly concerned about the effect of global warming on their businesses.63 But shouldn’t the top managers of insurance companies be?

The Evidence of the Present. “Climate change, once considered an issue for a distant future, has moved firmly into the present,” says the 2014 National Climate Assessment.64 “From Hurricane Sandy’s devastating blow to the Northeast to the protracted drought that hit the Midwest Corn Belt,” pointed out economic writer Eduardo Porter, “natural catastrophes pounded insurers [in 2012], generating $35 billion in privately insured property damage, $11 billion more than the average over the last decade.”65 The insurance industry, he reported, expected the situation to get worse, a view reinforced by a 2014 report by the Intergovern-mental Panel on Climate Change, a United Nations group.66

Anticipating the Worst? Despite the mounting weather-related claims, which included damage by floods and wildfires, a report by Ceres, a Boston-based nonprofit promoting eco-minded business practices, said most U.S. insurance companies, large and small, did not have comprehensive strategies to cope with climate change.67 “Of 184 companies surveyed,” says one account, “only 23 had such strategies, and 13 of those were foreign-owned.”68

However, research by a scientist at the federally funded Lawrence Berkeley National Laboratory, which studied large global insurers, said the industry was stepping up to the challenge, having made 1,148 efforts to adapt and mitigate climate change.69

Whatever the past behavior, the Geneva Association, an international think tank for strategically important insurance and risk management issues, called on insurers to start setting rates “based on climate-modeling scenarios rather than historic trends traditionally employed.”70

YOUR CALL

Based on contingency planning for climate variability and volatility in every part of the globe, what is the responsibility of insurance companies? Just try to avoid catastrophic losses by raising premiums, adding exclusions, and refusing to cover high-risk communities? Or try to educate consumers about building more resilient structures in less risky areas?

Page 173Because the scenarios try to peer far into the future—perhaps five or more years—they are necessarily written in rather general terms. Nevertheless, the great value of contingency planning is that it not only equips an organization to prepare for emergencies and uncertainty, it also gets managers thinking strategically.

Benchmarking: Comparing with the Best

Benchmarking is a process by which a company compares its performance with that of high-performing organizations. 71 Professional sports teams do this all the time, but so do other kinds of organizations, including nonprofit ones. Example: Airlines use such benchmarks as average turnaround time, on-time arrivals, cost per seat per passenger mile, fuel cost, numbers of lost bags, and so on. At Xerox Corp., generally thought to be the first American company to use benchmarking, it is defined as, in one description, “the continuous process of measuring products, services, and practices against the toughest competitors or those companies recognized as industry leaders.”72

Porter’s Five Competitive Forces

What determines competitiveness within a particular industry? After studying several kinds of businesses, strategic-management expert Michael Porter suggested in his Porter’s model for industry analysis that business-level strategies originate in five primary competitive forces in the firm’s environment: (1) threats of new entrants, (2) bargaining power of suppliers, (3) bargaining power of buyers, (4) threats of substitute products or services, and (5) rivalry among competitors. 73

1. Threats of New Entrants New competitors can affect an industry almost overnight, taking away customers from existing organizations. Example: Kraft Macaroni & Cheese is a venerable, well-known brand but is threatened from the low end by store brands, such as Walmart’s brand, and from the high end by Annie’s Organic & Natural Mac and Cheese.

Threat of new entrants. McDonald’s is being threatened by new so-called fast-casual restaurants such as Chipotle and Five Guys, which attract customers in their 20s and 30s, who are seeking fresher, healthier food and customizable menu options. What’s your opinion of these new chains compared to the older ones?

Page 1742. Bargaining Power of Suppliers Some companies are readily able to switch suppliers in order to get components or services, but others are not. Example: Clark Foam of Laguna Niguel, California, supplied nearly 90% of the foam cores used domestically to make custom surfboards. When it suddenly closed shop in late 2005, blaming government agencies for trying to shut it down, many independent board shapers and small retailers found they couldn’t afford to get foam from outside the country. On the other hand, Surftech in Santa Cruz, California, was one of the few board manufacturers to use resin instead of foam, and so it saw a spike in sales.74

3. Bargaining Power of Buyers Customers who buy a lot of products or services from an organization have more bargaining power than those who don’t. Customers who use the Internet to shop around are also better able to negotiate a better price. Example: Buying a car used to be pretty much a local activity, but now potential car buyers can use the Internet to scout a range of offerings within a 100-mile or larger radius, giving them the power to force down the asking price of any one particular seller.

4. Threats of Substitute Products or Services Again, particularly because of the Internet, an organization is in a better position to switch to other products or services when circumstances threaten their usual channels. Example: Oil companies worried when Brazil achieved energy self-sufficiency in 2006, able to meet its growing demand for vehicle fuel by substituting ethanol derived from sugar cane for petroleum—until 2007, when population and economic growth forced the country to start importing oil again.75

5. Rivalry among Competitors The preceding four forces influence the fifth force, rivalry among competitors. Think of the wild competition among makers and sellers of portable electronics, ranging from smartphones to tablets to videogame systems. Once again, the Internet has intensified rivalries among all kinds of organizations.

An organization should do a good SWOT analysis that examines these five competitive forces, Porter felt. Then it was in a position to formulate effective strategy, using what he identified as four competitive strategies, as we discuss in the next section.

To what extent do you think that a current or past employer was good at strategic thinking? Based on past research, firms that are better at strategic thinking should outperform those that are not. You can assess the strategic thinking of a current or past employer by taking Self-Assessment 6.1.

SELF-ASSESSMENT 6.1

Assessing Strategic Thinking

This survey is designed to assess an organization’s level of strategic thinking. Go to connect.mheducation.com and take Self-Assessment 6.1. When you’re done, answer the following questions:

1. What is the level of strategic thinking? Are you surprised by the results?

2. If you were meeting with an executive from the company you evaluated, what advice would you provide based on the survey results and what you learned about assessing current reality?

Page 175Formulating the Grand Strategy

How can three techniques—Porter’s four competitive strategies, diversification and synergy, and the BCG matrix—help me formulate strategy?

THE BIG PICTURE

Strategies may be growth, stability, or defensive strategies. Strategy formulation makes use of several concepts, including Porter’s four competitive strategies, diversification and synergy, and the BCG matrix.

After assessing the current reality (Step 2 in the strategic-management process), it’s time to turn to strategy formulation—developing a grand strategy (Step 3). Examples of techniques that can be used to formulate strategy are Porter’s four competitive strategies, diversification and synergy, and the BCG matrix.

The grand strategy must then be translated into more specific strategic plans, which determine what the organization’s long-term goals should be for the next 1–5 years. These should communicate not only the organization’s general goals about growth and profits but also information about how these goals will be achieved. Moreover, like all goals, they should be SMART—Specific, Measurable, Attainable, Results-oriented, and specifying Target dates (Chapter 5).

Three Common Grand Strategies

The three common grand strategies are growth, stability, and defensive.

1. The Growth Strategy A growth strategy is a grand strategy that involves expansion—as in sales revenues, market share, number of employees, or number of customers or (for nonprofits) clients served. Example: IBM under its previous CEO, Samuel J. Palmisano, decided to get out of low-profit businesses that were fading, such as the personal computer business, and shift to services and software, often delivered over the Internet from data centers connecting all kinds of devices—the growth business of cloud computing. 76 (Since then, however, the company has had a “rocky time,” says present CEO Virginia Rometty, as IBM found itself lagging in cloud computing sales, having lost important business to Amazon, and is now attempting to refocus its business.)77