Business Strategy
Business Strategy Who are Managers All corporations depend on effective management The work of all managers involves developing strategic and tactical plans. They must also analyze their competitive environments and plan, organize, direct, and control day-to day operations Although our focus is on managers in business settings, remember that the principles of management apply to all kinds of organizations
Charities, churches, social organizations, educational institutions, and government agencies
Setting Goals and Formulating Strategy The starting point in effective management is setting goals Goals: objectives that a business hopes and plans to achieve Every business needs goals, and we begin by discussing the basic aspects of organizational goal setting A company`s managers must also make decisions about actions that will and will not achieve its goals Strategy: is the broad program that underlines those decisions
Setting Goals Goals are performance targets, the means by which organizations and their managers measure success or failure at every level
The Purpose of Goal Setting An organization functions systematically because it sets goals and plans accordingly An organization functions as such because it commits its resources on all levels to achieving its goals There are 4 main purposes in organizational goal setting: 1. Goal setting provides direction, guidance, and motivation for all managers. If managers know precisely where the company is headed, there is less potential for error in the difference units of the company
Starbucks, for example, has a goal of increasing capital spending by 15%, with all additional expenditures devoted to opening new stores o This goal clearly informs everyone in the firm that expansion into new territories is a high priority for the firm 2. Goal setting helps firms allocate resources. Areas that are expected to grow will get first priority.
The company allocates more resources to new projects with large scale potential than it allocates to mature products with establishing but stagnant sales potential 1
o
Thus, Starbucks is primarily emphasizing new store expansion, while its ecommerce initiatives are currently given a lower priority 3. Goal setting helps to define corporate culture. General Electric`s goal, for instance, is to push each of its divisions to number 1 or 2 in its industry
The result is a competitive, often stressful, environment and a culture that rewards success and has little tolerance for failure o Because of this, GE`s various divisions are among the very best in their respective fields 4. Goal setting helps managers assess performance. If a company sets a goal to increase sales by 10% in a given year, managers in units who attain or exceed the goal can be rewarded
Units failing to reach the goal will also be compensated accordingly o GE has a long-standing reputation for stringently evaluating managerial performance, richly rewarding those who excel – and getting rid of those who do not o Each year the lower 10% of GE`s managerial force are informed that they either make dramatic improvement or consider alternative direction for their careers
Kinds of Goals Naturally, goals differ from company to company, depending on the firm`s purpose and mission Every enterprise has a purpose – a reason for being
Businesses seek profit, universities work to discover and transmit new knowledge
Most enterprises have a mission statement Mission Statement: an organization`s statement of how it will achieve its purpose in the environment in which it conducts its business
Mission statements should also include some statement about the company`s core values and its commitment to ethical behaviour o Bell Canada`s mission, for example, is to be a world leader in helping communicate and manage information
Two business firms can have the same purpose – for example, to sell watches at a profit – yet have very different missions
Timex sell low-cost, reliable watches in outlets ranging from department stores to corner drugstores Rolex sells high-quality, high-priced fashion watches through selected jewellery stores
Regardless of a company`s purpose and mission, every firm needs long-term, intermediate, and short-term goals: Long Term Goals: goals set for extended period of time. Typically five years or more into the future
MasterCard, for example, might set a long-term goal for doubling the number of participating merchants during the next 10 years 2
Intermediate Goals: goals set for a period of 1 to 5 years
Companies usually have intermediate goals in several areas o For example, the marketing department’s goal might be to increase sales by 3% in 2 years o The production department might want to decrease expenses by 6% in 4 years o Human resources might seek to cut turnover by 10% in 2 years o Finance might aim for a 3% increase in return on investment in 3 years
Short-Term Goals: goals set for the very near future, typically less than 1 year
Companies usually also have many short-term goals in different areas o Increasing sales by 2% this year o Cutting costs by 1% next quarter o Reducing turnover by 4% over the next six months
Formulating Strategy Planning is concerning with the nits and bolts of setting goals, choosing tactics, and establishing schedules In contrast, strategy tends to have a wider scope Strategy: a “broad program” the describes an organization’s intentions
A business strategy outlines how it intends to meet its goals, and includes the organization’s responsiveness to new challenges and new needs
Strategy Formulation: creation of a broad program for defining and meeting an organization’s goals. Involves 3 basic steps: 1. Set strategic goals 2. Analyze the organization and analyze the environment 3. Match the organization and its environment
(1) Setting Strategic Goals Strategic Goals: long-term goals derived directly from a firm’s mission statement
For example, CEO of Volkswagen, has clear strategic goals for the European market o When the new CEO took over, Volkswagen was only marginally profitable, and was thinking of pulling out of the U.S. market because of its sales were so poor o Over the next few years, however, the CEO totally revamped the firm and now it is making big profits
SWOT Analysis After strategic goals have been established, organizations usually go through a process called SWOT Analysis SWOT Analysis: identification and analysis of organizational strengths and weaknesses and environmental opportunities and threats as part of strategy formulation
Note that strengths and weaknesses are internal to the company, while opportunities and threats are external 3
o o
In formulating strategy, companies attempt to capitalize on organizational strengths and take advantage of environmental opportunities During this same process, they seek to overcome organizational weaknesses and cope with environmental threats
(2) Analyzing the Organization and its Environment Environmental Analysis: the process of scanning the environment for threats and opportunities
Threats include changing consumer tastes and hostile takeover offers Opportunities include areas in which the firm can potentially expand, grow, or take advantage of existing strengths
An name recognition that his businesses enjoyexample would be entrepreneur Richard Branson, owner of Virgin Group Ltd.
It is one of the best known brands in the world, comprising a conglomeration of over 200 entertainment, media and travel companies o Branson sees potential threats from other competitors such as British Airways o But he also sees significant opportunities because of the firm’s strong brand name (Specially in Europe) Most recent venture is Virgin Mobile
Organizational Analysis: the process of analyzing a firm’s strengths and weaknesses (internal factors)
Strengths might include surplus cash, a dedicated work-force, an ample supply of managerial talent, technical expertise, or weak competition Weaknesses would be the absence of any of those strengths
An example would be entrepreneur Richard Branson, owner of Virgin Group Ltd.
Strengths that Richard Branson has used is his widespread name recognition that his businesses enjoy, and his finances One of his weaknesses is that most of his senior managers have much experience I or knowledge about ecommerce
(3) Matching the Organization and its Environment The final step in strategy formulation is matching environmental threats and opportunities with corporate strengths and weaknesses The matching strategy is the heart of the process: More than any other facet of strategy, matching companies with their environments lays the foundation for successfully planning and conducting business Over the long term, this process may also determine whether a firm typically takes risks or behaves conservatively
Blue Bell, for example, is one of the most profitable ice-cream makers in the world, even though it sells its products in only about a dozen U.S. states o It controls more than 50% of the market in each state where it does business The firm has resisted the temptation to expand too quickly 4
o
Its success is based on product freshness and frequent deliveries – strengths that may suffer if the company grows too large
A Hierarchy of Plans Plans can be viewed on three levels: strategic, tactical, and operational Managerial responsibilities are defined at each level The levels constitute a hierarchy because implementing plans is practical only when there is a logical flow from one level to the next Strategic Plans: plans that reflect decisions about resource allocation, company priorities, and steps needed to meet strategic goals
They are usually set by the board of directors and top management o GE’s decision that viable products must be number 1 or number 2 within their respective categories is a matter of strategic planning
Tactical Plans: generally, short-range plans concerned with implementing specific aspects of a company’s strategic plans
They typically involve upper and middle management o Coca-Cola’s decision to increase sales in Europe by building European bottling facilities is an example of tactical planning
Operational Plans: plans setting short-term targets for daily, weekly, or monthly performance
McDonald’s, for example, establishes operational plans when it explains precisely how Big Macs are to be cooked, warmed, and served
Levels of Strategies There are 3 levels of strategy in a business firm
Corporate-Level Strategies Corporate-Level Strategy: identifies the various businesses that a company will be in, and how these businesses will relate to each other There are several different corporate-level strategies that a company might pursue, including concentration, growth, integration, diversification, and investment reduction
Concentration Concentration Strategy: involves focussing the company on one product or product line
Organizations that have successfully pursued a concentration strategy include McDonalds and Canadian National Railway The main advantages of a concentration strategy is that the company can focus its strengths on the one business that is knows so well The main disadvantage is the risk inherent in putting all of one’s eggs in one basket
Growth 5
Companies have several growth strategies available to them, all of the which focus on internal activities that will result in growth Market Penetration: boosting sales of present products by more aggressive selling in the firms current markets Product Development: developing improved products for current markets Geographic Expansion: expanding operations in new geographic areas of countries
CanJet, for example, is using a geographic expansion strategy, since it started by offering services Eastern Canada but has now added flights to cities in Western Canada
Integration There are two basic integration strategies, both of which focus on external activities that will result in growth Horizontal Integration: acquiring control of competitors in the same or similar markets with the same or similar products
For example, Hudson’s Bay Company purchased Kmart and Zellers
Vertical Integration: owning or controlling the inputs to the firm’s processes and/or the channels through which the products or services are distributed
Thus, oil companies like Shell not only drill and produce their own oil, but refine the oil into different products and then sell those products through company-controlled outlets across Canada
Diversification Diversification: expanding into related or unrelated products or market segments
Diversification helps the firm avoid the problem of having all of its eggs in one basket by spreading risk among several products or markets
Related Diversification: means adding new, but related products or services to an existing business
For example, Maple Leaf Gardens Ltd., which already owned the Toronto Maple Leafs, also acquired the Toronto Raptors
Conglomerate Diversification: means diversifying into products or markets that are not related to the firms present business
For example, Brascan Ltd. Owns companies in the mining, real estate, electric power generation, and financial service businesses Conglomerate diversification is not nearly as popular as it was a few years ago
Investment Reduction Investment Reduction: reducing the company’s investment in one or more of its lines of business Retrenchment: which means the reduction of activity or operations
For example, federal Industries was a conglomerate with interests in trucking, railways, metals, and other product lines, but it retrenched and now focuses on a more limited set of customers and products 6
Divestment: involves selling or liquidating one or more of a firm’s businesses
For example, BCE sold it Yellow Pages and White Pages for $4 billion
Business-Level (Competitive) Strategies Business-Level (Competitive) Strategy: Identifies the ways a business will compete in its chosen line of products or services Whatever corporate-level strategy a firm decides on, it must also have a competitive strategy A competitive strategy is a plan to establish a profitable and sustainable competitive position against the forces that determine industry competition Michael Porter identifies 3 competitive strategies: cost leadership, differentiation, and focus
Cost Leadership Cost Leadership” becoming the low cost leader in an industry Wal-Mart is an industry cost leader o Its distribution costs are minimized through satellite-based warehouse system, its store-location costs are minimized by placing stores on low-cost land, and the stores themselves are very plain
Differentiation Differentiation Strategy: a firm seeks to be unique in its industry along some dimension that is valued by buyers
For example, Volvo stresses safety, Apple stresses user-friendly products, and Mercedes-Benz emphasizes quality
Focus Focus Strategy: selecting a market segment and serving the customers in that market niche better than competitors
For example, before it was acquired by Nexfor, Fraser Inc. focussed on producing high-quality, durable, lightweight paper that it used in Bibles
Functional Strategies Functional Strategies: identify the basic course of actions that each department in the firm will pursue so that it contributes to the attainment of the business’s overall goals Each businesses choice of competitive strategy is translated into supporting functional strategies for each of its departments to pursue A functional strategy is the basic course of action that each department follows so that the business accomplishes its overall goals
To implement is cost-leadership strategy, for example, Wal-Mart’s distribution department pursued a functional strategy of satellite-based warehousing that ultimately drove distribution costs down to a minimum
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Charities, churches, social organizations, educational institutions, and government agencies
Setting Goals and Formulating Strategy The starting point in effective management is setting goals Goals: objectives that a business hopes and plans to achieve Every business needs goals, and we begin by discussing the basic aspects of organizational goal setting A company`s managers must also make decisions about actions that will and will not achieve its goals Strategy: is the broad program that underlines those decisions
Setting Goals Goals are performance targets, the means by which organizations and their managers measure success or failure at every level
The Purpose of Goal Setting An organization functions systematically because it sets goals and plans accordingly An organization functions as such because it commits its resources on all levels to achieving its goals There are 4 main purposes in organizational goal setting: 1. Goal setting provides direction, guidance, and motivation for all managers. If managers know precisely where the company is headed, there is less potential for error in the difference units of the company
Starbucks, for example, has a goal of increasing capital spending by 15%, with all additional expenditures devoted to opening new stores o This goal clearly informs everyone in the firm that expansion into new territories is a high priority for the firm 2. Goal setting helps firms allocate resources. Areas that are expected to grow will get first priority.
The company allocates more resources to new projects with large scale potential than it allocates to mature products with establishing but stagnant sales potential 1
o
Thus, Starbucks is primarily emphasizing new store expansion, while its ecommerce initiatives are currently given a lower priority 3. Goal setting helps to define corporate culture. General Electric`s goal, for instance, is to push each of its divisions to number 1 or 2 in its industry
The result is a competitive, often stressful, environment and a culture that rewards success and has little tolerance for failure o Because of this, GE`s various divisions are among the very best in their respective fields 4. Goal setting helps managers assess performance. If a company sets a goal to increase sales by 10% in a given year, managers in units who attain or exceed the goal can be rewarded
Units failing to reach the goal will also be compensated accordingly o GE has a long-standing reputation for stringently evaluating managerial performance, richly rewarding those who excel – and getting rid of those who do not o Each year the lower 10% of GE`s managerial force are informed that they either make dramatic improvement or consider alternative direction for their careers
Kinds of Goals Naturally, goals differ from company to company, depending on the firm`s purpose and mission Every enterprise has a purpose – a reason for being
Businesses seek profit, universities work to discover and transmit new knowledge
Most enterprises have a mission statement Mission Statement: an organization`s statement of how it will achieve its purpose in the environment in which it conducts its business
Mission statements should also include some statement about the company`s core values and its commitment to ethical behaviour o Bell Canada`s mission, for example, is to be a world leader in helping communicate and manage information
Two business firms can have the same purpose – for example, to sell watches at a profit – yet have very different missions
Timex sell low-cost, reliable watches in outlets ranging from department stores to corner drugstores Rolex sells high-quality, high-priced fashion watches through selected jewellery stores
Regardless of a company`s purpose and mission, every firm needs long-term, intermediate, and short-term goals: Long Term Goals: goals set for extended period of time. Typically five years or more into the future
MasterCard, for example, might set a long-term goal for doubling the number of participating merchants during the next 10 years 2
Intermediate Goals: goals set for a period of 1 to 5 years
Companies usually have intermediate goals in several areas o For example, the marketing department’s goal might be to increase sales by 3% in 2 years o The production department might want to decrease expenses by 6% in 4 years o Human resources might seek to cut turnover by 10% in 2 years o Finance might aim for a 3% increase in return on investment in 3 years
Short-Term Goals: goals set for the very near future, typically less than 1 year
Companies usually also have many short-term goals in different areas o Increasing sales by 2% this year o Cutting costs by 1% next quarter o Reducing turnover by 4% over the next six months
Formulating Strategy Planning is concerning with the nits and bolts of setting goals, choosing tactics, and establishing schedules In contrast, strategy tends to have a wider scope Strategy: a “broad program” the describes an organization’s intentions
A business strategy outlines how it intends to meet its goals, and includes the organization’s responsiveness to new challenges and new needs
Strategy Formulation: creation of a broad program for defining and meeting an organization’s goals. Involves 3 basic steps: 1. Set strategic goals 2. Analyze the organization and analyze the environment 3. Match the organization and its environment
(1) Setting Strategic Goals Strategic Goals: long-term goals derived directly from a firm’s mission statement
For example, CEO of Volkswagen, has clear strategic goals for the European market o When the new CEO took over, Volkswagen was only marginally profitable, and was thinking of pulling out of the U.S. market because of its sales were so poor o Over the next few years, however, the CEO totally revamped the firm and now it is making big profits
SWOT Analysis After strategic goals have been established, organizations usually go through a process called SWOT Analysis SWOT Analysis: identification and analysis of organizational strengths and weaknesses and environmental opportunities and threats as part of strategy formulation
Note that strengths and weaknesses are internal to the company, while opportunities and threats are external 3
o o
In formulating strategy, companies attempt to capitalize on organizational strengths and take advantage of environmental opportunities During this same process, they seek to overcome organizational weaknesses and cope with environmental threats
(2) Analyzing the Organization and its Environment Environmental Analysis: the process of scanning the environment for threats and opportunities
Threats include changing consumer tastes and hostile takeover offers Opportunities include areas in which the firm can potentially expand, grow, or take advantage of existing strengths
An name recognition that his businesses enjoyexample would be entrepreneur Richard Branson, owner of Virgin Group Ltd.
It is one of the best known brands in the world, comprising a conglomeration of over 200 entertainment, media and travel companies o Branson sees potential threats from other competitors such as British Airways o But he also sees significant opportunities because of the firm’s strong brand name (Specially in Europe) Most recent venture is Virgin Mobile
Organizational Analysis: the process of analyzing a firm’s strengths and weaknesses (internal factors)
Strengths might include surplus cash, a dedicated work-force, an ample supply of managerial talent, technical expertise, or weak competition Weaknesses would be the absence of any of those strengths
An example would be entrepreneur Richard Branson, owner of Virgin Group Ltd.
Strengths that Richard Branson has used is his widespread name recognition that his businesses enjoy, and his finances One of his weaknesses is that most of his senior managers have much experience I or knowledge about ecommerce
(3) Matching the Organization and its Environment The final step in strategy formulation is matching environmental threats and opportunities with corporate strengths and weaknesses The matching strategy is the heart of the process: More than any other facet of strategy, matching companies with their environments lays the foundation for successfully planning and conducting business Over the long term, this process may also determine whether a firm typically takes risks or behaves conservatively
Blue Bell, for example, is one of the most profitable ice-cream makers in the world, even though it sells its products in only about a dozen U.S. states o It controls more than 50% of the market in each state where it does business The firm has resisted the temptation to expand too quickly 4
o
Its success is based on product freshness and frequent deliveries – strengths that may suffer if the company grows too large
A Hierarchy of Plans Plans can be viewed on three levels: strategic, tactical, and operational Managerial responsibilities are defined at each level The levels constitute a hierarchy because implementing plans is practical only when there is a logical flow from one level to the next Strategic Plans: plans that reflect decisions about resource allocation, company priorities, and steps needed to meet strategic goals
They are usually set by the board of directors and top management o GE’s decision that viable products must be number 1 or number 2 within their respective categories is a matter of strategic planning
Tactical Plans: generally, short-range plans concerned with implementing specific aspects of a company’s strategic plans
They typically involve upper and middle management o Coca-Cola’s decision to increase sales in Europe by building European bottling facilities is an example of tactical planning
Operational Plans: plans setting short-term targets for daily, weekly, or monthly performance
McDonald’s, for example, establishes operational plans when it explains precisely how Big Macs are to be cooked, warmed, and served
Levels of Strategies There are 3 levels of strategy in a business firm
Corporate-Level Strategies Corporate-Level Strategy: identifies the various businesses that a company will be in, and how these businesses will relate to each other There are several different corporate-level strategies that a company might pursue, including concentration, growth, integration, diversification, and investment reduction
Concentration Concentration Strategy: involves focussing the company on one product or product line
Organizations that have successfully pursued a concentration strategy include McDonalds and Canadian National Railway The main advantages of a concentration strategy is that the company can focus its strengths on the one business that is knows so well The main disadvantage is the risk inherent in putting all of one’s eggs in one basket
Growth 5
Companies have several growth strategies available to them, all of the which focus on internal activities that will result in growth Market Penetration: boosting sales of present products by more aggressive selling in the firms current markets Product Development: developing improved products for current markets Geographic Expansion: expanding operations in new geographic areas of countries
CanJet, for example, is using a geographic expansion strategy, since it started by offering services Eastern Canada but has now added flights to cities in Western Canada
Integration There are two basic integration strategies, both of which focus on external activities that will result in growth Horizontal Integration: acquiring control of competitors in the same or similar markets with the same or similar products
For example, Hudson’s Bay Company purchased Kmart and Zellers
Vertical Integration: owning or controlling the inputs to the firm’s processes and/or the channels through which the products or services are distributed
Thus, oil companies like Shell not only drill and produce their own oil, but refine the oil into different products and then sell those products through company-controlled outlets across Canada
Diversification Diversification: expanding into related or unrelated products or market segments
Diversification helps the firm avoid the problem of having all of its eggs in one basket by spreading risk among several products or markets
Related Diversification: means adding new, but related products or services to an existing business
For example, Maple Leaf Gardens Ltd., which already owned the Toronto Maple Leafs, also acquired the Toronto Raptors
Conglomerate Diversification: means diversifying into products or markets that are not related to the firms present business
For example, Brascan Ltd. Owns companies in the mining, real estate, electric power generation, and financial service businesses Conglomerate diversification is not nearly as popular as it was a few years ago
Investment Reduction Investment Reduction: reducing the company’s investment in one or more of its lines of business Retrenchment: which means the reduction of activity or operations
For example, federal Industries was a conglomerate with interests in trucking, railways, metals, and other product lines, but it retrenched and now focuses on a more limited set of customers and products 6
Divestment: involves selling or liquidating one or more of a firm’s businesses
For example, BCE sold it Yellow Pages and White Pages for $4 billion
Business-Level (Competitive) Strategies Business-Level (Competitive) Strategy: Identifies the ways a business will compete in its chosen line of products or services Whatever corporate-level strategy a firm decides on, it must also have a competitive strategy A competitive strategy is a plan to establish a profitable and sustainable competitive position against the forces that determine industry competition Michael Porter identifies 3 competitive strategies: cost leadership, differentiation, and focus
Cost Leadership Cost Leadership” becoming the low cost leader in an industry Wal-Mart is an industry cost leader o Its distribution costs are minimized through satellite-based warehouse system, its store-location costs are minimized by placing stores on low-cost land, and the stores themselves are very plain
Differentiation Differentiation Strategy: a firm seeks to be unique in its industry along some dimension that is valued by buyers
For example, Volvo stresses safety, Apple stresses user-friendly products, and Mercedes-Benz emphasizes quality
Focus Focus Strategy: selecting a market segment and serving the customers in that market niche better than competitors
For example, before it was acquired by Nexfor, Fraser Inc. focussed on producing high-quality, durable, lightweight paper that it used in Bibles
Functional Strategies Functional Strategies: identify the basic course of actions that each department in the firm will pursue so that it contributes to the attainment of the business’s overall goals Each businesses choice of competitive strategy is translated into supporting functional strategies for each of its departments to pursue A functional strategy is the basic course of action that each department follows so that the business accomplishes its overall goals
To implement is cost-leadership strategy, for example, Wal-Mart’s distribution department pursued a functional strategy of satellite-based warehousing that ultimately drove distribution costs down to a minimum
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