Dell Inc.
Dell Inc., the personal computer company started by Michael Dell in his University of Texas dorm room, was one of the great success stories of the 1990s and early 2000s. Between the mid 1990s and 2007, Dell’s average return on invested capital (ROIC) was a staggering 48.3%, far more than the profitability of competing producers of personal computers (see Figure 1.1a). Clearly, for much of this period Dell had a sustained competitive advantage over its rivals. However, beginning in 2007, Dell’s profitability declined, while several of its competitors, including Apple and Hewlett-Packard, improved their performance. Even more striking, from 2005 onwards, Dell’s earnings per share have not grown, while those of Hewlett-Packard showed steady growth, and Apple’s soared (see Figure 1.1b). From where did Dell’s competitive advantage come? Why did it start to erode after the mid- 2000s? What actions must Dell need to take to arrest the decline in its performance?
Dell’s
competitive advantage was based on a business model of selling directly to
customers. By cutting out wholesalers and retailers, Dell gained the profit these
wholesalers and retailers would have otherwise received. Dell gave part of
these profits back to customers in the form of lower prices, which increased sales
volumes and market share gains, and boosted profit growth. Moreover, Dell’s
sophisticated Website allowed customers to mixand match product.
features such as microprocessors, memory capacity, monitors, internal hard drives, DVD drives, and keyboard and mouse formats, in order for customers to personalize their own computer system. The ability to customize orders provided Dell with repeat customers.
Another
reason for Dell’s competitive advantage was the way it managed its supply chain
to minimize the costs of holding inventory. Dell uses the Internet to feed
real-time information about order flow to its suppliers, who then have up to
the minute information about demand
trends for the components they produce, and volume expectations for the
upcoming 4–12 weeks. Dell’s suppliers use this information to adjust their
production schedules, manufacturing just enough components for Dell’s needs,
and shipping them via the most appropriate transportation mode to ensure that
the parts arrive just in time for production. Dell succeeded in decreasing
inventory to the lowest level in the industry. In 2006, it was turning its
inventory over every 5 days, compared to an average of 41 days at key
competitor
Hewlett-Packard. High industry turnover can be a major source of competitive advantage in the computer industry, where component costs account for 75% of revenues and typically fall by 1% per week due to rapid obsolescence.
Why, then, did Dell’s competitive advantage erode in the later half of the 2000s? There are several reasons. First, a large portion of Dell’s sales came from business customers. During the 2008–2009 recession, demand from businesses slumped. Second, Hewlett Packard gained share in the business market by selling not only personal computers, but a “bundle” that included a combination of PCs, servers, printers, storage devices, network equipment, and consulting services that helped businesses install, manage, and service this equipment. In other words, Hewlett-Packard repositioned itself as a provider of information technology hardware and consulting services. Dell lacked the assets to respond to this strategy. Third, to grow its consumer business, Dell needed to sell through retail channels such as Walmart and Best Buy, where profit margins were much lower (some consumers like to purchase online, many still do not). Finally, Apple gained share from Dell in the consumer market by differentiating its products through design and ease of use. Apple created the impression that products from rivals such as Dell were cheap commodity boxes that lacked styling and elegance.
Dell
has responded to these challenges by attempting to expand its offerings in
order to compete more effectively with companies such as Hewlett Packard. It
has purchased several companies, including a maker of storage devices, and
Perot Systems, an information technology consulting company. But is this enough?
Dell was once the industry leader, but is now playing catch up. Its competitive
advantage has eroded and the company is struggling to find the right strategy
to regain this advantage.
Overview
Why do some companies succeed while others fail? Why did Dell do so well during the 1990s and the first half of the 2000s? How did Apple return from near obsolence in the late 1990s and become the dominant technology company of today? Why has Walmart been able to persistently outperform its well-managed rivals? In the airline industry, how has Southwest Airlines managed to keep increasing its revenues and profits through both good times and bad, while rivals such as United Airlines have had to seek bankruptcy protection? What explains the persistent growth and profitability of Nucor Steel, now the largest steel maker in America, during a period when many of its once larger rivals disappeared into bankruptcy?
In this book, we argue that the strategies that a company’s managers pursue have a major impact on its performance relative to its competitors. A strategy is a set of related actions that managers take to increase their company’s performance. For most, if not all, companies, achieving superior performance relative to rivals is the ultimate challenge. If a company’s strategies result in superior performance, it is said to have a competitive advantage. Dell’s strategies produced superior performance from the mid 1990s until the mid 2000s; as a result, Dell enjoyed competitive advantage over its rivals. How did Dell achieve this competitive advantage? As explained in the Opening Case, it was due to the successful pursuit of varying strategies implemented by Dell’s managers. These strategies enabled the company to lower its cost structure, charge low prices, gain market share, and become more profitable than its rivals. Dell lost its competitive advantage in the later half of the 2000s, and is now pursuing strategies to attempt to regain that advantage. We will return to the example of Dell several times throughout this book in a Running Case that examines various aspects of Dell’s strategy and performance.
This book identifies and describes the strategies that managers can pursue to achieve superior performance and provide their company with a competitive advantage. One of its central aims is to give you a thorough understanding of the analytical techniques and skills necessary to identify and implement strategies successfully. The first step toward achieving this objective is to describe in more detail what superior performance and competitive advantage mean and to explain the pivotal role that managers play in leading the strategy making process.
Strategic leadership is about how to most
effectively manage a company’s Strategy making
process to create competitive advantage. The strategy-making process is the
process by which managers select and then implement a set of strategies that
aim to achieve a competitive advantage. Strategy formulation is the task of
selecting strategies, whereas strategy implementation is the task of putting
strategies into action, which includes designing, delivering, and supporting
products; improving the efficiency and effectiveness of operations; and
designing a company’s organization structure, control systems, and culture. By the end of this chapter, you will understand how strategic
leaders can manage the
strategy-making process by formulating and implementing strategies that enable a
company to achieve a competitive advantage and superior performance. Moreover,
you will learn how the strategy making process can go wrong, and what managers can
do to make this process more effective.
Strategic Leadership, Competitive Advantage, and Superior Performance.
Strategic
leadership is concerned with managing the strategy-making process to increase the
performance of a company, thereby increasing the value of the enterprise to its
owners, its shareholders. As shown in Figure 1.2, to increase shareholder value,
managers must pursue strategies that increase the profitability of the company
and ensure that profits grow (for more details, see the Appendix to this
chapter). To do this, a company must be able to outperform its rivals ; it must
have a competitive advantage.
Superior Performance
Maximizing shareholder value is the ultimate goal of profit-making companies, for two reasons. First, shareholders provide a company with the risk capital that enables managers to buy the resources needed to produce and sell goods and services. Risk capital is capital that cannot be recovered if a company fails and goes bankrupt. In the case of Dell, for example, shareholders provided the company with capital to build its assembly plants, invest in information systems, and build its order taking and customer support system. Had Dell failed, its shareholders would have lost their money; their shares would have been worthless. Thus, shareholders will not provide risk capital unless they believe that managers are committed to pursuing strategies that provide a good return on their capital investment. Second, shareholders are the legal owners of a corporation, and their shares, therefore, represent a claim on the profits generated by a company. Thus, managers have an obligation to invest those profits in ways that maximize shareholder value. Of course, as explained later in this book, managers must behave in a legal, ethical, and socially responsible manner while working to maximize shareholder value.
By shareholder value, we mean the returns that shareholders earn from purchasing shares in a company. These returns come from two sources: (a) capital appreciation in the value of a company’s shares and (b) dividend payments.
For
example, between January 2 and December 31, 2010, the value of one share in
Verizon Communications increased from $30.97 to $35.78, which represents a
capital appreciation of $4.81. In addition, Verizon paid out a dividend of
$1.93 per share during 2010. Thus, if an investor had bought one share of Verizon
on January 2 and held on to it for the entire year, the return would have been
$6.74 ($4.81 1 $1.93), an impressive 21.8% return on her investment. One reason
Verizon’s shareholders did so well during 2010 was that investors came to
believe that managers were pursuing strategies that would both increase the
long term profitability of the company and significantly grow its profits in the
future.
One way of measuring the profitability of a company is by the return that it makes on the capital invested in the enterprise.2 The return on invested capital (ROIC) that a company earns is defined as its net profit over the capital invested in the firm (profit/capital invested). By net profit, we mean net income after tax. By capital, we mean the sum of money invested in the company: that is, stockholders’ equity plus debt owed to creditors. So defined, profitability is the result of how efficiently and effectively managers use the capital at their disposal to produce goods and services that satisfy customer needs. A company that uses its capital efficiently and effectively makes a positive return on invested capital.
The profit growth of a company can be measured by the increase in net profit over time. A company can grow its profits if it sells products in markets that are growing rapidly, gains market share from rivals, increases the amount it sells to existing customers, expands overseas, or diversifies profitably into new lines of business. For example, between 2001 and 2010, Apple increased its net profit from $25 million to $14.02 billion. It was able to do this because the company (a) expanded its product offering to include the iPod, iPhone, and iPad; (b) successfully differentiated its products based on design, ease of use, and brand ; and (c) as a result, took market share from rivals such as Dell. Due to the increase in net profit, Apple’s earnings per share increased from $0.04 to $15.15, making each share more valuable, and leading, in turn, to appreciation in the value of Apple’s shares.
Together, profitability and profit growth are the principal drivers of shareholder value (see the Appendix to this chapter for details). To both boost profitability and grow profits over time, managers must formulate and implement strategies that give their company a competitive advantage over rivals.
Managers face a key challenge: to simultaneously generate high profitability and increase the profits of the company. Companies that have high profitability but profits that are not growing, will not be as highly valued by shareholders as a company that has both high profitability and rapid profit growth (see the Appendix for details). This was the situation that Dell faced in the later part of the 2000s. As a result, its shares lost significant value between 2007 and 2010. At the beginning of 2007, Dell’s shares were trading at approximately $27. By the end of 2010, they were trading at about $14. Although the company was still profitable, Dell’s shares had lost almost half of their value because it was not growing its profits over time (see the Opening Case for details). At the same time, managers need to be aware that if they grow profits but profitability declines, that too will not be as highly valued by shareholders. What shareholders want to see, and what managers must try to deliver through strategic leadership, is profitable growth: that is, high profitability and sustainable profit growth. This is not easy, but some of the most successful enterprises of our era have achieved it companies such as Apple, Google and Walmart.
Competitive Advantage and a Company’s Business Model
Managers do not make strategic decisions in a competitive vacuum. Their company is competing against other companies for customers. Competition is a roug and tumble process in which only the most efficient and effective companies win out. It is a race without end. To maximize shareholder value, managers must formulate and implement strategies that enable their company to outperform rivals that give it a competitive advantage. A company is said to have a competitive advantage over it’s rivals when its profitability is greater than the average profitability and profit growth of other companies competing for the same set of customers. The higher its profitability relative to rivals, the greater its competitive advantage will be. A company has a sustained competitive advantage when its strategies enable it to maintain aboveaverage profitability for a number of years. As discussed in the Opening Case, Dell had a significant and sustained competitive advantage over rivals between 1995 and 2005, but after 2005, that advantage began to erode.
If a company has a sustained competitive advantage, it is likely to gain market share from its rivals and thus grow its profits more rapidly than those of rivals. In turn, competitive advantage will also lead to higher profit growth than that shown by rivals.
The key to understanding competitive
advantage is appreciating how the different strategies managers pursue over
time can create activities that fit together to make a company unique or
different from its rivals and able to consistently outperform them. A business
model is managers’ conception of how the set of strategies their company
pursues should work together as a congruent whole, enabling the company to gain
a competitive advantage and achieve superior profitability and profit growth.
In essence, a business model is a kind of mental model, or gestalt, of how the
various strategies and capital investments a company makes should fit together
to generate above-average profitability and profit growth. A business model encompasses
the totality of how a company will :
|
- |
Select
its customers. |
|
- |
Define
and differentiate its product offerings |
|
- |
Create
value for its customers |
|
- |
Acquire
and keep customers. |
|
- |
Produce
goods or services |
|
- |
Lower
costs. |
|
- |
Deliver
goods and services to the market. |
|
- |
Organize
activities within the company. |
|
- |
Configure
it’s resources. |
|
- |
Achieve
and sustain a high level of profitability. |
|
- |
Grow
the business over time. |
The
business model at Dell during its height, for example, was based on the idea that
costs could be lowered by selling directly to customers, and avoiding using a
distribution channel (see the Opening Case). The cost savings attained as a
result of this model was then passed on to consumers in the form of lower
prices, which enabled Dell to gain market share from rivals. For the best part
of a decade, this business model proved superior to the established business
model in the industry selling computers through retailers.
Industry Differences in Performance
It is important to recognize that in addition to its business model and associated strategies, a company’s performance is also determined by the characteristics of the industry in which it competes. Different industries are characterized by different competitive conditions. In some industries, demand is growing rapidly, and in others it is contracting. Some industries might be beset by excess capacity and persistent price wars, others by strong demand and rising prices. In some, technological change might be revolutionizing competition; others may be characterized by stable technology. In some industries, high profitability among incumbent companies might induce new companies to enter the industry, and these new entrants might subsequently depress prices and profits in the industry. In other industries, new entry might be difficult, and periods of high profitability might persist for a considerable time. Thus, the different competitive conditions prevailing in different industries may lead to differences in profitability and profit growth. For example, average profitability might be higher in some industries and lower in other industries because competitive conditions vary from industry to industry.
Performance in Nonprofit Enterprises
A
final point concerns the concept of superior performance in the nonprofit
sector. By definition, nonprofit enterprises such as government agencies,
universities, and charities are not in “business” to make profits.
Nevertheless, they are expected to use their resources efficiently and operate
effectively, and their managers set goals to measure their performance. The
performance goal for a business school might be to get it’s programs ranked
among the best in the nation. The performance goal for a charity might be to
prevent childhood illnesses in poor countries. The performance goal for a
government agency might be to improve its services while not exceeding its
budget. The managers of nonprofits need to map out strategies to attain these
goals. They also need to understand that nonprofits compete with each other for
scarce resources, just as businesses do. For example, charities compete for scarce
donations, and their managers must plan and develop strategies that lead to high
performance and demonstrate a track record of meeting performance goals. A
successful strategy gives potential donors a compelling message about why they should
contribute additional donations. Thus, planning and thinking strategically are
as important for managers in the nonprofit sector as they are for managers in profit
seeking firms.
Strategic Managers
Managers are the linchpin in the strategy-making process. It is individual managers who must take responsibility for formulating strategies to attain a competitive advantage and for putting those strategies into effect. They must lead the strategymaking process. The strategies that made Dell so successful were not chosen by some abstract entity known as “the company”; they were chosen by the company’s founder, Michael Dell, and the managers he hired. Dell’s success was largely based on how well the company’s managers performed their strategic roles. In this section, we look at the strategic roles of different managers. Later in the chapter, we discuss strategic leadership, which is how managers can effectively lead the strategy making process.
In most companies, there are two primary types of managers: general managers, who bear responsibility for the overall performance of the company or for one of its major self contained subunits or divisions, and functional managers, who are responsible for supervising a particular function, that is, a task, activity, or operation, such as accounting, marketing, research and development (R&D), information technology, or logistics.
A company is a collection of functions or
departments that work together to bring a particular good or service to the
market. If a company provides several different kinds of goods or services, it
often duplicates these functions and creates a series of self contained
divisions (each of which contains its own set of functions) to manage each
different good or service. The general managers of these divisions then become
responsible for their particular product line. The overriding concern of
general managers is the success of the whole company or division under their direction;
they are responsible for deciding how to create a competitive advantage and
achieve high profitability with the resources and capital they have at their disposal.
Figure 1.4 shows the organization of a multidivisional company, that is, a company
that competes in several different businesses and has created a separate self contained
division to manage each. As you can see, there are three main levels of
management: corporate, business, and functional. General managers are found at the
first two of these levels, but their strategic roles differ depending on their
sphere of responsibility.
Corporate Level Managers
The
corporate level of management consists of the chief executive officer (CEO),
other senior executives, and corporate staff. These individuals occupy the apex
of decision making within the organization. The CEO is the principal general
manager. In consultation with other senior executives, the role of
corporate-level managers is to oversee the development of strategies for the
whole organization. This role includes defining the goals of the organization,
determining what businesses it should be in, allocating resources among the
different businesses, formulating and implementing strategies that span
individual businesses, and providing leadership for the entire organization.
Consider General Electric (GE) as an example. GE is active in a wide range of businesses, including lighting equipment, major appliances, motor and transportation equipment, turbine generators, construction and engineering services, industrial electronics, medical systems, aerospace, aircraft engines, and financial services. The main strategic responsibilities of its CEO, Jeffrey Immelt, are setting overall strategic goals, allocating resources among the different business areas, deciding whether the firm should divest itself of any of its businesses, and determining whether it should acquire any new ones. In other words, it is up to Immelt to develop strategies that span individual businesses; his concern is with building and managing the corporate portfolio of businesses to maximize corporate profitability.
It is the CEO’s specific responsibility (in this example, Immelt) to develop strategies for competing in the individual business areas, such as financial services. The development of such strategies is the responsibility of the general managers in these different businesses, or business level managers. However, it is Immelt’s responsibility to probe the strategic thinking of business-level managers to make sure that they are pursuing robust business models and strategies that will contribute toward the maximization of GE’s long-run profitability, to coach and motivate those managers, to reward them for attaining or exceeding goals, and to hold them accountable for poor performance.
Corporate level managers also provide a link between the people who oversee the strategic development of a firm and those who own it (the shareholders). Corporate level managers, and particularly the CEO, can be viewed as the agents of shareholders. 4 It is their responsibility to ensure that the corporate and business strategies that the company pursues are consistent with maximizing profitability and profit growth. If they are not, then the CEO is likely to be called to account by the shareholders.
Business Level Managers
A business unit is a self-contained division
(with its own functions e.g., finance, purchasing, production, and marketing
departments) that provides a product or service for a particular market. The
principal general manager at the business level, or the business level manager,
is the head of the division. The strategic role of these managers is to
translate the general statements of direction and intent that come from the
corporate level into concrete strategies for individual businesses. Whereas
corporate level general managers are concerned with strategies that span
individual businesses, business-level general managers are concerned with
strategies that are specific to a particular business. At GE, a major corporate
goal is to be first or second in every business in which the corporation
competes. Then, the general managers in each division work out for their
business the details of a business model that is consistent with this
objective.
Functional Level Managers
Functional-level managers are responsible for the specific business functions or operations (human resources, purchasing, product development, customer service, etc.) that constitute a company or one of its divisions. Thus, a functional manager’s sphere of responsibility is generally confined to one organizational activity, whereas general managers oversee the operation of an entire company or division. Although they are not responsible for the overall performance of the organization, functional managers nevertheless have a major strategic role: to develop functional strategies in their area that help fulfill the strategic objectives set by business and corporate level general managers.
In GE’s aerospace business, for instance,
manufacturing managers are responsible for developing manufacturing strategies
consistent with corporate objectives. Moreover, functional managers provide
most of the information that makes it possible for business and corporate-level
general managers to formulate realistic and attainable strategies. Indeed,
because they are closer to the customer than is the typical general manager,
functional managers themselves may generate important ideas that subsequently become
major strategies for the company. Thus, it is important for general managers to
listen closely to the ideas of their functional managers. An equally great responsibility
for managers at the operational level is strategy implementation: the execution
of corporate and business level plans.
The Strategy Making Process
We
can now turn our attention to the process by which managers formulate and
implement strategies. Many writers have emphasized that strategy is the outcome
of a formal planning process and that top management plays the most important
role in this process. Although this view has some basis in reality, it is not
the whole story. As we shall see later in the chapter, valuable strategies
often emerge from deep within the organization without prior planning.
Nevertheless, a consideration of formal, rational planning is a useful starting
point for our journey into the world of strategy. Accordingly, we consider what
might be described as a typical formal strategic planning model for making
strategy.
A Model of the Strategic Planning Process
The formal strategic planning process has five main steps :
|
1. |
Select
the corporate mission and major corporate goals. |
|
2. |
Analyze
the organization’s external competitive environment to identify opportunities
and threats. |
|
3. |
Analyze
the organization’s internal operating environment to identify the
organization’s strengths and weaknesses. |
|
4. |
Select
strategies that build on the organization’s strengths and correct its
weaknesses in order to take advantage of external opportunities and counter
external threats. These strategies should be consistent with the mission and
major goals of the organization. They should be congruent and constitute a
viable business model. |
|
5. |
Implement
the strategies. |
The task of analyzing the organization’s external and internal environments and then selecting appropriate strategies constitutes strategy formulation. In contrast, as noted earlier, strategy implementation involves putting the strategies (or plan) into action. This includes taking actions consistent with the selected strategies of the company at the corporate, business, and functional levels; allocating roles and responsibilities among managers (typically through the design of organization structure) allocating resources (including capital and money); setting short term objectives and designing the organization’s control and reward systems. These steps are illustrated in Figure 1.5 (which can also be viewed as a plan for the rest of this book).
Each step in Figure 1.5 constitutes a sequential step in the strategic planning process. At step 1, each round, or cycle, of the planning process begins with a statement of the corporate mission and major corporate goals. The existing business model of the company shapes this statement. The mission statement, then, is followed by the foundation of strategic thinking: external analysis, internal analysis, and strategic choice. The strategy-making process ends with the design of the organizational structure and the culture and control systems necessary to implement the organization’s chosen strategy. This chapter discusses how to select a corporate mission and choose major goals. Other parts of strategic planning are reserved for later chapters, as indicated in Figure 1.5.
Some
organizations go through a new cycle of the strategic planning process every
year. This does not necessarily mean that managers choose a new strategy each year.
In many instances, the result is simply to modify and reaffirm a strategy and structure
already in place. The strategic plans generated by the planning process
generally project over a period of 1–5 years, and the planis updated, or rolled
forward, every year. In most organizations, the results of the annual strategic
planning process are used as input into the budgetary process for the coming
year so that strategic planning is used to shape resource allocation within the
organization.
Mission Statement
The first component of the strategic management process is crafting the organization’s mission statement, which provides the framework or context within which strategies are formulated. A mission statement has four main components: a statement of the raison d’être of a company or organization it’s reason for existence which is normally referred to as the mission; a statement of some desired future state, usually referred to as the vision; a statement of the key values that the organization is committed to; and a statement of major goals.
The Mission A company’s mission describes what the company does. For example, the mission of Kodak is to provide “customers with the solutions they need to capture, store, process, output, and communicate images anywhere, anytime. In other words, Kodak exists to provide imaging solutions to consumers. This mission focuses on the customer needs that the company is trying to satisfy rather than on particular products. This is a customer oriented mission rather than product oriented mission.
An important first step in the process of
formulating a mission is to come up with a definition of the organization’s
business. Essentially, the definition answers these questions: “What is our
business? What will it be? What should it be?” The responses to these questions
guide the formulation of the mission. To answer the question, “What is our
business?” a company should define its business in terms of three dimensions :
who is being satisfied (what customer groups), what is being satisfied (what
customer needs), and how customers’ needs are being satisfied (by what skills, knowledge,
or distinctive competencies). Figure 1.6 illustrates these dimensions.
This approach stresses the need for a customer oriented rather than a productoriented business definition. A product-oriented business definition focuses on the characteristics of the products sold and the markets served, not on which kinds of customer needs the products are satisfying. Such an approach obscures the company’s true mission because a product is only the physical manifestation of applying a particular skill to satisfy a particular need for a particular customer group. In practice, that need may be served in many different ways, and a broad customer oriented business definition that identifies these ways can safeguard companies from being caught unaware by major shifts in demand.
By helping anticipate demand shifts, a customer-oriented mission statement can also assist companies in capitalizing on changes in their environment. It can help answer the question, “What will our business be?” Kodak’s mission statement to provide “customers with the solutions they need to capture, store, process, output, and communicate images” is a customer oriented statement that focuses on customer needs rather than a particular product (or solution) for satisfying those needs, such as chemical film processing. For this reason, from the early 1990s on ward the mission statement has driven Kodak’s choice to invest in digital imaging technologies, which replaced much of its traditional business based on chemical film processing.
The need to take a customer-oriented view of a company’s business has often been ignored. Business history is peppered with the ghosts of once great corporations that did not define their business, or defined it incorrectly, so that ultimately they declined. In the 1950s and 1960s, many office equipment companies, such as Smith Corona and Underwood, defined their businesses as being the production of typewriters. This product-oriented definition ignored the fact that they were really in the business of satisfying customers’ information-processing needs. Unfortunately for those companies, when a new form of technology appeared that better served customer needs for information processing (computers), demand for typewriters plummeted. The last great typewriter company, Smith Corona, went bankrupt in 1996, a victim of the success of computer based word processing technology.
In contrast, IBM correctly foresaw what its business would be. In the 1950s, IBM was a leader in the manufacture of typewriters and mechanical tabulating equipment using punch card technology. However, unlike many of its competitors, IBM defined it’s business as providing a means for information processing and storage, rather thanonly supplying mechanical tabulating equipment and typewriters. Given this definition, the company’s subsequent moves into computers, software systems, office systems, and printers seem logical.
Vision The vision of a company defines a desired future state; it articulates, often in bold terms, what the company would like to achieve. Nokia, the world’s largest manufacturer of mobile (wireless) phones, has been operating with a very simple but powerful vision for some time: “If it can go mobile, it will!” This vision implied that not only would voice telephony go mobile, but also a host of other services based on data, such as imaging and Internet browsing. This vision led Nokia to become a leader in developing mobile handsets that not only can be used for voice communication but that also take pictures, browse the Internet, play games, and manipulate personal and corporate information.
Values The values of a company state how
managers and employees should conduct themselves, how they should do business,
and what kind of organization they should build to help a company achieve its
mission. Insofar as they help drive and shape behavior within
a company, values are commonly seen as the bedrock of a company’s organizational
culture: the set of values, norms, and standards that control how employees
work to achieve an organization’s mission and goals. An organization’s culture
is commonly seen as an important source of its competitive advantage. (We
discuss the issue of organization culture in depth in Chapter 12.) For example,
Nucor Steel is one of the most productive and profitable steel firms in the world.
Its competitive advantage is based, in part, on the extremely high productivity
of its work force, which the company maintains is a direct result of its
cultural values, which in turn determine how it treats its employees. These
values are as follows :
|
- |
“Management
is obligated to manage Nucor in such a way that employees will have the
opportunity to earn according to their productivity.” |
|
- |
“Employees
should be able to feel confident that if they do their jobs properly, they
will have a job tomorrow.” |
|
- |
“Employees
have the right to be treated fairly and must believe that they will be.” |
|
- |
“Employees
must have an avenue of appeal when they believe they are being treated
unfairly. |
At Nucor, values emphasizing pay for performance, job security, and fair treatment for employees help to create an atmosphere within the company that leads to high employee productivity. In turn, this has helped to give Nucor one of the lowest cost structures in its industry, and helps to explain the company’s profitability in a very price competitive business.
In one study of organizational values, researchers identified a set of values associated with high performing organizations that help companies achieve superior financial performance through their impact on employee behavior. These values included respect for the interests of key organizational stakeholders: individuals or groups that have an interest, claim, or stake in the company, in what it does, and in how well it performs. They include stockholders, bondholders, employees, customers, the communities in which the company does business, and the general public. The study found that deep respect for the interests of customers, employees, suppliers, and shareholders was associated with high performance. The study also noted that the encouragement of leadership and entrepreneurial behavior by mid and Lower level managers and a willingness to support change efforts within the organization contributed to high performance. Companies that emphasize such values consistently throughout their organization include Hewlett Packard, Walmart, and PepsiCo. The same study identified the values of poorly performing companies values that, as might be expected, are not articulated in company mission statements : (1) arrogance, particularly to ideas from outside the company; (2) a lack of respect for key stakeholders; and (3) a history of resisting change efforts and “punishing” mid and lower-level managers who showed “too much leadership.” General Motors was held up as an example of one such organization. According to the research, a mid or lower level manager who showed too much leadership and initiative there was not promoted!
Major Goals
Having stated the mission, vision, and key values, strategic managers can take the next step in the formulation of a mission statement: establishing major goals. A goal is a precise and measurable desired future state that a company attempts to realize In this context, the purpose of goals is to specify with precision what must be done if the company is to attain its mission or vision.
Well
constructed goals have four main characteristics
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They
are precise and measurable. Measurable goals give managers a yardstick orstandard
against which they can judge their performance. |
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They
address crucial issues. To maintain focus, managers should select a limited number
of major goals to assess the performance of the company. The goals that are
selected should be crucial or important ones. |
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They
are challenging but realistic. They give all employees an incentive to look for
ways of improving the operations of an organization. If a goal is unrealistic
in the challenges it poses, employees may give up; a goal that is too easy
may fail to motivate managers and other employees |
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They
specify a time period in which the goals should be achieved, when that is appropriate.
Time constraints tell employees that success requires a goal to be attained by
a given date, not after that date. Deadlines can inject a sense of urgency into
goal attainment and act as a motivator. However, not all goals require time constraints. |
Well constructed goals also provide a means by which the performance of managers can be evaluated.
As noted earlier, although most companies operate with a variety of goals, the primary goal of most corporations is to maximize shareholder returns, and doing this requires both high profitability and sustained profit growth. Thus, most companies operate with goals for profitability and profit growth. However, it is important that top managers do not make the mistake of overemphasizing current profitability to the detriment of long-term profitability and profit growth. The overzealous pursuit of current profitability to maximize short-term ROIC can encourage such misguided managerial actions as cutting expenditures judged to be nonessential in the short run for instance, expenditures for research and development, marketing, and new capital investments. Although cutting current expenditure increases current profitability, the resulting underinvestment, lack of innovation, and diminished marketing can jeopardize long run profitability and profit growth.
To guard against short run decision making, managers need to ensure that they adopt goals whose attainment will increase the long-run performance and competitiveness of their enterprise. Long term goals are related to such issues as product development, customer satisfaction, and efficiency, and they emphasize specific objectives or targets concerning such details as employee and capital productivity, product quality, innovation, customer satisfaction, and customer service.
External Analysis
The
second component of the strategic management process is an analysis of the organization’s
external operating environment. The essential purpose of the external analysis
is to identify strategic opportunities and threats within the organization’s operating
environment that will affect how it pursues its mission. Strategy in Action 1.1
describes how an analysis of opportunities and threats in the external environment
led to a strategic shift at Time Inc.
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1.1.
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Strategic Analysis at Time Inc. Time Inc., the magazine publishing
division of media conglomerate Time Warner, has a venerable history. Its
magazine titles include Time, Fortune, Sports Illustrated,
and People, all long time leaders in their respective categories. By
the mid 2000s, however, Time Inc. recognized that it needed to change its
strategy. By 2005, circulation at Time had decreased by 12%; Fortune,
by 10%; and Sports Illustrated, by 17%. An external analysis revealed what was happening. The readership of Time’s magazines was aging. Increasingly, younger readers were getting what they wanted from the Web. This was both a threat for Time Inc., since its Web offerings were not strong, and an opportunity, because with the right offerings, Time Inc. could capture this audience. Time also realized that advertising dollars were migrating rapidly to the Web, and if the company was going to maintain its share, its Web offerings had to be every bit as good as its print offering An
internal analysis revealed why, despite multiple attempts, Time had failed to
capitalize on the opportunities offered by the emergence of the Web. Although
Time had tremendous strengths, including powerful brands and strong
reporting, development of its Web offerings had been hindered by a serious weakness
an editorial culture that regarded Web publishing as a backwater. At People, for example, the online operation use to be “like a distant moon” according to managing editor Martha Nelson. Managers at Time Inc. had also been worried that Web offerings would cannibalize print offerings and help to accelerate the decline in the circulation of magazines, with dire financial consequences for the company. As a result of this culture, efforts to move publications onto the Web were underfunded or were stymied entirely by a lack of management attention and commitment. It was Martha Nelson at People who, in 2003, showed the way forward for the company. Her strategy for overcoming the weakness at Time Inc., and better exploiting opportunities on the Web, started with merging the print and online newsrooms at People, removing the distinction between them. Then, she relaunched the magazine’s online site, made major editorial commitments to Web publishing, stated that original content should appear on the Web, and emphasized the importance of driving traffic to the site and earning advertising revenues. Over the next 2 years, page views at People.com increased fivefold Ann Moore, the CEO at Time Inc., formalized this strategy in 2005, mandating that all print offerings should follow the lead of People.com, integrating print and online newsrooms and investing significantly more resources in Web publishing. To drive this home, Time hired several well known bloggers to write for its online publications. The goal of Moore’s strategy was to neutralize the cultural weakness that had hindered online efforts in the past at Time Inc., and to redirect resources to Web publishing. In 2006, Time made another strategic move designed to exploit the opportunities associated with the Web when it started a partnership with the 24 hour news channel, CNN, putting all of its financial magazines onto a site that is jointly owned, CNNMoney.com. The site, which offers free access to Fortune, Money, and Business 2.0, quickly took the third spot in online financial Websites behind Yahoo! finance and MSN. This was followed with a redesigned Website for Sports Illustrated that has rolled out video downloads for iPods and mobile phones. To
drive home the shift to Web-centric publishing, in 2007 Time announced
another change in strategy it would sell off 18 magazine titles that, while
good performers, did not appear to have much traction on the Web. Ann Moore
stated that going forward Time would be focusing its energy, resources, and
investments on the company’s largest and most profitable brands: brands that
have demonstrated an ability to draw large audiences in digital form. |
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Source
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A.
Van Duyn, “Time Inc. Revamp to Include Sale of 18 Titles,” Financial Times,
September 13, 2006, p. 24; M. Karnitsching, “TimeInc. Makes New Bid to be Big
Web Player,” Wall Street Journal, March 29, 2006, p. B1; M. Flamm,
“Time Tries the Web Again,” Crain’s New York Business, January 16,
2006
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Three
interrelated environments should be examined when undertaking an external analysis
: the industry environment in which the company operates, the country or
national environment, and the wider socioeconomic or macroenvironment Analyzing
the industry environment requires an assessment of the competitive structure of
the company’s industry, including the competitive position of the company and
it’s major rivals. It also requires analysis of the nature, stage, dynamics,
and history of the industry. Because many markets are now global markets,
analyzing the industry environment also means assessing the impact of
globalization on competition within an industry. Such an analysis may reveal
that a company should move some production facilities to another nation, that
it should aggressively expand in emerging markets such as China, or that it
should beware of new competition from emerging nations. Analyzing the
macroenvironment consists of examining macroeconomic, social, government,
legal, international, and technological factors that may affect the company and
its industry. We look at external analysis in Chapter 2.
Internal Analysis
Internal analysis, the third component of the strategic planning process, focuses on reviewing the resources, capabilities, and competencies of a company. The goal is to identify the strengths and weaknesses of the company. For example, as described in Strategy in Action 1.1, an internal analysis at Time Inc. revealed that while the company had strong well known brands such as Fortune, Money, Sports Illustrated, and People (a strength), and strong reporting capabilities (another strength), it suffered from a lack of editorial commitment to online publishing (a weakness). We consider internal analysis in Chapter 3.
SWOT Analysis and the Business Model
The next component of strategic thinking requires the generation of a series of strategic alternatives, or choices of future strategies to pursue, given the company’s internal strengths and weaknesses and its external opportunities and threats. The comparison of strengths, weaknesses, opportunities, and threats is normally referred to as a SWOT analysis. The central purpose is to identify the strategies to exploit external opportunities, counter threats, build on and protect company strengths, and eradicate weaknesses.
At Time Inc., managers saw the move of readership to the Web as both an opportunity that they must exploit and a threat to Time’s established print magazines. Managers recognized that Time’s well known brands and strong reporting capabilities were strengths that would serve it well online, but that an editorial culture that marginalized online publishing was a weakness that had to be fixed. The strategies that managers at Time Inc. came up with included merging the print and online newsrooms to remove distinctions between them; investing significant financial resources in online sites; and entering into a partnership with CNN, which already had a strong online presence.
More generally, the goal of a SWOT analysis is to create, affirm,
or fine tune a company specific business model that will best align, fit, or
match a company’s resources and capabilities to the demands of the environment
in which it operates. Managers compare and contrast the various alternative
possible strategies against each other and then identify the set of strategies
that will create and sustain a competitive advantage. These strategies can be
divided into four main categories :
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Functional
level strategies, directed at improving the effectiveness of operations within a
company, such as manufacturing, marketing, materials management, product
development, and customer service. We review functional-level strategies in
Chapter 4. |
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Busines
level strategies, which encompasses the business’s overall competitive theme, the
way it positions itself in the marketplace to gain a competitive advantage, and
the different positioning strategies that can be used in different industry
settings—for example, cost leadership, differentiation, focusing on a particular
niche or segment of the industry, or some combination of these. We review
business level strategies in Chapters 5, 6, and 7. |
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Global
strategies, which addresses how to expand operations outside the home country
to grow and prosper in a world where competitive advantage is determined at a
global level. We review global strategies in Chapter 8. |
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Corporate
level strategies, which answer the primary questions: What business or businesses
should we be in to maximize the long-run profitability and profit growth of
the organization, and how should we enter and increase our presence in these
businesses to gain a competitive advantage? We review corporate level strategies
in Chapters 9 and 10. |
The
strategies identified through a SWOT analysis should be congruent with each
other. Thus, functional-level strategies should be consistent with, or support,
the company’s business level strategy and global strategy. Moreover, as we explain
later in this book, corporate level strategies should support business level strategies.
When combined, the various strategies pursued by a company should constitute a
complete, viable business model. In essence, a SWOT analysis is a methodology
for choosing between competing business models, and for finetuning the business
model that managers choose. For example, when Microsoft entered the videogame
market with its Xbox offering, it had to settle on the best business model for
competing in this market. Microsoft used a SWOT type of analysis to compare
alternatives and settled on a “razor and razor blades” business model in which
the Xbox console is priced below cost to build sales (the “razor”), while
profits are made from royalties on the sale of games for the Xbox (the “blades”).
Strategy Implementation
Once managers have chosen a set of congruent strategies to achieve a competitive advantage and increase performance, managers must put those strategies into action : strategy has to be implemented. Strategy implementation involves taking actions at the functional, business, and corporate levels to execute a strategic plan. Implementation can include, for example, putting quality improvement programs into place, changing the way a product is designed, positioning the product differently in the marketplace, segmenting the marketing and offering different versions of the product to different consumer groups, implementing price increases or decreases, expanding through mergers and acquisitions, or downsizing the company by closing down or selling off parts of the company. These and other topics are discussed in detail in Chapters 4 through 10.
Strategy
implementation also entails designing the best organization structure and the
best culture and control systems to put a chosen strategy into action. In
addition, senior managers need to put a governance system in place to make sure
that all within the organization act in a manner that is not only consistent
with maximizing profitability and profit growth, but also legal and ethical. In
this book, we look at the topic of governance and ethics in Chapter 11 we
discuss the organization structure, culture, and controls required to implement
business-level strategies in Chapter 12; and discuss the structure, culture,
and controls required to implement corporatelevel strategies in Chapter 13.
Strategy as an Emergent Process
The
planning model suggests that a company’s strategies are the result of a plan, that
the strategic planning process is rational and highly structured, and that top management
orchestrates the process. Several scholars have criticized the formal planning
model for three main reasons: the unpredictability of the real world, the role
that lower-level managers can play in the strategic management process, and the
fact that many successful strategies are often the result of serendipity, not
rational strategizing. These scholars have advocated an alternative view of strategy
making.
The Feedback Loop
The
feedback loop in Figure 1.5 indicates that strategic planning is ongoing: it never
ends. Once a strategy has been implemented, its execution must be monitored to
determine the extent to which strategic goals and objectives are actually being
achieved, and to what degree competitive advantage is being created and
sustained. This information and knowledge is returned to the corporate level
through feedback loops, and becomes the input for the next round of strategy
formulation and implementation. Top managers can then decide whether to
reaffirm the existing business model and the existing strategies and goals, or
suggest changes for the future. For example, if a strategic goal proves too
optimistic, the next time, a more conservative goal is set. Or, feedback may
reveal that the business model is not working, so managers may seek ways to
change it. In essence, this is what happened at Time Inc. (see Strategy in
Action 1.1).
Strategy as an Emergent Process
The planning model suggests that a company’s strategies are the result of a plan, that the strategic planning process is rational and highly structured, and that top management orchestrates the process. Several scholars have criticized the formal planning model for three main reasons: the unpredictability of the real world, the role that lower-level managers can play in the strategic management process, and the fact that many successful strategies are often the result of serendipity, not rational strategizing. These scholars have advocated an alternative view of strategy making.
Strategy Making in an Unpredictable World
Critics of formal planning systems argue that we live in a world in which uncertainty, complexity, and ambiguity dominate, and in which small chance events can have a large and unpredictable impact on outcomes. In such circumstances, they claim, even the most carefully thought out strategic plans are prone to being rendered useless by rapid and unforeseen change. In an unpredictable world, being able to respond quickly to changing circumstances, and to alter the strategies of the organization accordingly, is paramount. The dramatic rise of Google, for example, with its business model-based revenues earned from advertising links associated with search results (the so-called pay-per-click business model), disrupted the business models of companies that made money from online advertising. Nobody could foresee this development or plan for it, but companies had to respond to it, and rapidly. Companies with a strong online advertising presence, including Yahoo.com and Microsoft’s MSN network, rapidly changed their strategies to adapt to the threat Google posed. Specifically, both companies developed their own search engines and copied Google’s pay per click business model. According to critics of formal systems, such a flexible approach to strategy-making is not possible within the framework of a traditional strategic planning process, with its implicit assumption that an organization’s strategies only need to be reviewed during the annual strategic planning exercise.
Autonomous Action: Strategy Making by Lower Level Managers
Another
criticism leveled at the rational planning model of strategy is that too much
importance is attached to the role of top management, particularly the CEO. An
alternative view is that individual managers deep within an organization can and
often do exert a profound influence over the strategic direction of the firm. Writing with Robert Burgelman of Stanford
University, Andy Grove, the former CEO of Intel, noted that many important
strategic decisions at Intel were initiated not by top managers but by the
autonomous action of lower-level managers deep within Intel who, on their own
initiative, formulated new strategies and worked to persuade top-level managers
to alter the strategic priorities of the firm. These strategic decisions
included the decision to exit an important market (the DRAM memory chip market)
and to develop a certain class of microprocessors (RISC-based microprocessors)
in direct contrast to the stated strategy of Intel’s top managers. Another
example of autonomous action, this one at Starbucks, is given in Strategy in
Action 1.2.
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1.2. |
Strategy
In Action Starbucks’ Music Business Anyone who has walked into a Starbucks cannot help but notice that, in addition to various coffee beverages and food, the company also sells music CDs. Most Starbucks stores now have racks displaying about 20 CDs. The interesting thing about Starbucks’ entry into music retailing is that it was not the result of a formal planning process. The company’s journey into music retailing started in the late 1980s when Tim Jones, then the manager of a Starbucks in Seattle’s University Village, started to bring his own tapes of music compilations into the store to play. Soon Jones was getting requests for copies from customers. Jones told this to Starbucks’ CEO, Howard Schultz, and suggested that Starbucks start to sell its own music. At first, Schultz was skeptical but after repeated lobbying efforts by Jones, he eventually took up the suggestion. Today, Starbucks not only sells CDs, it also provides music downloading at its “Hear Music” Starbucks stores, outlets where customers can listen to music from Starbucks’ 200,000-song online music library while sipping their coffee and burning their own CDs. |
Autonomous
action may be particularly important in helping established companies deal with
the uncertainty created by the arrival of a radical new technology that changes
the dominant paradigm in an industry. Top managers usually rise to preeminence by
successfully executing the established strategy of the firm. Therefore, they
may have an emotional commitment to the status quo and are often unable to see
things from a different perspective. In this sense, they can be a conservative
force that promotes inertia. Lower level managers, however, are less likely to
have the same commitment to the status quo and have more to gain from promoting
new technologies and strategies. They may be the first ones to recognize new
strategic opportunities and lobby for strategic change. As described in
Strategy in Action 1.3, this seems to have been the case at discount stockbroker,
Charles Schwab, which had to adjust to the arrival of the Web in the 1990s.
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1.3. |
Strategy In Action A Strategic Shift at Charles Schwab In the mid 1990s, Charles Schwab was the most successful discount stock broker in the world. Over 20 years, it had gained share from full service brokers like Merrill Lynch by offering deep discounts on the commissions charged for stock trades. Although Schwab had a nationwide network of branches, most customers executed their trades through a telephone system called TeleBroker. Others used online proprietary software, Street Smart, which had to be purchased from Schwab. It was a business model that worked well then along came E*Trade. Bill Porter, a physicist and inventor, started the discount brokerage firm E*Trade in 1994 to take advantage of the opportunity created by the rapid emergence of the World Wide Web. E*Trade launched the first dedicated Website for online trading : E*Trade had no branches, no brokers, and no telephone system for taking orders, and thus it had a very low-cost structure. Customers traded stocks over the company’s Website. Due to its low-cost structure, E*Trade was able to announce a flat $14.95 commission on stock trades, a figure significantly below Schwab’s average commission, which at the time was $65. It was clear from the outset that E*Trade and other online brokers, such as Ameritrade, who soon followed, offered a direct threat to Schwab. Not only were their cost structures and commission rates considerably lower than Schwab’s, but the ease, speed, and flexibility of trading stocks over the Web suddenly made Schwab’s Street Smart trading software seem limited and its telephone system antiquated. Deep within Schwab, William Pearson, a young software specialist who had worked on the development of Street Smart, immediately saw the transformational power of the Web. Pearson believed that Schwab needed to develop its own Web-based software, and quickly. Try as he might, though, Pearson could not get the attention of his supervisor. He tried a number of other executives but found little support. Eventually he approached Anne Hennegar, a former Schwab manager who now worked as a consultant to the company. Hennegar suggested that Pearson meet with Tom Seip, an executive vice president at Schwab who was known for his ability to think outside the box. Hennegar approached Seip on Pearson’s behalf, and Seip responded positively, asking her to set up a meeting. Hennegar and Pearson arrived expecting to meet only Seip, but to their surprise, in walked Charles Schwab, his chief operating officer, David Pottruck, and the vice presidents in charge of strategic planning and electronic brokerage. As
the group watched Pearson’s demo, which detailed how a Web based system would
look and work, they became increasingly excited. It was clear to those in the
room that a Web-based system using real time information, personalization,
customization, and interactivity all advanced Schwab’s commitment to
empowering customers. By the end of the meeting, Pearson had received a green
light to start work on the project. A year later, Schwab launched its own
Web-based offering, eSchwab, which enabled Schwab clients to execute stock
trades for a low flat rate commission. eSchwab went on to become the core of
the company’s offering, enabling it to stave off competition from deep
discount brokers like E*Trade. |
