Managers Who Redo Budgets Rethink Processes Or Revise Policies Are

Question: How Managers Stay Successful

Answer: "How can we build organizations that are as nimble as change itself—not only operationally, but strategically?" asks famed management professor Gary Hamel.Unfortunately, the way many people deal with the uncertainty of change is by succumbing to fads, or short-lived enthusiasms, suggests University of Delaware sociologist Joel Best, author of Flavor of the Month: Why Smart People Fall for Fads.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."That the field of management has its fads is evident in the constant production 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. And one of those that has been found to work 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 TopsEvery year since 1993, Bain & Company, a global business consulting firm, prepares a "Management Tools and Trends" survey of the use of and satisfaction with the most popular management tools. The 2011 survey found that the second most widely used management tool in 2010 (after benchmarking, which again took first place and was a familiar tool from 10 and even 12 years earlier—namely, strategic planning, favored by about 65% of the senior managers surveyed. The use of mission and vision statements also continued to be popular, favored by about 63%.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 these.Lesson 2—Managers Must Be Willing to Make Large, Painful Decisions to Suddenly Alter StrategyAnother lesson is that in a world of rapid and discontinuous change, managers must always be prepared to make large, painful decisions and radically alter their business design—the very basis of how the company makes money. Because of fast-changing world conditions, managers must be able to make difficult decisions: "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."

Question: Business Plan

Answer: A document that outlines a proposed firm's goals, the strategy for achieving them, and the standards for measuring success. But that's often the case with entrepreneurs, with one study finding that 41% of Inc. magazine's 1989 list of fastest-growing private firms didn't have a business plan and 26% had only rudimentary plans, percentages essentially unchanged in 2002.Business plans embody a firm's strategy. In this section, we do the following:-Define strategy and strategic management.-Explain why strategic planning is important.-Describe the three key principles that underlie strategic positioning.-Discuss strategic management in large versus small firms.

Question: "Big Picture"

Answer: Every organization needs to have a "big picture" about where it's going and how to get there. These are matters of strategy, strategic management, and strategic planning.

Question: Strategy

Answer: A strategy is a large-scale action plan that sets the direction for an organization. It represents an "educated guess" about what must be done in the long term for the survival or the prosperity of the organization or its principal parts. We hear the word expressed in terms like "Budweiser's ultimate strategy ..." or "Visa's overseas strategy ..." or financial strategy, marketing strategy, and human resource strategy.An example of a strategy is "Find out what customers want, then provide it to them as cheaply and quickly as possible" (the strategy of Walmart). However, strategy is not something that can be decided on just once. Because of fast-changing conditions, it needs to be revisited from time to time, probably every year or two.

Question: Strategic Management

Answer: In the late 1940s, most large U.S. companies were organized around a single idea or product line. By the 1970s, Fortune 500 companies were operating in more than one industry and had expanded overseas. It became apparent that to stay focused and efficient, companies had to begin taking a strategic-management approach.Strategic management is a process that involves managers from all parts of the organization in the formulation and the implementation of strategies and strategic goals. This definition doesn't mean that managers at the top dictate ideas to be followed by people lower down. Indeed, precisely because middle managers are the ones who will be asked to understand and implement the strategies, they should also help to formulate them.

Question: Strategic Planning

Answer: Strategic planning, as we stated in Chapter 5, determines not only the organization's long-term goals for the next 1-5 years regarding growth and profits but also the ways the organization should achieve them.As one consultant put it, "Simply put, strategic planning determines where an organization is going over the next year or more, how it's going to get there and how it'll know if it got there or not

Question: Why Strategic Management & Planning Are Important

Answer: An organization should adopt strategic management and strategic planning for three reasons: They can (1) provide direction and momentum, (2) encourage new ideas, and above all (3) develop a sustainable competitive advantage.

Question: 1. Providing Direction & Momentum

Answer: Some executives are unable even to articulate what their strategy is.Others are so preoccupied with day-to-day pressures that their organizations can lose momentum. But strategic planning can help people focus on the most critical problems, choices, and opportunities. If everyone is involved in the process, that can also help create teamwork, promote learning, and build commitment across the organization. Indeed, as we describe in Chapter 8, strategy can determine the very structure of the organization—for example, a top-down hierarchy with lots of management levels, as might be appropriate for an electricity-and-gas power utility, versus a flat organization with few management levels and flexible roles, as might suit a fast-moving social media startup.Unless a strategic plan is in place, managers may well focus on just whatever is in front of them, the usual run-of-the-mill problems—until they get an unpleasant jolt when a competitor moves out in front because it has been able to take a long-range view of things and act more quickly. In recent times, this surprise has been happening over and over as companies have been confronted by some digital or Internet trend that emerged as a threat—as Amazon.com was to Barnes & Noble; as digital cameras were to Kodak's film business; as Google News, blogs, and citizen media were to newspapers.13But there are many other instances in which a big company didn't take competitors seriously (as Sears didn't Walmart, IBM didn't Microsoft, and GM didn't Toyota). "We were five years late in recognizing that [microbreweries] were going to take as much market as they did," says August Busch III, CEO of massive brewer Anheuser-Busch, "and five years late in recognizing we should have joined them."Of course, a poor plan can send an organization in the wrong direction. Bad planning usually results from faulty assumptions about the future, poor assessment of an organization's capabilities, ineffective group dynamics, and information overload.

Question: 2. Encouraging New Ideas

Answer: Some people object that planning can foster rigidity, that it creates blinders that block out peripheral vision and reduces creative thinking and action. "Setting oneself on a predetermined course in unknown waters," says one critic, "is the perfect way to sail straight into an iceberg."Actually, far from being a straitjacket for new ideas, strategic planning can help encourage them by stressing the importance of innovation in achieving long-range success. Gary Hamel says that companies such as Apple have been successful because they have been able to unleash the spirit of "strategy innovation." Strategy innovation, he says, is the ability to reinvent the basis of competition within existing industries—"bold new business models that put incumbents on the defensive."Some successful innovators are companies creating new wealth in the grocery business, where Starbucks Coffee, Trader Joe's, Petco, ConAgra, and Walmart, for example, have developed entirely new product categories and retailing concepts. For instance, Starbucks (No. 8 on the 2012 Fortune "World's Most Admired Companies"), after going through a period of overambitious growth and an economic meltdown that shut down hundreds of stores, has launched Via as an instant coffee brand that will evolve into "multiple formats and new form factors" for worldwide distribution. It's also the No. 3 consumer brand on Facebook and the top coffee brand on Twitter.

Question: 3. Developing A Sustainable Competitive Advantage

Answer: Strategic management provides a sustainable competitive advantage, which, you'll recall (from Chapter 1) is the ability of an organization to produce goods or services more effectively than its competitors, thereby outperforming them. Sustainable competitive advantage occurs when an organization is able to get and stay ahead in four areas: (1) in being responsive to customers(2) in innovating(3) in quality(4) in effectiveness

Question: What Is An Effective Strategy

Answer: 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.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.

Question: Strategic Positioning

Answer: 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."Three key principles underlie strategic positioning1. Strategy is the creation of a unique and valuable position2. Strategy requires trade-offs in competing3. Strategy involves creating a "fit" among activities

Question: 1. Strategy Is the Creation of a Unique & Valuable Position

Answer: 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: Bessemer Trust targets only very high wealth clients.-Broad needs, many customers. Strategy may be oriented toward serving the broad needs of many customers. Example: Carmike Cinemas operates only in cities with populations of fewer than 200,000 people.

Question: 2. Strategy Requires Trade-offs in Competing

Answer: 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.

Question: 3. Strategy Involves Creating a "Fit" Among Activities

Answer: "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 Continental Lite 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.

Question: Does Strategic Management Work for Both Small & Large Firms?

Answer: 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 General Motors run without some sort of grand design?But what about smaller companies, which account for more than half of total employment and the bulk of employment growth in recent years? One analysis of several studies found that strategic planning was appropriate not just for large firms—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."

Question: When Is It A Good Time to Begin Strategic Management Process?

Answer: When is a good time to begin the strategic-management process? Often it's touched off by some crisis.Toyota was compelled to do serious soul searching in 2010, when it encountered severe quality problems involving what seemed to be uncontrollable acceleration in its automobiles (later attributed mostly to driver mistakes). Toyota Motor's president Akio Toyoda concluded that these problems were partly owing to the company's "excessive focus on market share and profits," requiring that the company reorient its strategy toward quality and innovation. For 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.

Question: 5 Steps in Strategic Management Process

Answer: 1. Establish mission & vision2. Establish the grand strategy w/ environmental scanning3. Formulate the strategic plans 4. Carry out the strategic plans5. Maintain strategic control

Question: Step 1: Establish the Mission & the Vision

Answer: 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, you'll recall, is the organization's purpose or reason for being, and 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.Characteristics of a Good Vision Statement:An organization's vision, you'll recall, is its long-term goal describing what it wants to become. It 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.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. Consider Google, for example. Google's vision is "to organize the world's information and make it universally accessible and useful." Google's former CEO Eric Schmidt estimated that it might take 300 years to achieve the company's vision. Doing so will require Google to have strategic patience and to develop a grand strategy that is broad in focus.Guidelines for constructing powerful mission statements and vision statements are in the table on the next page."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."

Question: Examples

Answer: Mission statements: Does your company's mission statement answer these questions?1. Who are our customers?2. What are our major products or services?3. In what geographical areas do we compete?4. What is our basic technology?5. What is our commitment to economic objectives?6. What are our basic beliefs, values, aspirations, and philosophical priorities?7. What are our major strengths and competitive advantages?8. What are our public responsibilities, and what image do we wish to project?9. What is our attitude toward our employees?Vision statements: Does your company's vision statement answer yes to these questions?1. Is it appropriate for the organization and for the times?2. Does it set standards of excellence and reflect high ideals?3. Does it clarify purpose and direction?4. Does it inspire enthusiasm and encourage commitment?5. Is it well articulated and easily understood?6. Does it reflect the uniqueness of the organization, its distinctive competence, what it stands for, what it's able to achieve?7. Is it ambitious?

Question: Step 2: Establish the Grand Strategy

Answer: The next step is to translate the broad mission and vision statements into a grand strategy, which, after an assessment of current organizational performance, then explains how the organization's mission is to be accomplished.Three common grand strategies are growth, stability, and defensive.The first part of the process of developing a grand strategy, then, is to make a rigorous analysis of the organization's present situation to determine where it is presently headed. The second part is to determine where it should be headed in the future.How do you establish a grand strategy? Among the strategic-planning tools and techniques used are (1) SWOT analysis and (2) forecasting

Question: 1. The Growth Strategy

Answer: 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—what is today called cloud computing.

Question: 2. The Stability Strategy

Answer: A stability strategy is a grand strategy that involves little or no significant change. Example: Alaska Airlines, which enjoyed a profitable year in 2011, following a decade in which other carriers went bankrupt, decided to remain a "smallish, specialized, regional airline in a world of global giants," says one report, and to avoid cross-continental alliances and megamergers. Its stability strategy is simply to focus on lowering the cost per available seat mile.

Question: 3. The Defensive Strategy

Answer: A defensive strategy or a retrenchment strategy, is a grand strategy that involves reduction in the organization's efforts. Example: After Kodak, the iconic film manufacturer, failed to reinvent itself and declared bankruptcy in 2012, it decided to focus on a fresh start on making inkjet printers.

Question: How Company Can Implement Grand Strategies

Answer: Growth strategy-It can improve an existing product or service to attract more buyers.-It can increase its promotion and marketing efforts to try to expand its market share.-It can expand its operations, as in taking over distribution or manufacturing previously handled by someone else.-It can expand into new products or services.-It can acquire similar or complementary businesses.-It can merge with another company to form a larger company.Stability strategy-It can go for a no-change strategy (if, for example, it has found that too-fast growth leads to foul-ups with orders and customer complaints).-It can go for a little-change strategy (if, for example, the company has been growing at breakneck speed and believes it needs a period of consolidation).Defensive strategy-It can reduce costs, as by freezing hiring or tightening expenses.-It can sell off (liquidate) assets—land, buildings, inventories, and the like.-It can gradually phase out product lines or services.-It can divest part of its business, as in selling off entire divisions or subsidiaries.-It can declare bankruptcy.-It can attempt a turnaround—do some retrenching, with a view toward restoring profitability.

Question: Step 3: Formulate Strategic Plans

Answer: 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

Question: Strategy Formulation

Answer: Strategy formulation is the process of choosing among different strategies and altering them to best fit the organization's needs. Because the process is so important, formulating strategic plans is a time-consuming process. Among the techniques used to formulate strategy is Porter's competitive forces and strategies

Question: Step 4: Carry Out the Strategic Plans

Answer: 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.Often implementation means overcoming resistance by people who feel the plans threaten their influence or livelihood. This is particularly the case when the plans must be implemented rapidly, since delay is the easiest kind of resistance there is (all kinds of excuses are usually available to justify delays). Thus, top managers can't just announce the plans; they have to actively sell them to middle and supervisory managers.

Question: Step 5: Maintain Strategic Control: The Feedback Loop

Answer: 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. To keep a strategic plan on track, suggests Bryan Barry, you need to do the following:-Engage people. You need to actively engage people in clarifying what your group hopes to accomplish and how you will accomplish it.-Keep it simple. Keep your planning simple, unless there's a good reason to make it more complex.-Stay focused. Stay concentrated on the important things.-Keep moving. Keep moving toward your vision of the future, adjusting your plans as you learn what works.

Question: Establishing The Grand Strategy

Answer: Three kinds of strategic-planning tools and techniques are (1) competitive intelligence, (2) SWOT analysis, and (3) forecasting—trend analysis and contingency planning.

Question: Competitive Intelligence

Answer: 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 to major brewers and mountain bikes did to 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.Gaining 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. 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.

Question: SWOT Analysis

Answer: 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.

Question: Environmental Scanning

Answer: 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.

Question: Dividing Up SWOT

Answer: The 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.SWOT stands for Strengths, Weaknesses, Opportunities, Threats.

Question: Inside Matters

Answer: 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 mission.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 mission.

Question: Outside Matters

Answer: 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.

Question: Forecast

Answer: 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.

Question: Trend Analysis

Answer: 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).

Question: Contingency Planning

Answer: 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.Because the scenarios try to peer far into the future—perhaps 5 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.

Question: Porter's 5 Competitive Forces

Answer: 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(5) rivalry among competitors

Question: 1. Threats of New Entrants

Answer: 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 Creamy Macaroni and Cheese with Real Aged Wisconsin Cheddar.

Question: 2. Bargaining Power of Suppliers

Answer: 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

Question: 3. Bargaining Power of Buyers

Answer: 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.

Question: 4. Threats of Substitute Products or Services

Answer: 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 might worry that Brazil is close to becoming energy self-sufficient because it is able to meet its growing demand for vehicle fuel by substituting ethanol derived from sugar cane for petroleum.

Question: 5. Rivalry Among Competitors

Answer: 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 cellphones to MP3 audio players to video-game 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 thought. Then it was in a position to formulate effective strategy, using what he identified as four competitive strategies, as we discuss next.

Question: Porter's 4 Competitive Strategies

Answer: Porter's four competitive strategies (also called four generic strategies) are(1) cost-leadership(2) differentiation(3) cost-focus(4) focused-differentiation.The first two strategies focus on wide markets, the last two on narrow markets. Time Warner, which produces lots of media and publications, serves wide markets around the world. Your neighborhood newspaper serves a narrow market of just local customers.

Question: 1. Cost-Leadership Strategy: Keeping Costs & Prices Low for a Wide Market

Answer: The cost-leadership strategy is to keep the costs, and hence prices, of a product or service below those of competitors and to target a wide market.This puts the pressure on R&D managers to develop products or services that can be created cheaply, production managers to reduce production costs, and marketing managers to reach a wide variety of customers as inexpensively as possible.Firms implementing the cost-leadership strategy include computer maker Dell, watch maker Timex, hardware retailer Home Depot, and pen maker Bic.

Question: 2. Differentiation Strategy: Offering Unique & Superior Value for a Wide Market

Answer: The differentiation strategy is to offer products or services that are of unique and superior value compared with those of competitors but to target a wide market.Because products are expensive, managers may have to spend more on R&D, marketing, and customer service. This is the strategy followed by Ritz-Carlton hotels and the maker of Lexus automobiles.The strategy is also pursued by companies trying to create brands to differentiate themselves from competitors. Although Coca-Cola may cost only cents more than a supermarket's own house brand of cola, Coke spends millions on ads.

Question: 3. Cost-Focus Strategy: Keeping Costs & Prices Low for a Narrow Market

Answer: The cost-focus strategy is to keep the costs, and hence prices, of a product or service below those of competitors and to target a narrow market.This is a strategy you often see executed with low-end products sold in discount stores, such as low-cost beer or cigarettes, or with regional gas stations, such as the Terrible Herbst or Rotten Robbie chains in parts of the West.Needless to say, the pressure on managers to keep costs down is even more intense than it is with those in cost-leadership companies.

Question: 4. Focused-Differentiation Strategy: Offering Unique & Superior Value for a Narrow Market

Answer: The focused-differentiation strategy is to offer products or services that are of unique and superior value compared to those of competitors and to target a narrow market.Some luxury cars are so expensive—Rolls-Royce, Ferrari, Lamborghini—that only a few car buyers can afford them. Other companies following the strategy are jeweler Cartier and shirtmaker Turnbull & Asser. Yet focused-differentiation products need not be expensive. The publisher Chelsea Green has found success with niche books, such as The Straw Bale House.

Question: The Single-Product Strategy: Focused but Vulnerable

Answer: In a single-product strategy, a company makes and sells only one product within its market. This is the kind of strategy you see all the time as you drive past the small retail businesses in a small town: There may be one shop that sells only flowers, one that sells only security systems, and so on.The single-product strategy has both positives and negatives:-The benefit—focus. Making just one product allows you to focus your manufacturing and marketing efforts just on that product. This means that your company can become savvy about repairing defects, upgrading production lines, scouting the competition, and doing highly focused advertising and sales.A small-business example: San Francisco's Green Toys makes all its toddler tea sets, toy trucks, and building blocks out of plastic recycled from milk jugs and, in a strategy called "reverse globalization," carries out all its operations in California, a push back against offshoring and outsourcing. (Sales have grown 80% a year since the firm's founding in 2007.) Another example: See's Candies, a chain of 200 stores throughout the West, specializes in making boxed chocolates—something it does so well that when See's was acquired by Berkshire Hathaway, its corporate owner chose not to tamper with success and runs it with a "hands-off" policy.-The risk—vulnerability. The risk, of course, is that if you do not focus on all aspects of the business, if a rival gets the jump on you, or if an act of God intervenes (for a florist, roses suffer a blight right before Mother's Day), your entire business may go under.Example: Small specialty animal farms trying to capitalize on the popularity with consumers of locally grown foods, such as the one in East Montpelier, Vermont, where Erica Zimmerman and her husband produce pasture-raised pigs, have proved vulnerable to a shortage of slaughterhouses, which has led to backlogs and lengthy waits.84 Another example: Indian Motorcycle Company, once a worthy rival to Harley-Davidson, sold only motorcycles. It went bankrupt twice, the second time because of quality problems, notably an overheating engine. (It was relaunched in 2009 and is presently being manufactured in Spirit Lake, Iowa.)85

Question: The Diversification Strategy: Operating Different Businesses to Spread the Risk

Answer: The obvious answer to the risks of a single-product strategy is diversification, operating several businesses in order to spread the risk. You see this at the small retailer level when you drive past a store that sells gas and food and souvenirs and rents DVD movies.There are two kinds of diversification—unrelated and related.

Question: Unrelated Diversification: Independent Business Lines

Answer: If you operate a small shop that sells flowers on one side and computers on the other, you are exercising a strategy of unrelated diversification—operating several businesses under one ownership that are not related to one another. This has been a common big-company strategy. General Electric, for instance, which began by making lighting products, diversified into such unrelated areas as plastics, broadcasting, and financial services. Disney, Time Warner, and Sony run different divisions specializing in television, music, publishing, and the like.

Question: Related Diversification: Related Business Lines

Answer: In some parts of the world you have to do all your grocery shopping in separate stores—the butcher, the baker, the greengrocer, and so on. In most U.S. grocery stores, all these businesses appear under the same roof, an example of the strategy of related diversification, in which an organization under one ownership operates separate businesses that are related to one another. A big-company example: The famous British raincoat maker Burberry started by making and marketing outerwear clothing but since then has expanded into related business lines, including accessories such as umbrellas, children's clothing, and even fragrances, which it sells in its own stores.Related diversification has three advantages:1. Reduced risk—because more than one product. If one product is weak, others may take up the slack. Example: When rainwear sales are slow, Burberry's economic risk is reduced by sales of its other product lines, such as children's clothes.2. Management efficiencies—administration spread over several businesses. Whatever the business, it usually has certain obligatory administrative costs—accounting, legal, taxes, and so on. Example: Burberry need not have separate versions of these for each business line. Rather, it can actually save money by using the same administrative services for all its businesses.-Synergy—the sum is greater than the parts. When a company has special strengths in one business, it can apply those to its other related businesses. Example: PepsiCo can apply its marketing muscle not only to Pepsi Cola but also to 7-Up and Mountain Dew, which it also owns. This is an example of synergy—the economic value of separate, related businesses under one ownership and management is greater together than the businesses are worth separately.An example of a company that went from a single-product strategy to a diversification strategy is Skilled Manufacturing Inc. of Detroit, which used to supply power-train components to the auto industry, but shuttered one of its two Michigan plants in 2005 after one of its automotive clients moved the work to Mexico. Now it has reopened the factory because it has branched out to other sectors, such as aerospace, in addition to continuing to serve the auto industry.

Question: The BCG Matrix

Answer: Developed by the Boston Consulting Group, the BCG matrix is a means of evaluating strategic business units on the basis of (1) their business growth rates and (2) their share of the market. -Business growth rate is concerned with how fast the entire industry is increasing. -Market share is concerned with the business unit's share of the market in relation to competitors.In general, the BCG matrix suggests that an organization will do better in fast-growing markets in which it has a high market share rather than in slow-growing markets in which it has a low market share. These concepts are illustrated below.Market growth is divided into two categories, low and high. Market share is also divided into low and high. Thus, in this matrix, "Stars" are business units that are highly desirable (high-growth, high-market share), compared to "Dogs," which are not so desirable (low-growth, low-market share).

Question: Executing

Answer: Larry Bossidy, former CEO of AlliedSignal (later Honeywell), and Ram Charan, a business adviser to senior executives, are authors of Execution: The Discipline of Getting Things DoneThey say, is not simply tactics, it is a central part of any company's strategy. It consists of using questioning, analysis, and follow-through to mesh strategy with reality, align people with goals, and achieve the results promised.How important is execution to organizational success in today's global economy? A survey of 769 global CEOs from 40 countries revealed that "excellence in execution" was their most important concern—more important than "profit growth," "customer loyalty," "stimulating innovation," and "finding qualified employees."Bossidy and Charan outline how organizations and managers can improve the ability to execute. Effective execution requires managers to build a foundation for execution within three core processes found in any business: people, strategy, and operations.

Question: The Three Core Processes of Business: People, Strategy, & Operations

Answer: A company's overall ability to execute is a function of effectively executing according to three processes: people, strategy, and operations. Because all work ultimately entails some human interaction, effort, or involvement, Bossidy and Charan believe that the people process is the most important.

Question: The First Core Process—People: "You Need to Consider Who Will Benefit You in the Future"

Answer: "If you don't get the people process right," say Bossidy and Charan, "you will never fulfill the potential of your business." But today most organizations focus on evaluating the jobs people are doing at present, rather than considering which individuals can handle the jobs of the future. An effective leader tries to evaluate talent by linking people to particular strategic milestones, developing future leaders, dealing with nonperformers, and transforming the mission and operations of the human resource department.

Question: The Second Core Process—Strategy: "You Need to Consider How Success Will Be Accomplished"

Answer: In most organizations, the strategies developed fail to consider the "how" of execution. According to the authors, a good strategic plan addresses nine questions. In considering whether the organization can execute the strategy, a leader must take a realistic and critical view of its capabilities and competencies. If it does not have the talent in finance, sales, and manufacturing to accomplish the vision, the chances of success are drastically reduced.

Question: What Questions Should A Strong Strategic Plan Address

Answer: 1. What is the assessment of the external environment?2. How well do you understand the existing customers and markets?3. What is the best way to grow the business profitably, and what are the obstacles to growth?4. Who is the competition?5. Can the business execute the strategy?6. Are the short term and long term balanced?7. What are the important milestones for executing the plan?8. What are the critical issues facing the business?9. How will the business make money on a sustainable basis?

Question: The Third Core Process—Operations: "You Need to Consider What Path Will Be Followed"

Answer: The strategy process defines where an organization wants to go, and the people process defines who's going to get it done. The third core process, operations, or the operating plan, provides the path for people to follow. The operating plan, as we described in Chapter 5, should address all the major activities in which the company will engage—marketing, production, sales, and so on—and then define short-term objectives for these activities, to provide targets for people to aim at.

Question: Building Foundation of Execution

Answer: The foundation of execution is based on leadership and organizational culture. Bossidy and Charan suggest that there are seven essential types of leader behaviors that are needed to fuel the engine of execution. Managers are advised to engage in seven kinds of behaviors, as follows:-Know Your People & Your Business: "Engage Intensely with Your Employees"In companies that don't execute, leaders are usually out of touch with the day-to-day realities. Bossidy and Charan insist leaders must engage intensely and personally with their organization's people and its businesses. They cannot rely on secondhand knowledge through other people's observations, assessments, and recommendations.-Insist on Realism: "Don't Let Others Avoid Reality" Many people want to avoid or shade reality, hiding mistakes or avoiding confrontations. Making realism a priority begins with the leaders being realistic themselves, and making sure realism is the goal of all dialogues in the organization.-Set Clear Priorities: "Focus on a Few Rather Than Many Goals" Leaders who execute focus on a very few clear priorities that everyone can grasp.-Follow Through: "Establish Accountability & Check on Results" Failing to follow through is a major cause of poor execution. "How many meetings have you attended where people left without firm conclusions about who would do what and when?" Bossidy and Charan ask. Accountability and follow-up are important.-Reward the Doers: "Show Top Performers That They Matter" If people are to produce specific results, they must be rewarded accordingly, making sure that top performers are rewarded far better than ordinary performers.-Expand People's Capabilities: "Develop the Talent" Coaching is an important part of the executive's job, providing useful and specific feedback that can improve performance.-Know Yourself: "Do the Hard Work of Understanding Who You Are" Leaders must develop "emotional fortitude" based on honest self-assessments. Four core qualities are authenticity, self-awareness, self-mastery, and humility.Organizational culture is a system of shared beliefs and values within an organization that guides the behavior of its members. In this context, effective execution will not occur unless the culture supports an emphasis on getting quality work done in a timely manner. Chapter 8 presents 11 ways managers can attempt to create an execution-oriented culture.

Question: How Execution Helps Implement & Control Strategy

Answer: Many executives appear to have an aversion to execution, which they associate with boring tactics—with the tedium of doing, as opposed to the excitement of visioning—and which they hand off to subordinates. But, Bossidy and Charan point out, this notion can be a fatal flaw. "There's an enormous difference between leading an organization and presiding over it," they write. "The leader who boasts of her hands-off style or puts her faith in empowerment is not dealing with the issues of the day.... Leading for execution is not about micromanaging.... Leaders who excel at execution immerse themselves in the substance of execution and even some of the key details. They use their knowledge of the business to constantly probe and question. They bring weaknesses to light and rally their people to correct them."By linking people, strategy, and operating plans, execution allows executives to direct and control the three core processes that will advance their strategic vision.

Question: JC Penny Is Changing Its Competitive Strategy

Answer: Shortly after taking the top job at J. C. Penney Co. last fall, chief executive Ron Johnson signed up for the company's e-mail alerts. He was shocked by what landed in his inbox.The former Apple Inc. retail executive was deluged by sales announcements, sometimes two a day. He and his team counted 590 separate sales last year. They didn't bring in shoppers—Mr. Johnson's team found the average customer purchased only four times a year—but they did crush prices. Alarmingly, he learned nearly three-quarters of Penney's products sold at discounts of 50% or more."I thought to myself, 'This is desperation,'" Mr. Johnson said.Now three months into his job, the new chief executive is hoping to turn things around with a far-reaching but risky overhaul of the department store format in an effort to lure consumers back to a chain that's often criticized as dowdy.Mr. Johnson, who won plaudits for reinventing the retail experience with Apple store's clean lines and empty space, laid out an ambitious plan Wednesday that involves carving stores into a warren of specialty shops, turning the high-traffic center selling space into an entertainment and hang-out area, and eschewing constant "sales" in favor of lower prices every day.The idea is to make stores more inviting, highlight brand names, and gain more control over pricing."Some may call it crazy, but I don't think there is an alternative," Mr. Johnson said in an interview. "In an Internet age where you can have exactly what you want with one keyword, people won't tolerate big stores. You have to break it down for them."But overhauling the chain's fleet of 1,100 stores will pose costly challenges, and consumers have been reluctant to spend without the incentive of big markdowns.Penney has been battered in recent years by competition from rivals like Macy's Inc. and Kohl's Corp. Under former chief executive Myron Ullman, Penney shed its catalog business and invested in exclusive brands and partnerships with hot sellers like fast-fashion line MANGO and Sephora cosmetics. But it continued to struggle with lackluster sales and the need to discount heavily to clear merchandise.At an interview at the Plano, Texas, headquarters last week, Mr. Johnson said he determined that the store's initial prices needed to be realigned with what consumers feel comfortable paying. Beginning in February, Penney will lower the initial price for items by about 40% from where they start now.He also plans to sharply reduce the number of promotions. Penney will pick a number of in-season items that will be on sale for an entire month. It will have two clearance sales, on the first and third Fridays of the month, called "Best Price Friday's," an idea he picked up while working at Mervyn's, a now defunct regional department store. Prices will be expressed in flat dollar amounts without cents.Penney plans to spend $80 million a month on the program.The move is risky, as shoppers have become rabid bargain hunters. But the old strategy wasn't working. Sales at stores open at least a year, a key measure of a retailer's strength, rose a thin 0.7% in the 11 months through December, down from a 2.7% increase the year before and well below Macy's 5.4% gain....The new CEO also plans to replace the "center core"—the highest traffic middle area where stores typically concentrate cosmetics, accessories and other high-margin impulse buys—with what he calls "Town Square."The section will be a minimum of 10,000 square feet and rotate monthly attractions and services, such as free back-to-school haircuts or free hot dogs and ice cream in July.Mr. Johnson equates Town Square with Apple's "Genius Bar," where customers have their products serviced. "Just like in the Apple store, you have to walk through the products to get to the Town Square," he says.Two things Mr. Johnson isn't interested in are celebrity lines and private-label apparel. Mr. Johnson, a believer in brands, says in-house labels lack distinctiveness and pricing power.As a result, Penney is slashing the number of private-label lines it has from hundreds to a few strong ones, chief operating officer Mike Kramer said.The company acknowledges that the changes will require investments, but Mr. Johnson says cost cutting and the elimination of sales have been "engineered to pay for it."