Four Strategic Questions

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Chapter 2

The Organizational Context:

Seeing the Big Picture

The Need for Strategy


When Lou Gerstner took over as Chairman and CEO of
IBM, he faced monumental challenges. Critics saw IBM as
bureaucratic, slow, bloated, and self
-
absorbed.


Gerstner was an outsider to the computer industry and
lacked technical knowledge, but was a strong manager who
could bring fresh perspectives.


He said, “What IBM needs now is a series of very tough
-
minded, market
-
driven, highly effective strategies in each of
its businesses.”


The chapter considers the “big picture” facing firms, and
how highly effective strategies are developed in the face of
environmental demands.

Four Strategic Questions


How do we respond to new opportunities in the
environment, lessen the impact of threats from the
environment, and strengthen the mix of the organization’s
activities by doing more of some things and less of others?


How do we assign resources among the various subunits,
divisions, and activities of the organization?


How do we compete with other organizations for customers
through allocation of existing or new products and services?


How do we effectively manage organizational activities at
the departmental, divisional, and corporate levels of the
organization?

Environmental Domains of an
Organization (Figure 2
-
1)

Economic

Technological

Physical

Political

Competitive

Social

Organization

The Economic Domain


Many economic factors, such as interest rates, trade
deficits, inflation rates, gross domestic product
indicators, and the money supply, may influence an
organization’s activities.


Factors in the economic domain influence the ability of
managers to get resources needed to produce goods and
services and distribute them to a market.


Also, employees are likely to behave differently
depending on the nature of the economic environment.

The Political Domain


The political domain of the organization environment rests
on the laws and regulations passed by governmental
agencies and legislative bodies.


Legislation has been directed toward:


eliminating discrimination based on gender, race, and age


ending sexual harassment in the workplace


preventing unfair pricing in markets


restricting pollution


protecting customers


discouraging unethical behavior


regulating corporate taxation


As corporations are more global, they must consider
political risk associated with foreign governments.

The Social Domain


The social domain of an organization’s environment
consists of societal values, attitudes, norms, customs,
and demographics.


Values are what people believe to be proper goals for
members of society to maintain or achieve.


Attitudes reflect what individuals think about issues and
behaviors that occur within a society.


Values and attitudes may change over time. Examples
in the U.S. include changing attitudes toward mothers in
the workplace and toward providing benefits to same
-
sex partners of employees.

The Technological Domain


The technological domain, or technology, refers to the
application of knowledge to the production and
distribution of goods and services.


Technology is greatly affected by innovation;
innovation
is the creation or modification of a process,
product, or service.


Technology transfer

involves the application of
innovation to processes, products, or services either
within or between industries.


Technology and technological change are transforming
organizations.

The Competitive Domain


Organizations can face a wide variety of competitive
conditions in their environment.


Some large organizations compete only with small
organizations, often giving them an advantage in pricing of
their products.


Other competitive conditions arise from different mixes of
the strategies that competitors pursue.


Within a capitalistic system, organizations can compete in
one of four competitive market structures.


Deregulation
--

relaxation of government controls to
encourage greater competition
--

is transforming many
industries.

Competitive Market Structures


Monopoly
exists when an organization has sole access
to the market for its goods and services.


Oligopoly
exists when only a few firms are in
competition to provide goods and services to a market.


Monopolistic competition
exists when many firms
offer a similar good or service with only minor price
differentials.


Perfect competition
exists when many organizations
offer essentially the same good or service; price thus
becomes the primary discriminator.


The Physical Domain


All organizations must respond in some manner to
their physical domains.


Weather conditions, for instance, may greatly
influence the activities of a firm. This is especially
true, for instance, of airlines, construction companies
in the upper Midwest, and orange growers.


The physical domain may also influence things such
as the availability of qualified talent. For instance,
companies located in one of the “Best Places to
Live” may find themselves at an advantage.

Environmental Dimensions


Three important environmental dimensions are
munificence, dynamism, and complexity:


Munificence
of an organization’s environment refers to the
level of resources available to the organization.


Dynamism

refers to the rate of change in environmental
factors.


Complexity

is the number of components in an organization’s
environment and the degree to which they are similar or
different.


High levels of dynamism and complexity result in
perceived
environmental uncertainty (PEU)
. When PEU is high, firms
may have to emphasize creativity and flexibility over efficiency.



Perceived Environmental Uncertainty

Perceived

Environmental

Uncertainty

Environmental

Complexity

Environmental

Dynamism

Organizational Effectiveness


Organizational effectiveness

can be
defined as the degree to which an
organization achieves its goals, maintains
its health, secures resources needed for
survival, and satisfies parties that have a
stake in it.


This definition suggests that effectiveness
has many dimensions.

Approaches to Assessing Organizational

Effectiveness


Goals assessment
is concerned with whether the
organization reaches the growth, sales, profitability, or
other goals management has set for it.



Internal process assessment

focuses on organizational
health. According to this approach, an unhealthy
organization cannot be considered effective.


Systems resource assessment

considers whether an
organization is able to acquire the resources it needs to
survive and prosper.


Strategic constituencies assessment

considers whether
an organization satisfies important its constituencies.

Approaches to Assessing Organizational

Effectiveness (Figure 2
-
2)

CONSTITUENTS

(Strategic

Constituencies

Assessment)

INPUTS

(Systems

Resource

Assessment)

ACTIVITIES

(Internal

Process

Assessment)

OUTPUTS

(Goals

Assessment)

America’s Most Admired and Least
Admired Companies (Figure 2
-
3)

The Top Ten
The Bottom Ten
1. General Electric
495. Humana
2. Microsoft
496. Revlon
3. Dell Computer
497. Trans World Airlines
4. Cisco Systems
498. CKE Restaurants
5. Wal-Mart Stores
499. CHS Electronics
6. Southwest Airlines
500. Rite Aid
7. Berkshire Hathaway
501. Trump Resorts
8. Intel
502. Fruit of the Loom
9. Home Depot
503.
Amerco
10. Lucent Technologies
504. Caremark Rx
The Malcolm Baldrige Quality Award


The Malcolm Baldrige National Quality
Award was established in 1987 to
enhance U.S. competitiveness by
promoting quality awareness,
recognizing quality and business
achievements of U.S. companies, and
publicizing those companies’ successful
performance.


The award is based on rated performance
on seven criteria.

Malcolm Baldrige Award Criteria

Baldrige Award

Criteria

Leadership

Information

and Analysis

Strategic

Planning

HR Development

and Management

Process

Management

Business

Results

Customer Focus

and Satisfaction

Strategies


Strategies
are methods of competition.


The
strategic plan

of an organization is a
comprehensive plan that reflects the longer
-
term
needs and directions of the organization or subunit.


Strategic planning consists of several components,
as shown in Figure 2
-
5.

The Strategic Planning Process

(Figure 2
-
5)

Strategic

Analysis

Establish the

Purpose, Vision,

and Mission

Define

Strategic

Objectives

Implement the

Strategic Plan

Evaluate the

Strategic Plan

Focus on Management: Alagasco Puts
Customers Second



Alagasco, Alabama’s largest utility
--

and the
only utility on
Fortune

magazine’s 100 Best
Companies to Work for in America list
--

is
proud of its philosophy of “putting customers
second.”


Alagasco believes that by putting employees
first and treating them well, good service to
customers will naturally follow.


Each year Alagasco employees at all levels meet
to refine the corporate strategic plan for the
coming year.

SWOT Analysis

Internal
S
trengths
W
eaknesses
External
O
pportunities
T
hreats
SWOT Analysis Questions Regarding
Internal Strengths


A distinctive competence?


Adequate financial resources?


Good competitive skills?


Well thought of by buyers?


An acknowledged market leader?


Well
-
conceived functional strategies?


Access to economies of scale?

SWOT Analysis Questions Regarding
Internal Strengths (Continued)


Insulated from competitive pressures?


Technology leader?


Cost advantages?


Competitive advantages?


Product innovation abilities?


Proven management?


Other?


SWOT Analysis Questions Regarding
Internal Weaknesses


No clear strategic direction?


A deteriorating competitive position?


Obsolete factories?


Subpar profitability?


Lack of managerial depth and talent?


Missing any key skills or competencies?


Poor track record in implementing strategy?


Plagued with internal operating problems?


Vulnerable to competitive pressures?

SWOT Analysis Questions Regarding
Internal Weaknesses (Continued)


Falling behind in research?


Too narrow a product line?


Weak market image?


Competitive disadvantages?


Below
-
average marketing skills?


Unable to finance needed changes in strategy?


Other?

SWOT Analysis Questions Regarding
External Opportunities


Serve additional customer groups?


Enter new markets or segments?


Expand product line to meet broader range of
customer needs?


Diversify into related products?


Vertical integration?


Ability to move to better strategic group?


Complacency among rival firms?


Faster market growth?


Other?

SWOT Analysis Questions Regarding
External Threats


Likely entry of new competitors?


Rising sales of substitute products?


Slower market growth?


Adverse government policies?


Growing competitive pressures?


Vulnerability to recession and business cycle?


Growing power of customers or suppliers?


Changing buyer needs and tastes?


Adverse demographic changes?


Other?

Focus on Management: SWOT Analysis
at Ruby Tuesday


As the first step in a thorough strategic
planning process, Ruby Tuesday conducted a
SWOT analysis.


Strengths identified included “growth rate of
20%,” “strong technical skills,” and “fast
reaction time from management team.”


Weaknesses included “lack of proactive
approach,” “internal communications could be
improved,” and “need comprehensive review
of compensation system.”


Opportunities and threats were also identified.

Purpose, Vision, and Mission


The
purpose
of the organization is the
reason for the organization’s existence.


Vision

is a vivid description of a preferred
future.


The organizational
mission

is the path
managers choose to achieve the purpose and
vision.


The mission is often written down in the
form of a
mission statement
.

Focus on Management: Ben & Jerry’s
Mission Statement


Product
:

“To make, distribute and sell the finest
-
quality all
-
natural ice cream and related products in a
wide variety of innovative flavors made from Vermont
dairy products.”


Economic
:

“To operate the company on a sound
financial basis of profitable growth, increasing value
for our shareholders, and creating career opportunities
and financial rewards for our employees.”


Social
:

“To operate the company in a way that actively
recognizes the central role that business plays in the
structure of society by initiating innovative ways to
improve the quality of life of a broad community
--

local, national, and international.”

Bottom Line: Developing a Mission
Statement

Identify the

Basic Reasons

Why the

Organization

Exists

List the Core

Values of the

Organization

That Drive How

It Will Do Business

Identify the

Primary

Business or

Businesses of

the Organization

Identify the

Primary

Customers of

the Organization

Draft the Mission

Statement in

Writing, Evaluate

It, and Modify It

As Needed

Finalize the

Mission Statement

in a Way That is

Understandable

and Inspiring

Focus on Management: Strategic
Objectives at Dana Corporation


Dana Corporation, one of the world’s largest independent
suppliers to vehicle and engine manufacturers, was
selected as a “Most
-
Admired Manufacturer” in the U.S.
by
Start

Magazine.


Start

emphasized Dana’s strategic objectives, focus on
technology, employee involvement, and reputation.


In 1998, Dana had 41% of its sales outside the U.S. and
44% from diversified (as opposed to highway vehicle
sales) markets. Among its key strategic objectives are to
have 50% international sales and 50% diversified sales.



Choose Corporate
-
Level Strategies


Corporate
-
level strategies provide direction
for the total organization.


Managers at the corporate level define a
strategic direction that includes business
units and departments within those business
units.


Managers often select either grand
strategies or portfolio strategies for guiding
their company.

Grand Strategies


A
grand strategy

is a broad plan to guide the organization
toward reaching its goals.


Managers may choose to implement one of three grand
strategies:


A
growth strategy

is common in new, emerging industries or
industries that are undergoing rapid growth and gaining new
external opportunities.


A
stability strategy

is selected when managers want to protect the
existing market share of the firm from external threats or have just
completed a phase of rapid growth or divestment.


A
retrenchment strategy

is often selected when managers are
faced with declining performance due to internal weaknesses and
external threats.

Focus on Management: The Risks of
“Growth at Any Cost”


The danger of “growth at any cost” was dramatically
evident in the crash of ValuJet Flight 592 in the Florida
Everglades.


ValuJet
--

which had grown from its inception to serve 17
states
--

was only two years old.


ValuJet had attempted to achieve growth through
aggressive efforts to cut costs. It paid low salaries, used
planes averaging older than 26 years, and turned planes
around so fast that FAA inspection was difficult.


ValuJet pictured itself as the Wal
-
Mart of airlines but, as
noted by one writer, “Wal
-
mart does not conduct business
35,000 feet above the ground.”

Global Perspectives: Retrenchment of
the Chaebols


Korea’s largest family
-
owned conglomerates, or
chaebols
, have fallen on hard times.


These conglomerates pursued growth at any cost.


They sprawl across industries, have heavy debt loads,
and are bloated, making little attempt to focus on core
businesses.


In the face of Korea’s economic crisis, smaller
chaebols

have had to radically downsize to raise cash.


For the larger
chaebols
, the crisis
--

and government and
bank pressure
--

is forcing downsizing and streamlining.

Grand Strategy Selection Matrix

(Figure 2
-
7)

Stability

Stability

Growth

Retrenchment

Numerous Environmental Opportunities

Major Environmental Threats

Substantial Internal Strengths

Critical Internal Weaknesses

Portfolio Strategies


A
portfolio strategy

considers the business
mix of the firm
--

that is, the types of
business units and product lines the firm
controls.


The BCG matrix and the GE matrix are two
models used by many corporations in
selecting a portfolio strategy.

The BCG Portfolio Matrix

(Figure 2
-
8)

Relative Market Share


High Low

High

Market

Growth Rate

Low

Stars

Dogs

Cash

Cows

Question

Marks

Strategic Types in the BCG Matrix


A
star

is a business unit that has both a high
market growth rate and a relatively large share of
the market.


A
cash cow
has a large share of the market, but
there is little growth.


Question marks
exist in a rapidly growing market
but have a small market share.


A
dog
is a poor performer because of little growth
in the market and a small market share.

Implications of the Strategic Types


Stars typically need large amounts of cash to support rapid
growth. Stars have the potential to increase sales and
generate large amounts of profit in the future.


Large amounts of cash can be “milked” from cash cows and
channeled into stars.


Managers must decide whether to invest more cash into
question marks to take advantage of high growth
opportunities (and transform them into stars) or to divest it to
emphasize other business units and products in the portfolio.


Management must sell dogs to another company or liquidate
their assets.

The GE Matrix (Figure 2
-
9)

Business Strength/Competitive Position


Strong Average Weak

Long
-
Term Industry

Attractiveness



High


Medium


Low

Divestment

Investment
Growth

Selective
Investment

The Adaptation Model


Raymond Miles and Charles Snow developed the
adaptation model

of organizational strategy.


The model contends that a major thrust of strategic
management should be the aligning organizational activities
with key dimensions of the organizational environment.


To do this, managers must set up a strategy that will adapt
to environmental conditions and also manage internal
organizational activities to support the selected strategy.


Adaptation is accomplished by simultaneously solving three
critical strategic problems: entrepreneurial, engineering, and
administrative.


Critical Strategic Problems in the
Adaptation Model


The
entrepreneurial problem
considers what
managers believe to be their market.


The
engineering problem
is one of deciding
which methods are appropriate for the production
and distribution of goods or services.


The
administrative problem
addresses the need to
develop an appropriate administrative system
within the organization.

Organizational Types in the Adaptation
Model


The
defender strategy
is carried out when management
seeks or creates an environment that is stable.


The
prospector strategy
--

the opposite of the defender
strategy
--

seeks or creates an unstable environment in the
form of rapid change and high growth rate in the market.


The
analyzer strategy
exists between the two extremes of
defender and prospector. It involves adapting solutions
from both the defender and prospector strategies to the three
problems.


The
reactor strategy

is adopted in an organization that has
experienced strategic failure.

Lighten Up: Ambushes and Golden
Parachutes

Some of the language of mergers and acquisitions:


Afterglow
: Postmerger euphoria of acquirer and/or acquiree, but
soon lost.


Cyanide pill
: Antitakeover finance strategy in which the potential
target arranges for long
-
term debt to fall due immediately and in
full if it is acquired.


Golden parachute
: Provision in the employment contract of top
executives that ensures them a lucrative financial landing if the
firm is acquired in a takeover.


Mushroom treatment
: Postmerger problems from an acquired
executive’s viewpoint: “First they buried us in manure, then they
left us in the dark awhile, then they let us stew, and finally they
canned us.”


The Competitive Model


The
competitive model

of organizational strategy
was developed by Michael Porter.


This model contends that the nature and degree of
competition in an industry determine the strategy
that is appropriate for managers to formulate and
implement.


The model considers five industry forces and three
competitive strategies.

Industry Forces in the Competitive Model


The threat of new entrants to compete in the
industry.


The bargaining power of suppliers in the
industry.


The bargaining power of customers in the
industry.


The threat of substitute products or services
from potential competitors.


Competitive rivalry among existing firms.

Strategies in the Competitive Model


Overall cost leadership.
This strategy requires
management to formulate and implement a strategic plan
that will lead to an efficient and low
-
cost organization.


Differentiation.
This strategy recognizes that a firm’s
product is unique in relation to other products produced in
the industry.


Focus.
This strategy pursues either an overall cost
leadership strategy or a differentiation strategy by
focusing on a narrow customer group, product line, or
geographic market.

Implement the Strategic Plan


Vince Lombardi said, “The best game plan in the
world never blocked or tackled anybody.”


Managers must see that strategic plans are
converted into action.


To do this, they must:


effectively communicate the plan


assign responsibility and authority for activities within
the plan


motivate employees to achieve the plan


develop methods for measuring the results of activities


develop procedures for taking any corrective action

Evaluate the Strategic Plan


Since there are many facets of effectiveness, we must assess
effectiveness of the strategic plan on those multiple facets.


The
balanced scorecard (BSC)

is a conceptual framework
for translating an organization’s vision into a set of
performance indicators distributed among four perspectives:


financial


customer


internal business processes


learning and growth


Using the BSC, companies can monitor both their current
performance and their efforts to learn and improve.

Balanced Scorecard Indicators


Financial
-
based measures.

Examples: return on
investment, cost reduction, profits.


Customer
-
based measures.

Examples: customer
satisfaction, retention, market share.


Internal business process measures.

Examples:
quality, response time, new product introductions.


Learning
-

and growth
-
based measures.
Examples: employee satisfaction, employee
productivity, employee retention.