Business Policy & Strategy

2012 Jennifer C.
Leonard
CONTENTS
Chapter 1 Definitions and Overview ............................................................................................................. 1 Strategy Definitions ......................................................................................................................... 1 Competitive Advantage Definitions ................................................................................................. 3 The Value Chain ............................................................................................................................... 5 Supply Chain..................................................................................................................................... 8 Strategic Fit ...................................................................................................................................... 9 Chapter 2 The Strategic Process ................................................................................................................. 10 Step I: Vision, Mission, & Value Statements Determine The Strategy....................................... 10 Step 2: Set Goals ............................................................................................................................ 15 Step 3: Create the Strategic Plan ................................................................................................... 18 Step 4: Implement ......................................................................................................................... 20 Step 5: Monitor & Adjust ............................................................................................................... 20 Chapter 3 Environmental Analysis .............................................................................................................. 21 Overview ........................................................................................................................................ 21 Macro-environmental Analysis ...................................................................................................... 22 Macro-environment Analysis Example .......................................................................................... 25 Micro-environmental Analysis ....................................................................................................... 29 Micro-environment Analysis Example ........................................................................................... 36 Internal Environmental Analysis .................................................................................................... 40 Internal Environment Analysis Example ........................................................................................ 54 SWOT Analysis ............................................................................................................................... 60 SWOT Analysis Example ................................................................................................................. 62 Chapter 4 Business-Level Strategies ........................................................................................................... 68 Overview ........................................................................................................................................ 68 Five Generic Strategies .................................................................................................................. 68 Low Cost Leadership ...................................................................................................................... 69 Differentiation................................................................................................................................ 70 Focused .......................................................................................................................................... 72 Hybrid .......................................................................................................................................... 73 Recap .......................................................................................................................................... 74 Chapter 5 Industry Specifics........................................................................................................................ 75 Industry Lifecycles .......................................................................................................................... 75 Leaders or Followers ...................................................................................................................... 79 Other Considerations ..................................................................................................................... 80 Chapter 6 Corporate-Level Strategies......................................................................................................... 83 Overview ........................................................................................................................................ 83 Outsourcing.................................................................................................................................... 83
Integration ..................................................................................................................................... 85 Diversification ................................................................................................................................ 88 Alliances & Partnerships ................................................................................................................ 91 Mergers & Acquisitions .................................................................................................................. 92 Chapter 7 Foreign Markets ......................................................................................................................... 94 Overview ........................................................................................................................................ 94 Definitions ...................................................................................................................................... 94 Why Go Into Foreign Markets? ...................................................................................................... 95 Cultural, Market, & Political Differences ....................................................................................... 95 Strategies for Entering Foreign Markets ........................................................................................ 99 Emerging Market Strategies .......................................................................................................... 99 Local or Global?............................................................................................................................ 100 Chapter 8 Ethics ........................................................................................................................................ 101 Overview ...................................................................................................................................... 101 Ethical Philosophies ..................................................................................................................... 101 Ethical Universalism ..................................................................................................................... 103 Ethical Relativism ......................................................................................................................... 104 Integrative Social Contracts ......................................................................................................... 105 Ethical Utilitarianism .................................................................................................................... 106 The Golden Rule ........................................................................................................................... 107 The Billboard or Mother Rule ...................................................................................................... 107 What Drives Unethical Behavior in Business? ............................................................................. 107 Dilemma or Decision? .................................................................................................................. 108 Managing Ethics ........................................................................................................................... 109 Why be Ethical? ........................................................................................................................... 110 Chapter 9 Social Responsibility ................................................................................................................. 111 Overview ...................................................................................................................................... 111 A Duty to ................................................................................................................................... 112 Why be Socially Responsible? ...................................................................................................... 113 Chapter 10 Organizational Culture ........................................................................................................... 114 Overview ...................................................................................................................................... 114 Key features ................................................................................................................................. 115 Perpetuation & Evolution ............................................................................................................ 115 Types of Cultures ......................................................................................................................... 118 Ally or Obstacle? .......................................................................................................................... 119 Changing Culture.......................................................................................................................... 119 Chapter 11 Implementation...................................................................................................................... 122 What Needs to Be Done .............................................................................................................. 122 Some Additional Information .................................................................................................... 126
CHAPTER 1 DEFINITIONS AND OVERVIEW

STRATEGY DEFINITIONS
VALUE STATEMENT
What we believe drives mission and vision
MISSION STATEMENT
Who we are and what we do drives strategy
VISION STATEMENT
Who and what we want to be in the future tied to strategy
STRATEGY
How the company is going to compete, grow, take advantage of its value chain, and increase performance There are five basic business-level strategies: differentiation, low-cost leadership, focused differentiation, focused low-cost leadership, and hybrid (aka, best cost or stuck in the middle). There are four basic ways to gain a competitive advantage: low-cost provider, differentiation, niche markets, and value chain/resource expertise. These tie directly to the five strategies. Notes
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Chapter 1
Definitions & Overview
TACTICS
Tactics are the specific ideas of how to execute the strategy. Differentiating on customer service, for example, would be tactic of a differentiation, focused differentiation, or hybrid strategies. Buying raw materials in bulk would be a tactic of the low-cost leadership, focused low-cost leadership, or hybrid strategies.
GOALS
Goals are broad statements about what the company wants to accomplish. These are NOT quantifiable. For example, if our tactic is to differentiate on customer service, our goals might be 1) to reduce customer complaints or 2) train the employees. A company should have both financial and non-financial objectives.
OBJECTIVES
Objectives are the quantifiable statements about the goals the specifics. These must be quantifiable in measurement and in time. For example, our goal is to train employees. So, the objectives may be 1) Hire an HR training person in the next six months; 2) have all employees attend at least one training seminar in one-year; 3) set up new policies that require new employees to attend training within three months of being hired.
ACTION PLAN
The action plan details the specifics of how the company is going to achieve its objectives, who is going to be responsible, and a timeline for completion. Notes
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Chapter 1
BUSINESS MODEL
How the company will make sales, generally. Some examples are a business may sell subscriptions; have a storefront retail outlet; or sell product inexpensively, but required accessories are expensive. The following figure shows how the parts of strategy creation work together.
COMPETITIVE ADVANTAGE DEFINITIONS

RESOURCES
Things the company has. Resources may be tangible (plant, equipment, people) or intangible (patents, knowledge).
CAPABILITIES
Things the company can do. For example, the company can make dog food; the company can hire people. Notes
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Chapter 1
COMPETENCY
Competencies are capabilities the company does well. For example, if the company is good (efficient and effective) at making dog food, then it has a competency in that area.
CORE COMPETENCY
A core competency is a competency around which the company can build the organization - not just something it does well, but does VERY well.
COMPETITIVE ADVANTAGE
A competitive advantage is a core competency that a company performs better than its rivals.
SUSTAINABLE COMPETITIVE ADVANTAGE

A sustainable competitive advantage is a competitive advantage that lasts for a relatively long time. At least one (but often several) of the resources and/or capabilities upon which the competitive advantage is based must have ALL four of these characteristics: 1) Rare; 2) Valuable; 3) Hard to Imitate; and 4) Nonsubstitutable. Any three characteristics are good, but to gain a sustainable competitive advantage, the resource or capability must have all four.
Notes
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Chapter 1
PERFORMANCE
Performance is not necessarily measured by the bottom line or profits. Performance may be measured in a variety of ways, but must suit the business. For example, a not-for-profit may consider performance to be the number of clients helped, while a social entity may consider performance to be the number of people employed, and an automobile manufacturer may consider both profit and number of vehicles sold.
THE VALUE CHAIN

VALUE CHAIN
The activities a business performs on a product or service that increases the worth of the product or service. Every business has a value chain, but not every business will add value at every step. Some only add value through service for example.
Notes
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DIRECT VALUE
Direct value is an activity that impacts the product or service in a straightforward and obvious manner. Direct value chain activities are inbound logistics; operations; outbound logistics; sales; and service.
INDIRECT VALUE
Indirect value results from an activity that increases worth in a roundabout way. For example, good hiring practices lower turnover, resulting in high morale, which then leads to higher quality service. Also called support activities, those activities that add indirect value are R&D, technology, HR, and Administration.
INBOUND LOGISTICS
Inbound Logistics deals with the planning, implementation, and control of raw materials coming into the firm. Inbound logistics deals with things like supply chain management, JIT systems, warehousing, receiving, and raw material quality checks.
OPERATIONS
Operations is where the firm changes the raw materials into finished goods. Operations deals with machinery, workflow, TQM, scheduling, materials usage, and other activities associated with product creation
OUTBOUND LOGISTICS
Outbound Logistics deals with the planning, implementation, and control of finished products and their distribution. Outbound logistics deals with warehousing, transportation, and delivery to the buyer.
SALES
Sales refers to those activities that create demand. Sales includes advertising, sales force management, customer relationship management, contracting, pre-sale customer service, and building brand name and image. Notes
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Chapter 1
SERVICE
Service activities are those that happen after the sale. Service includes such things as warranty work, help after the sale, assistance with making the sale, and maintenance.
R&D
R&D deals with researching the features and materials used in the product, as well as the processes used in the business.
TECHNOLOGY
Technology means both information technology and other technology used in both the product and the process. Using robots to paint cars is an example. So is using a CRM application.
HR
HR encompasses such activities as employee policies, hiring, scheduling, training, determining benefits, and other human resource management issues.
ADMINISTRATION
Administration covers management, accounting tasks, management functions, legal activities, and other things the company must do to keep its doors open. Notes
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Chapter 1
SUPPLY CHAIN
The supply chain indicates the suppliers and buyers for your product. The chain may start as far back as the raw materials and go as far forward as the end user. This is determined by how important the level of supplier or buyer is. Each step in the supply chain adds value because each company has its own value chain. If a step in the supply chain does not add value, it should be removed.
Notes
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Chapter 1
STRATEGIC FIT
Not all strategies are equally good in any situation. In order to be successful, there must be strategic fit. In order to get the best performance (remember, not necessarily profit), the structure (value chain activities; supply chain issues; resources and capabilities; business model; etc.) must align with the strategy. Thus, good strategy must: Fit the resources and capabilities of the firm Fit the industry and company situation Better the companys performance Help keep or create a Sustainable Competitive Advantage
Notes
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CHAPTER 2 THE STRATEGIC PROCESS

STEP I: VISION, MISSION, & VALUE STATEMENTS DETERMINE THE STRATEGY
VALUES VS. VISION VS. MISSION
Value What the organization stands for Vision who the firm WANTS to be in the future Mission who the firm is and what it does now
D EVELOP A V ALUE S TATEMENT

The core of what the organization believes Deeply held driving forces and beliefs Provides both employees and consumers awareness of the priorities of the company Sometimes called guiding principles
D EVELOP A V ISION S TATEMENT

C HARACTERISTICS Not Quantifiable Graphic Directional Focused Flexible Desirable Easy to communicate NOT A MISSION STATEMENT LINK TO COMPANY CORE VALUES!
Notes
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Chapter 2 T HINGS TO REMEMBER ... A vision must be based on the organization's values Vision statements often have shortcomings Vision and Mission Statements are not the same! A vision is the future A mission statement is the present There are many ways to communicate the vision. Slogans are not the only way. The vision must be communicated from the TOP DOWN!
Strategic Process
D EVELOP A M ISSION S TATEMENT Same process as a value statement, but with a different time focus Notes
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Chapter 2 S OME E XAMPLES DOLLAR GENERAL

Values We believe in: Demonstrating integrity in everything we do Providing employees the opportunity for growth and development, in a friendly and fun environment Delivering results through hard work and a shared commitment to excellence Celebrating success and recognizing the contributions of others Owning our actions and decisions and learning from our mistakes Respecting the dignity and differences of others
Strategic Process
Vision Todays neighborhood general store, serving the needs of our customers by providing convenience, value, and service Every day! Mission For Customers Convenience, Quality, and Great Prices. For Employees Respect and Opportunity. For Shareholders A Superior Return. For Communities A Better Life
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Chapter 2 Harley Davidson

Values Telling the truth Keeping our Promises Respecting the individual Encouraging Intellectual Curiosity Be fair
Strategic Process
Vision Harley-Davidson is an action-oriented, international company, a leader in its commitment to continuously improve [its] mutually beneficial relationships with stakeholders (customers, suppliers, employees, shareholders, Government, and society). Harley-Davidson believes the key to success is to balance stakeholders interests through the empowerment of all employees to focus on value-added activities. Mission We fulfill dreams through the experiences of motorcycling, by providing to motorcyclists and to the general public an expanding line of motorcycles, branded products and services in selected market segments.
Snowy Mountain Design

Values Integrity above all else Be fair Treat others as you wish to be treated Always do your best, no matter what you do Encourage questions and criticism Vision The vision of Snowy Mountain Design is to be the premier provider of law enforcement software and web-based applications. Mission The mission of Snowy Mountain Design is to produce innovative, affordable, and creative web applications to law enforcement agencies, individuals, and businesses, while fostering a family atmosphere with our employees, management, contactors, and clients.
Notes
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Chapter 2
Strategic Process
S TRATEGY
Determine which of the generic business strategies best fits your vision, mission, and values. There are only five business level strategies. These will be covered in more depth in a later chapter. In a nutshell, a company competes either on price or something else. The something else could be customer service, quality, location, selection, or any combination of things that are NOT price. Price advantage is called Low Cost Leadership, while any other advantage is considered Differentiation. A company also determines if it is going to target a large market (such Wal-Mart) or a niche market (such as Rolls Royce). The combination of market size and competitive advantage determines which strategy a company should follow.
Notes
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Chapter 2
Strategic Process
STEP 2: SET GOALS

DEFINITIONS
Goals are broad statements about what the company wants to accomplish. These are NOT quantifiable. For example, if our strategy is to differentiate on customer service, our goals might be to 1) reduce customer complaints or 2) train the employees. A company should have both financial and non-financial goals. Objectives are the quantifiable statements about the goals the specifics. These must be quantifiable in measurement and in time. For example, our goal is to train employees. So, the objectives may be to 1) Hire an HR training person in the next six months; 2) have all employees attend at least one training seminar in one year; 3) set up new policies that require new employees to attend training within three months of being hired.
TYPES OF GOALS AND OBJECTIVES

Stretch goals o Goals and objectives that are slightly beyond reach, but still obtainable Leading and Lagging o Leading goals and objectives are those that are proactive, such as training or decreasing delivery time A driver o Lagging goals and objectives are those that indicate what has already happened. For example a survey or customer satisfaction cards Short-term AND long-term o Short-term goals and objectives take less than one year to achieve o Long-term goals and objectives take more than one year to achieve
Notes
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Chapter 2
Strategic Process
BALANCED SCORECARD1
The Balanced Scorecard is a holistic way to look at goals and objectives. The four elements of the balanced scorecard are
For each of the four elements, a company should have at least one goal. Each goal should have at least one objective. To make the process easier, create a scorecard as illustrated below.
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Example Scorecard for Snowy Mountain Design OBJECTIVE ELEMENT GOAL MEASURE FINANCIAL Grow law enforcement revenue Ensure reliability Increase customer awareness INTERNAL Leverage 3rd party relationships Install new CRM Number of new sales Number of repeat sales CUSTOMER Number of new servers Increase advertising expense Referrals TARGET Increase by 10% Increase by 25% 3 machines 15% of current TIME FRAME 12/31/2012 12/31/2013 6/31/2012 12/31/2012
Increase expense by 15% Increase number by 100%
12/31/2012 12/31/2015 12/31/2013 6/30/2013 12/31/2013
LEARNING & GROWTH
Number of Installations Employees Trained
All employees 100% Increase by 10%
Increase Sales Bonuses
Increase in expense
Chapter 2
Strategic Process
STEP 3: CREATE THE STRATEGIC PLAN

WHO IS INVOLVED?
Usually all of the "C" level executives (the CEO, COO, CIO, CFO, and VP of Marketing, etc.), also called the "top management team" or TMT. Strategies only come in two levels: Corporate and business unit. At this point, the discussion will be limited to business unit strategies. Tactics are created at four levels: Corporate, business unit, functional area, and operations. Managers at each level need to be involved. All of these tactics must be coordinated for the chosen strategy to work, but are still created Top Down.
Notes
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Strategic Process
THE STRATEGIC MAP

A strategic map is a way of visualizing the mission, goals, objectives, and tactics in one chart. The following graphic shows an example of a strategic map for Snowy Mountain Design. Notice how each of the balance elements is included, each of the major goals, and some of the specific tactics are shown.
Notes
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Chapter 2
Strategic Process
STEP 4: IMPLEMENT
STRATEGIC FIT
Implementing is the HARDEST PART! The NUMBER ONE reason strategy fails is bad IMPLEMENTATION!
The four parts of implementing strategy are like a bar stool
If any of the legs are missing or short The strategy gets wobbly!
Remember, the structure of the organization must match the strategy if a company is to get the most performance.
STEP 5: MONITOR & ADJUST

A company does not create a strategy plan once it must read the plan, use the plan, and adjust where necessary. This should be done formally every three to five years at a minimum; but reviewing the plan informally should happen annually. Use the scorecard and the strategic plan to judge achievements and places where changes need to be made.
Notes
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CHAPTER 3 ENVIRONMENTAL ANALYSIS

OVERVIEW
One of the most important steps in any strategic plan is determining the strengths, weaknesses, opportunities, and threats (SWOT) the business faces. The SWOT is a recap of three other analyses, starting broad at the general level and narrowing to the firm itself.
Notes
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Chapter 3
Environmental Analysis
The macro-environmental analysis consists of evaluating the business climate as it pertains to the members of the industry in which the business exists. Information from the macro analysis helps ascertain opportunities and threats. In the micro-environmental analysis, the business industry is examined. The information generated in this analysis is used to identify additional opportunities and threats. The internal analysis is performed at the firm level. Resources, capabilities, value chain activities are investigated to determine strengths and weaknesses of the business. The resulting SWOT list is examined and analyzed to see if the firms strengths are enough to outweigh its weaknesses and help mitigate its threats and take advantage of the opportunities.
MACRO-ENVIRONMENTAL ANALYSIS
The macro-environmental analysis is the first step in creating the final SWOT Analysis. The macroenvironment examines the general business climate as it relates to the organizations industry, but has nothing to do with the organization itself. The macro-environment is primarily concerned with major issues and real or predicted changes. The acronym for the macro analysis is STEP. Also called PEST just rearrange the letters! The four areas of interest are Socio-cultural and demographics; Technology; Economic conditions; and Political and legal. Notes
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Chapter 3
SOCIO-CULTURAL AND DEMOGRAPHICS

Societal values and lifestyles change over time, and the most important of these should be discussed. For example, over the past generation, it has become acceptable for women to work outside the home or not; smoking is not as acceptable as it once was; people are no longer retiring at 65; students going to college are older; and people are more aware of the environment and healthful living styles. The changes in values and lifestyles may come from many sources: medical (smoking, healthy eating, exercising); science (global warming, going green); economic (people working longer, women in the workforce); cultural diversity (music preferences, foods, living accommodations, medicine); and technologies (Internet dating, biodegradable plastic) are just a FEW examples. Some changes in values and lifestyles will be important to the industry, but not to your business. For example, the current trend is to adopt pets from a shelter, rather than from a pet store; this has an impact on the pet store industry. However, if a pet store is located in a town that does not have a shelter or the store does not sell pets (just supplies like PetSmart), then the change does not affect the business. When discussing demographics, do NOT discuss only the target market. This section deals with changes to the population and demographics as a WHOLE and those that may affect the specific industry not just the business. It is not important that the population of Billings is growing. It is important that more people are moving to smaller cities and rural areas. It is not important that the average age of the population of Montana is 35.2 years. It is important that people are living and working longer, in general. Notes
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TECHNOLOGY
Technology encompasses more than computers! Remember that technology comes in many forms medical devices, new plastics, production techniques and be sure to include them in the list if they are important. The technology discussion should not include what the business does but what is available to members of the industry!
ECONOMIC CONDITIONS
The state of the economy is usually in some sort of flux. The current situation (specific to the industry) and any changes that may be forecast are important. The current economic situation is not conducive to new car sales, but may be better for used car sales and while new appliance sales are in decline, repair people are seeing a large increase. How might these situations change if the economy improves or worsens? The economic section also deals with unemployment, interest rates, loan availability, disposable income, and other issues that are economic in nature. Notes
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POLITICAL AND LEGAL

In this section, an analysis is made of pertinent local, state, and federal legal information in the business and industry environment. But also consider political ramifications. Democrats and Republicans, Independents and Green all of these parties have fundamentally different views on business, environment, taxes, and many other issues that may affect a business. General business laws such as zoning, taxes, minimum wage, other human resource issues, and OSHA should be mentioned, especially if changes to the laws are pending or being discussed. Additionally, an industry may have specific laws and regulations. For example, a pet store would deal with federal animal welfare and prohibited pet laws as wells as state laws concerning animal cruelty, housing, veterinary care and so on. The major laws and regulations should be discussed, especially those with pending legislation.
MACRO-ENVIRONMENT ANALYSIS EXAMPLE

Introduce the section what is it; why do it; what does it tell the business owner? Present the analysis in bullet format with short complete sentences, if needed, or in paragraph form. You may use a combination of both. The following pages provide an example of how a macro-environmental analysis should be written for a mythical pet store that sells pets and supplies in rural Montana.
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Chapter 3
MACRO-ENVIRONMENTAL ANALYSIS (EXAMPLE)

The purpose of the macro-environmental analysis is to determine what outside influences may have an effect on the industry, and, therefore, the business. The analysis examines four areas of interest: 1) societal values and lifestyles; 2) technology; 3) general economic conditions; and 4) politics, laws, regulations, and legislation.
Socio-Cultural and Demographics

Pet Adoptions Adopting pets, as opposed to buying them, has recently become a societal issue. The awareness of animals in shelters has come about from several sources: o A popular president, Barak Obama, stated his intention to adopt a dog from a shelter o Increased advertising by the Animal Human Society and sponsors such as Pedigree brand dog food. o Increasing amount of bad press regarding animal cruelty and abuse Pets as companion animals Many nursing homes, assisted-living, retirement communities and long-term care facilities are allowing residents to bring small pets as companion animals. This trend is expected to continue and the number of eldercare facilities allowing small pets is expected to increase for the foreseeable future (cite). Dumping In some areas, generally large cities that are mostly surrounded by rural communities, dumping unwanted animals in those rural areas seems to be acceptable. Some urban people think that an animal dropped at a farm will automatically be taken in by the landowner; however, this is not usually the case.
While pet ownership does not have a specific direct impact on the physical environment, several issues must be considered: Exotic Pets o May be depleting natural populations o Some people release they may replace native populations E.g. Alligators and Boa Constrictors in Florida Over population of domestic (dog and cat) populations o Spay and neuter issues o Unwanted kittens and puppies o Feral populations Sustainable practices in manufacturing of pet food and accessories
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Chapter 3 Several key factors regarding demographics and population are
People are living longer, which may increase the need or want for companion animals (cite). Families are larger, with more children, which may indicate an increased desire for pets (cite). As children leave home, empty nest syndrome becomes important. Many older couples are becoming pet parents lavishing the attention and money on pets rather than their children. In the next five years the number of people moving from urban or suburban areas to rural areas will increase 27% (cite).
Technology
Several enhancements in technology have affected the pet store industry. Two of the most important are micro chipping and advances in pet store POS systems.
Economic Conditions
The world economy is in a recession. However, a recovery is estimated to begin within the next 18 months. Current recession In general, people are spending less. This may have an impact on the pet store industry because potential customers o No longer have homes to house pets because of foreclosures o May opt to adopt a mongrel rather than a more expensive pure bred animal o May opt not to get a pet at all o May not spend as much on non-essential pet supplies such as new toys, fancy leashes, or upscale treats o May shop at supermarkets rather than pet stores as they feel pet stores charge more Projected recovery When the recovery begins some areas that may improve are o Increased number of people wanting pets either because they can afford the pet itself, its care, or a house that allows them to have pets. o Increase in sales in upscale pet accessories as people feel guilty for neglecting their pets when times were hard.
Political and Legal

Politics play no explicit role in pet stores. Pet ownership is deemed acceptable and desirable by most political parties. Pet Stores must adhere to all standard local, state, and federal laws that are generally required of businesses such as zoning, OSHA, taxes, EEOC, and overtime pay. Additional laws and pending regulations that are specific and important to the industry are:
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Chapter 3
Federal Laws o Animal welfare o Prohibited pet laws State Laws and Regulations o Animal cruelty o Housing o Veterinary care o Minimum wage1 was $7.65 in Montana, expected to be raised to $8.00 on January 1, 2014. Local Laws o Zoning many cities or counties limit the number of animals that may be kept within specific zoning areas.
ABC Pets hires most of its clerks at minimum wage; otherwise, this may not be important.
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Chapter 3
MICRO-ENVIRONMENTAL ANALYSIS
The micro-environmental analysis is the second step in creating the SWOT Analysis. The microenvironment examines the general business climate as it relates to the organization within its industry. The micro-environment is also known as Porters Five Forces of Competition2. The micro-environment is primarily concerned with major issues and upcoming changes in the environment. The analysis looks at five areas of interest, which are 1) Power of the Buyers; 2) Power of the Suppliers; 3) Threat of Substitute Products; 4) Threat of New Entrants; and 5) Intensity of Rivalry. Notice in the following diagram, how these five areas interact and influence each other.
Notes
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Chapter 3
When discussing the five forces, one does so from the firms point of view; the buyers are the FIRMS buyers, the suppliers are the FIRMS suppliers. The results of this analysis are not clear cut. Some effects may increase power or threat and other may decrease power or threats. Think out each issue and how important it is to the overall element.
BARGAINING POWER OF BUYERS

D EFINITION
The power the buyer has over the firm to force the firm to make changes in the product or service and/or to affect prices.
S WITCHING C OSTS
Power of buyers is higher when buyers have low switching costs. It is easier for them to defect to another product or brand. Switching costs may be either monetary or psychological or both.
S IZE & N UMBER

Power increases when the buyer places large volume sales. Power also increases when only a few buyers exist. Usually these indicate that the firm is dependent on the buyer for some degree of survival. However, it is possible that a large number of small buyers can band together in order to affect the firm.
D EMAND
When demand for the product is weak, declining, or dramatically slows, the buyers power increases. This situation is called a buyers market
B UYER I DENTITY
When it is important to the firm that a specific buyer or group of buyers is associated with the product, the buyers power goes up. Notes
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Chapter 3
I NFORMATION
When the quality and quantity of information to which the buyers have access is high, their power goes up because they can compare options, prices, and make better decisions.
I MMEDIACY
If the buyer can postpone the purchase, his power increases. If a purchase must be made immediately or very quickly, the buyer has fewer options and his power decreases.
C OMMODITY
If the product is a commodity (usually does not have a recognizable brand name or is readily available), then buyers have higher power. This is caused by low switching cost, lack of brand loyalty, availability, etc.
S UBSTITUTE P RODUCTS
When the threat of substitute products is high, buyer power increases. The more choices a buyer has, the more power he has.
BARGAINING POWER OF SUPPLIERS

D EFINITION
The power the supplier has over the firm to force the firm to make changes in the product or service and/or to accept higher prices. (Remember this includes ALL inputs, including HUMAN).
N UMBER OF S UPPLIERS
When there are few suppliers of the needed good or service, the suppliers power goes up.
S WITCHING C OSTS
Power of suppliers is lower when the firm has low switching costs. It is easier for the firm to defect to another product or brand. Switching costs may be either monetary or psychological or both. Notes
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Chapter 3
S IZE
Power decreases when the firm places large volume sales. Usually this indicates that the supplier is dependent on the firm for some degree of survival.
D EMAND
When demand for the product is weak, declining, or dramatically slows, the suppliers power decreases. When demand is strong or quantities are limited, the situation is called a sellers market.
S PECIALIZATION
When the product is highly specialized or customized, the suppliers power is increased. The increase happens because specialization and customization limit the number of possible suppliers.
I NTEGRATION
When there is a strong possibility that suppliers can integrate forward (buy its buyers the firm) their power increases. On the other hand, if there is a strong threat that the firm can backwardly integrate (buy the supplier), then supplier power decreases.
S UBSTITUTE P RODUCTS
When the threat of substitute products is high, supplier power decreases. The more choices the firm has, the more power he has.
THREAT OF SUBSTITUTE PRODUCTS OR SERVICES

D EFINITION
The threat of substitute products concerns the availability of another product or service that can be used for the same purpose. Please note that this does NOT MEAN BRAND SUBSTITUTION. Traveling by train is a substitute for flying. This is a substitute product (or service). They serve the same purpose to get you somewhere else. Coke is a substitute BRAND for Pepsi. They are the same basic product (soda). Notes
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A VAILABILITY OF G OOD S UBSTITUTES

A good substitute is one that is viable. For example, riding a horse may be a substitute for flying somewhere, but it may not be a good substitute because of time constraints, final destination, cost, or other reasons. A product or service usually has a substitute; the key question one must ask is is it a good substitute? The more good substitutes available, the more power a buyer has to choose the substitute, thus the threat is higher.
P RICE
When a substitute is attractively priced, the buyer has more choices, thus increasing the threat that the buyer will use a substitute product or service.
F EATURES
If the substitute is basically the same, or has better features, the threat is increased. Buyers may prefer the features of the substitute product or service.
S WITCHING C OSTS
If a buyer has low switching costs, the threat that they will choose a substitute product or service is increased. Switching costs may be monetary or psychological, or based on the ease of substitution.
C OMFORT L EVEL
When a buyer is comfortable with a substitute, then the threat is higher. On the other hand, if a buyer is not comfortable with the substitute product for any number of reasons, the threat is reduced. Notes
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THREAT OF NEW ENTRANTS

D EFINITION
What are the chances that a new firm will enter the industry?
E NTRY AND E XIT B ARRIERS

When entry barriers (knowledge, capital, patents, etc.) are high, then the threat of a new entrant is lower. When it is easy for a company to leave an industry (exit barriers), the threat increases as well. The ideal situation for a firm is to be in an industry where entry barriers are high and exit barriers are low. This allows firms to exit easily, but limits the number that will increase competition.
P ROFIT
When an industry is profitable, the threat of new entrants increases - the more profitable the industry, the higher the threat.
G APS
If current competition has gaps in product/service segments or geographic coverage, the chances that someone will come in to fill the void increases.
C USTOMER L OYALTY
The more loyal customers are to existing brands, the less chance the buyers will switch to another brand, thus the threat is lowered. Notes
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I NDUSTRY A TTRACTIVENESS I NTERACTION OF THE 5 F ORCES

When buyer power is low, the advantage is with the firm, thus increasing the attractiveness of the industry. When supplier power is low, the advantage is also with the firm, thereby increasing the attractiveness of the industry. A low threat of substitute products also makes an industry attractive to a potential rival. Finally, when the intensity of the competition is low, the industry is more attractive. The more attractive the industry, the higher the threat that a new competitor will enter the industry.
INTENSITY OF RIVALRY
D EFINITION
Intensity of rivalry is the degree to which current members of an industry will fight for market share or to dominate the market.
A GGRESSION
The more aggressively a firm (or small group of firms) will fight for market share, the higher the intensity of rivalry. High power of buyers and suppliers make firms more aggressive, as does a high threat of substitute products. Each firm is fighting against issues such as brand loyalty, switching costs, features, price, etc.
D EMAND
When buyer demand is slowing, or when sellers have excess inventory or capacity, firms in the industry will become more aggressive, thus increasing the rivalry. When demand exceeds supply, generally the intensity decreases. Notes
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S IZE AND N UMBER

Generally, when an industry has several competitors of equal size, the intensity among those rivals is intense. However, it is possible that smaller competitors may not be as aggressive and may not have the intensity of rivalry seen in larger competitors. The sheer number of competitors in an industry can increase rivalry.
C OMMODITIES
When products are commodities, the brand is not generally important. Therefore, rivalry is increased as firms try to increase marketshare through pricing or other differentiation. Competing on features is very hard, because the very indication of commodity is that it is generic.
C OMPETITIVE A DVANTAGE
When one or two firms have powerful competitive advantage, or sustainable competitive advantages, the rivalry has a tendency to increase as these firms fight over marketshare.
MICRO-ENVIRONMENT ANALYSIS EXAMPLE

Introduce the section what is it; why do it; what does it tell the business owner? Each of the five forces is ranked on a high to low scale, sometimes part of the force is high, but other parts are low. A pet store has many suppliers of dog toys. Most people do not have a brand preference as long as the dog likes the toy, it is acceptable. Thus, the supplier power of dog toys is low. However, the pet store also sells purebred dogs. The most wanted breeds are Labradors and Beagles. There are a small number of breeders in the area. Thus, the supplier power of dogs is high. Present the analysis in bullet format with short complete sentences, if needed. Identify the issue in each category. Unlike the macro-environmental analysis, the entire micro-environmental analysis goes in the main body of a business plan. The following pages give an example of how a micro-environmental analysis should be written for a mythical pet store that sells pets and supplies in rural Montana.
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MICRO-ENVIRONMENTAL ANALYSIS (EXAMPLE)

The micro-environmental analysis is an examination of the forces in the industry that may have a direct impact on the business. The five forces that are studied are 1) the bargaining power of the buyers; 2) the bargaining power of the suppliers; 3) the threat of substitute products or services; 4) the threat of new entrants; and 5) the intensity of rivalry.
Power of Buyers (Medium High)

Purebred Animal Buyers High Many options for obtaining animals (pet store, breeder, adoption) Infrequent purchase Some substitutes available (mongrels, other animals) Purchase can generally be postponed Low switching costs o Animal type o Animal breed o Where purchased Pet Supply Buyers Medium Options for purchasing general supplies is high (grocery stores, farm supply) Options for purchasing specialty supplies (e.g., grooming supplies, designer brands of food, training supplies) is generally limited, especially in rural areas Brand is not, by and large, important Large number of small buyers
Power of Suppliers (Medium)

Purebred Animal Suppliers High Not a large portion of sales Limited number of suppliers Specialty product Low cost to switch to other suppliers No substitutes Pet Supply Suppliers Low Many suppliers Brand is not important Low switching costs to other suppliers
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Miscellaneous Suppliers Low Employees (low) o High unemployment rate o Desirable job for many o Non-union Location (low) o Many businesses closing rent is lost by landlord o Other locations available, but switching cost may be high to move
Threat of Substitute Products (Medium)

Purebred Animals Low Most buyers of purebred animals do not want any substitutes by either type (dog vs. cat) or breed. Pet Supplies Medium Pet food does not have a substitute other than table scraps or homemade products, neither of which is a good substitute. Therefore, the threat is very low. Pet toys have many substitute products, for example socks, tennis balls, Frisbees, string/yarn, and laser pointers. Thus, the threat is very high. Other supplies may have good substitutes (e.g., human combs and brushes) and others do not (e.g., pet carriers). Consequently, the threat could be rated as medium.
Threat of New Entrants (High)

Relatively low startup costs Relatively low specialized knowledge Relatively attractive profits (cite) o 57% of pet stores had increased profits despite the economy o Markup for dry goods is 62% o Markup for live animals is 112% o Average customer transaction $41.89 (up from $38.46) Steady growth of 5% per year (cite) Owning pets encouraged from social standpoint Number of Pet Parents increasing specialized supplies and services o Organic treats o Upscale boarding o Personalized pet goods (bowls, collars, etc.) o And so on
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Intensity of Rivalry (Medium Low)

Non-rural Areas High PETCO (6%) and PetSmart (11%) market share leaders in industry o Primarily located in towns of 100,000+ population Majority (68%) of pet stores located in urban areas of 50,000+ population Threat of substitute products medium Buyer power medium high Threat of new entrants high Increased buyer spending Steady growth in industry Rural Areas Low Few (32%) of stores located in towns with fewer than 50,000 population Buyer power medium (due to lack of other purchasing options) Threat of substitute products medium Threat of new entrants low o Limited number of buyers o Limited work force o Limited number of sales Increased buyer spending Steady growth in industry
Recap
Overall, the outlook in the pet store industry is favorable for a sole proprietor or small partnership pet store in a rural area. Buyer power, supplier power, and threat of substitute products are all at the medium threat level, but intensity of rivalry and the threat of new entrants in the rural market are low.
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INTERNAL ENVIRONMENTAL ANALYSIS

The internal environment is the final step in gathering information for the SWOT Analysis. The internal analysis consists of identifying resources, capabilities, and competencies (in the form of the value chain), and determining what competitive advantages (hopefully sustainable) the organization has.
RESOURCES, CAPABILITIES, AND COMPETENCIES

Resources, capabilities, and competencies should be evaluated with respect to goals, strategy, and the vision statement of the organization. Not every RC&C needs to be included in the evaluation only those that will eventually lead to a competitive advantage. For example, you have a top-notch janitorial staff. Unless you have a cleaning service, it really does not help your competitive position. The following lists will help identify what types of RC&C items that need to be considered. A FEW examples are listed this is NOT an exhaustive list! Write down all the important RC&C items, and then narrow the list to the ones that may lead to a competitive advantage. If anything is missing from the organizations list be sure to note that as well! DO NOT CLASSIFY BY THIS LIST It is ONLY to get you jump-started!
R ESOURCES
Physical o Plants o Equipment o Natural resources Human o Managerial know-how o Talented key employees o Friendly staff
Notes
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Chapter 3 Intellectual o Specialized knowledge o Collective learning o Cutting edge technology knowledge Intangible o Patents and copyrights o Brand name o Customer loyalty Skills o Proven ability to introduce new products o Experts at providing consistently good customer service o Able to create lean value chain Organizational o Proprietary technology o Cash o Strong network of suppliers o Well organized, effective, efficient management structure o Alliances, partnerships, cooperative or joint ventures
Notes
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C APABILITIES
Capabilities are generally assessed through the value chain and. Again, this is NOT an exhaustive list! Only include the items that actually add value not just are done because they need to be done (e.g., Accounts Payable). Remember that value may be in the form of cost efficiencies. If anything is missing from the organizations list be sure to note that as well! DO NOT CLASSIFY BY THESE HEADINGS! They are just to get you started!
C OMPETENCIES
Competencies are accomplished by evaluating the organizations resources and capabilities and benchmarking. Benchmarking may be done on several levels: industry, primary competition, and prior performance. Although often focused primarily on cost, benchmarking may also be accessed through efficiency and effectiveness. Some examples of efficiency benchmarking might be number of defective widgets produced, hours of downtime for machine X, or number of days from sale to delivery. Efficiency types of measures should be used in conjunction with standard financial measures of benchmarking, such as days in inventory or asset turnover ratios. Notes
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COMPETITIVE AND SUSTAINABLE COMPETITIVE ADVANTAGE(S)

A benchmarking chart will provide information about what competitive advantages the organization has the items that rank highest against the competition or industry. However, the ultimate goal is to create a SUSTAINABLE competitive advantage. In order to assess whether a competitive advantage is sustainable or not, the inputs (resources and capabilities) must be examined. In order for a resource and/or capability to provide the basis for a sustainable competitive advantage, four questions must be answered in the positive: 1. Is the resource or capability valuable? Does the resource or capability add value to the consumer? Does it provide a core competence? Does it provide or support a competitive advantage? Would this resource/capability be valuable to the competition? Value is not based on monetary considerations alone. A brand name can have value, and so can a location. 2. Is the resource or capability rare? Do rival firms have the resource or capability? If not, would it be easy for rivals to obtain? The resource/capability must not be readily available to the competition or must take a long time to develop. For example, the knowledge of the owner may be rare it depends on the type of knowledge the owner has. Is it in depth knowledge of contracts, management, special details? Can the knowledge be easily replicated? If the knowledge of the product, how it works, how to manage and sell it is very in depth and impressive, you might consider it rare. If it is general knowledge, it would not be rare, and if it is somewhere in-between, it is somewhat rare. If the company has an exclusive contract with a special supplier, then the contract is rare because no one else can get a contract. A great location may be rare depends upon whether a competitor could get a location that is as good. Determining the rarity of a recourse or capability is a judgment call on the part of the analyst. Notes
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3. Is the resource or capability hard to imitate (non-imitable)? Is the resource or capability unique? Is the resource or capability protected by law (copyright or patent)? Was the resource or capability built over a relatively long period? Does the resource or capability have extreme capital requirements? Non-imitable refers to the ability of the competition to recreate or imitate the resource or capability. The lack of imitation may be caused by long time frames needed to develop the resource/capability, protection by copyrights or patents, use of proprietary knowledge, or costs. Financial resources are not generally non-imitable. Locations may be somewhat non-imitable. While exclusive contracts are definitely non-imitable. 4. Can the resource or capability be trumped by a substitute resource or capability (nonsubstitutable)? Is it possible to use another resource or capability to take the place of the one being used by the firm? For example, can technology be replaced by outsourcing to gain a cost advantage? Can outstanding engineering be replaced by high quality design? When no other resource or capability could take the place of the one in question, the resource/capability is considered non-substitutable. For example, would good customer service take the place of a good location? Are customers willing to drive farther to get great service or is the companys location so convenient that service wouldnt matter? If the location is so convenient that price, location, or specialized knowledge is not important to the customer, then the product is non-substitutable. If a company is building a car and uses a metal grill and a plastic grill that is overlaid with aluminum will do the same thing, then the resource (metal grill) is not non-substitutable. Patents (and other intellectual products) are non-substitutable. Notes
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E XPLOITABLE
While the previous four elements will determine a basis for sustainable competitive advantage, the resource or capability must be exploitable, or it is not really worth much. Remember the janitorial example above - In that situation, the resource or capability is not exploitable. Can the company exploit its patents? Can it make use of its customer service to out do the competition? If yes, then the resource or capability is exploitable or, perhaps, at least somewhat exploitable
C HART
If the answer to ALL FOUR questions is yes AND the resource or capability can be exploited (remember the janitor example) then a sustainable competitive advantage is present. Create a chart, like the one shown below, to list the most important competitive advantages. If the chart shows a yes in all five categories, it is most likely a source of sustainable competitive advantage. Resource/Capability Owner's knowledge Financial resources Location Marketing skills Hiring skills Customer Service Supplier Contracts Rare Valuable Non-substitutable Non-imitable Exploitable Yes Yes Yes Somewhat Yes Yes No Yes Yes Somewhat Somewhat Somewhat Yes Yes Yes
Somewhat Yes No Yes No
Somewhat Yes Yes Yes No Somewhat Yes No Yes
Somewhat Yes Yes Yes Yes Yes
Notes
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S OME P OSSIBILITIES
Strategy o Core competencies o Competitive advantage(s) o RC&C matched to the KSF Financial position o Cost advantages o Unit costs o Balance sheet o Debt Product or service differentiation o Brand and/or reputation o Product and/or service quality Market and Marketing issues o Advertising and promotion o Product line breadth vis--vis market needs o R&D vis--vis market needs o Market share o Customer service management capabilities o Geographic coverage o Attractiveness of customer base o E-commerce Learning or experience curve o Technology and/or technology skills and/or intellectual property o Intellectual capital Internal operating issues o Economies of scale o Management depth o Plant capacity o Product and/or service innovation capabilities o Supply chain management capabilities Alliances and/or joint ventures
Notes
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BENCHMARKING
K EY S UCCESS F ACTORS
Compare the organizations RC&Cs (especially the competencies) to the competition or industry. Create a chart of weighted key success factors (KSF). KSFs are those competencies that are 1) needed to survive in the industry and 2) needed to create a profitable position within the industry. Determine what the KEY factors (competencies) are and list them in the chart. A weighted chart is used, as not all competencies are as important as others are.
Notes
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Step 1: List the five to ten items that are most important to succeeding in the business. Order is not important. Try to limit the list to ten items after ten, the information becomes meaningless. Step 2: Determine how important the item is to success. The total MUST equal 100%. Example, the product selection accounts for 20% of the success of a business in this industry. The numbers that go here are judgment calls on the part of the analyst or owner. Step 3a: Choose a rating scale. The example uses 1 through 10, but any scale (usually 1 to 5) will work. One is always the low point. Step 3b: Rate the company. How well is it performing? Does it have a great reputation? Then that item should rank high on the scale. Step 4: Calculate the weighted score and add up all of the items.
Repeat steps 3 and 4 for each of the companies or industry against which the company is being benchmarked. Step 5: Compare the total scores. How does the company stack up against its competition? How does it compare to the industry? What about the industry leader? If the scores are significantly lower than the direct competition, then the company has a real problem. If the scores are higher than the direct competition, then there isnt too much to worry about. Rating higher than the industry is good, but not necessarily bad if the company ranks lower. If the industry has many large players, this is often the case. Rating lower than the industry leader is not unusual (unless the company is #2!), because it has the power of branding, loyalty, and sheer size to help it achieve the success factors. Step 6: Identify those items where the company has much lower scores than the industry and competition. These could indicate weaknesses. Scores that are much higher scores than the industry and competition could indicate strengths. Notes
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C OMPETITIVE M AP
Next, determine how the competitors and industry look on the most important KSFs in a visual manner. Show the competitive position on a bubble chart. Step 1: Determine the two most important KSFs from the analysis above. Step 2: Determine the size of the bubbles. Use either the size (sales, market share, profits, etc.) or the third most important KSF. This is determined by the analyst. Step 3: Create an Excel chart (see below)
Step 3a: Highlight the top titles and numbers as shown
Notes
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Chapter 3 Step 3b: Create the bubble chart INSERT OTHER CHARTS 3D BUBBLE
Notes
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Chapter 3 Step 4: Delete the legend. Click on the legend and press BACKSPACE Step 5: Add labels.
Click inside the chart CHART TOOLS LAYOUT TEXTBOX Type the Label Move near to appropriate bubble Repeat for each label. Step 6: Add arrows if needed. Click inside the chart CHART TOOLS LAYOUT SHAPES Select the Arrow Move to appropriate bubble Format as desired Step 7: Format the bubble color. Select the bubble. Click, pause, click. Right Click FORMAT DATA POINT FILL SOLID FILL choose color CLOSE. Repeat for each bubble. HINT: The target company should be a different color so it stands out. Step 8: Format the Axes. Click on the Vertical Axis RIGHT CLICK FORMAT AXIS AXIS OPTIONS Axis labels = NONE Major Tick mark type = None CLOSE Click on the Horizontal Axis RIGHT CLICK FORMAT AXIS AXIS OPTIONS Axis labels = NONE Major Tick mark type = None CLOSE Click inside the chart LAYOUT AXIS TITLES PRIMARY HORIZONTAL AXIS TITLE TITLE BELOW THE AXIS Type the name of the FIRST column Click inside the chart LAYOUT AXIS TITLES PRIMARY VERTICAL AXIS TITLE ROTATED TITLE Type the name of the SECOND column Notes
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Chapter 3 Step 9: Label the Axis Points.
Click inside the chart CHART TOOLS LAYOUT TEXTBOX Type HIGH Move to top of Vertical Axis. Repeat for each label as shown Step 10: Clear the lines. Click inside the chart LAYOUT GRIDLINES PRIMARY HORIZONTAL GRIDLINES NONE Step 10: Copy and Paste the Chart Select the chart. COPY Click in Word Document. PASTE SPECIAL PNG
The final chart should look something like this.
Notes
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F INANCIAL B ENCHMARKING
To determine the financial resources and capabilities benchmark with financial ratios. Benchmarking against the industry is best and against the competition is great (if the information is available). Sometimes the information is just not available in which case, the best way to create financial benchmarking is against past performance (or current performance against proforma financial statements). Use the following ratios (at least one from each group) that are most appropriate to the company.
GENERAL CALCULATIONS
= : = + ( =
LIQUIDITY AND LEVERAGE RATIOS

= = = =
ROT = 2 (Higher is better) ROT = 1 (Higher is better) ROT = Industry or .66 Lower is better Higher is better
OPERATING RATIOS
= = 365 =365 = Higher is better Lower is better Lower is better Higher is better
PROFITABILITY RATIOS
= = = Notes Higher is better Higher is better Higher is better
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INTERNAL ENVIRONMENT ANALYSIS EXAMPLE

The analysis of the internal environment is used throughout the business plan. The KSF analysis is presented in the Environmental Analysis section, as are the Competitive and Sustainable Competitive Advantages. Benchmarking is discussed in the operations plan; a competitor analysis (KSF) that focuses on marketing goes in the Marketing Plan section, while a KFS focusing on operations will be presented in the Operations portion of the plan. Introduce the section what is it; why do it; what does it tell the business owner? Other than the tables, it is easiest if this is written in bullet points. The following pages give an example of how an internal analysis should be written for a mythical pet store that sells pets and supplies in rural Montana.
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INTERNAL ENVIRONMENTAL ANALYSIS (EXAMPLE)

The internal analysis is an examination of the resources, capabilities, and competencies the firm has. The analysis leads to identification of strengths, weaknesses, and competitive and sustainable competitive advantages.
Competitive Advantage
ABC Pet Company has the following resources and capabilities that may lead to a competitive advantage: Resource/Capability Owner's knowledge Financial resources Location Marketing skills Hiring skills Customer Service Breeder Contracts Rare Valuable Non-substitutable Non-imitable Exploitable Yes Yes Yes Somewhat Yes Yes No Yes Yes Somewhat Somewhat Somewhat Yes Yes Yes
Somewhat Yes No Yes No
Somewhat Yes Yes Yes No Somewhat Yes No Yes
Somewhat Yes Yes Yes Yes Yes
As indicated in the table above, ABCs breeder contracts may be a source of sustainable competitive advantage, if those contracts are exclusive.
Key Success Factors

As can be seen in the table below, ABC Pet Stores strength scores are slightly above average overall when compared to the industry. Additionally, ABC has very strong scores against its local competitor, Mom & Pop Shop, but does not compare favorably against the leading industry competitor, Pets R Us.
On the other hand, ABC Pet Company needs to develop resources and capabilities in the following areas: Management skills (particularly in the area of delegation) Technology Ability to train employees
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Scale: 1 = Very Weak to 10 = Very Strong
ABC Pet Store

Key Success Factor or Strength Weight Rating Weighted Score
Industry
Rating Weighte d Score
Mom & Pop Shop

Pets R Us
Quality of products Reputation Financial resources Knowledgeable sales staff Location Product selection general Product selection designer Quality of live pets
5% 10% 10% 5% 10% 10%
6 8 4 7 2 5
0.30 0.80 0.40 0.35 0.20 0.50
7 5 5 6 6 8
0.35 0.50 0.50 0.30 0.60 0.80
6 4 5 4 8 5
0.30 0.40 0.50 0.20 0.80 0.50
8 8 10 6 9 8
0.40 0.80 1.00 0.30 0.90 0.80
20% 30% 100%
5 8
1.00 2.40 5.95
5 6
1.00 1.80 5.85
5 4
1.00 1.20 4.90
8 7
1.60 2.10 7.90
At this time, the comparison of ABC to Pets R Us is relatively unimportant as Pets R Us only locates in cities with populations in excess of 100,000 and ABC is located in a town of 35,000 people. However, it is always important to benchmark against the industry leader, as some best practices used by that leader may be adaptable to small organizations such as ABC. The major competitive advantages that ABC has compared to the industry and it primary rival (Mom & Pop Shop) are its reputation and the quality of the live pets it carries. As ABC Pet Store has several exclusive contracts with 5-star AKC breeders, highly reputable CFA breeders, and a USDA approved bird breeder, a sustainable competitive advantage in the area of quality of live pets has been established.
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As can be seen in the Competitor Analysis below, ABC Pet Shop compares favorably with the competition with respect to Quality of Live Pets, Reputation, and Local Market Share.
Benchmarking
As can be seen in the table below, ABC Pet Store is performing well in the financial benchmarking analysis. ABC is near industry and industry leader (Pets R Us) levels in most areas and well above its nearest competitor (Mom & Pop Shop) in all financial comparisons. (And so on)
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Chapter 3 ABC Pet Store Return on Sales Return on Assets Gross Profit Margin Net Profit Margin Inventory Turnover Current Ratio Quick Ratio 7.04% 19.26% 33.08% 5.21% 6.53 2.05 0.92 Industry 5.98% 13.05% 34.95% 5.73% 7.90 1.55 0.67 Mom & Pop Shop 5.21% 12.52% 30.20% 4.76% 4.91 1.23 0.08
Environmental Analysis Pets R Us 5.75% 13.93% 38.03% 5.98% 5.02 1.72 0.84
Other benchmarking issues have also been examined. As can be seen in Table Y, below, ABC Pet Store is comparable in most areas to the industry-wide figures. (And so on)
ABC Pet Store Average Customer Transaction Dog Owner Average Transaction Cat Owners Average Transaction Percent of Sales from Dog Food Average Markup Average Markup Live Animals Full time employees
(not including manager/owner)
Industry $38.34 $41.07 $23.75 18% 27% 112% 4.60
$41.89 $44.05 $21.08 20% 30% 120% 3.00
Part time employees Owner/Manager Salary Full time employee per hour Part time employee per hour
3.00 $41,256.14 $10.90 $8.00
4.80 $47,593.26 $11.24 $8.64
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Finally, 32% of pet stores do not offer any services beyond retail sales. The services provided by ABC pets are provided by a large number of competitors in the industry: Grooming (30%) Obedience training (19%) Self-service dog wash (12%)
Notes
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SWOT ANALYSIS
Preparing the actual evaluation of the strengths, weaknesses, opportunities, and threats is the final part of the Environmental analysis. The purpose of the SWOT analysis is to determine what recommendations need to be made, how the organization can create a competitive and/or sustainable competitive advantage, what is going on in the environment of which the organization can take advantage and what possible threats are on the horizon. It is also used to determine if the strengths of the firm can be used to reduce weaknesses, mitigate threats, and/or take advantage of opportunities. The SWOT is broken into four parts: SWOT RECAP Internal Environment External Environment Positive Forces Strengths Negative Forces Weaknesses
Opportunities
Threats
Notes
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STRENGTHS AND WEAKNESSES

Strengths and weaknesses are based on the evaluation of the internal environment RC&C, benchmarking, and KSF analyses. Normally, the strengths are presented first, and weaknesses follow. Both should be organized into groups. For example, if you want to talk about strength in customer service, you may want to discuss the strengths the company has in employee training, empowerment, and culture. List them like that! The same goes for weaknesses. It is okay to make a broad statement but not to the level of a recommendation about weaknesses you find.
OPPORTUNITIES AND THREATS

First, do not think of opportunities in the conventional sense. In the SWOT, an opportunity is an external issue that the company may be able to exploit. It is not something the company should do. For example, Open a store in Laurel is NOT an opportunity in the SWOT it is a recommendation. The opportunity is listed as Increasing population in Laurel. Remember, if the opportunity is something over which the company has direct control (opening a store), then it is NOT an opportunity; it is either a weakness or a recommendation. Opportunities and threats are determined from the micro and macro-environmental analysis ONLY! Normally the opportunities are listed first and threats follow. Both should be organized into groups. For example, if you want to talk about an opportunity in demographics regarding the number of families, you may want to discuss the increase in families, the increase in the percentage of families with pets, etc. List them like that! The same goes for threats. It is okay to make a broad statement but not to the level of a recommendation about opportunities and threats you find. An example of how to list opportunities and threats for the mythical pet store is shown in the Appendix. Notes
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Chapter 3 MOST IMPORTANT!
Remember that opportunities and threats are external!!!! Do NOT say that a company has an opportunity to increase training! It is a weakness that needs to be addressed because training is INTERNAL to the company!
RECAP
Once you have a good list of the SWOT elements, you should recap them in a table at the end of the section. IF IT GOES IN THE LIST IT GOES IN THE TABLE AND VICE VERSA! POSITIVE FORCES Strength 1 Strength 2 Strength 3 Strength 4 Opportunity 1 Opportunity 2 Opportunity 3 NEGATIVE FORCES Weakness 1 Weakness 2 Weakness 3 Threat 1 Threat 2 Threat 3 Threat 4
INTERNAL ENVIRONMENT
EXTERNAL ENVIRONMENT
SWOT ANALYSIS EXAMPLE

Introduce the section what is it; why do it; what does it tell the business owner? Each of the four items should be presented in groups and must be recapped in a table. It is easiest to write this section in a bullet list. Remember two things if it is in the recap table, it must be in the text section and vice versa; and opportunities and threats come only from the external (micro and macro) analyses. Finish with a text summary. The following pages give an example of how a SWOT analysis should be written for a mythical pet store that sells pets and supplies in rural Montana.
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SWOT ANALYSIS (EXAMPLE)

Introduction
The purpose of the SWOT analysis is to determine the strengths of the firm, as well as its weaknesses. External forces are also analyzed and possible opportunities and threats are presented. The strengths of the firm are then examined to determine if they can be used to offset weaknesses and threats and/or take advantages of possible opportunities.
Strengths
ABC Pet Store has several strong points. The most important of these, given its location and market are the quality of the products it sells and its customer service. Quality of Products ABC Pet Store maintains very high quality in both live pets and general pet merchandise, which is reflected in the strengths in this area: Exclusive contacts with quality breeders Clean and professional pet kennels Pre-purchase veterinary checkup 30-day warranty
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Customer Service While ABC has high quality products, it prides itself on its customer service. To this end, ABC exhibits the following strengths: Knowledgeable owner Long-time employees 30-day warranty Generous refund policy Other Strengths In addition to high quality products and great customer service, ABC has strengths in other areas: Reputation Selection of products Etc.
Weaknesses
As is true with most organizations, ABC Pet Store has its share of weaknesses. According to the analysis, the two major areas of weakness of are location and financial resources. Location Compared to Pets R Us, the location of ABC suffers greatly, as well as when compared to its local competition. Low traffic area Rural community Not located near major shopping areas
Financial Resources While operations at ABC are providing a positive cash flow, there is little money in retained earnings for expansions, moves, or taking advantage of opportunities that may appear. Low retained earnings Good earnings and financial ratios Owner will not borrow money for financing expanded operations
Other Weaknesses The only other weakness that could be found was that ABC does not have a formal training program for employees. Blah, blah, blah.
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Opportunities
Several factors outside of ABC Pet Company may affect its operations. The positive forces are referred to as opportunities, which ABC can use to enhance its operations. The major factors affecting the industry are the aging population, the number of people moving to rural communities, and the power of the buyers, which is high for live animals. Other major opportunities are: Higher unemployment means hiring good, qualified staff is easier to find. People who want purebred animals will not usually settle for cross breeds. Blah, blah, blah
Threats
The negative forces external to the organization are referred to as threats. ABC must try to use its strengths and opportunities in order to combat these threats. There are several possible threats on the horizon. The most important of these are: The threat of new entrants is high, as it does not take much investment or specialized knowledge to enter the pet store market. However, the high level of cash flow, reputation, and customer loyalty may be used to lower this threat somewhat as it pertains specifically to ABC Pet Stores. Economic conditions are currently poor; however, a recovery is predicted in the next 18 months. If ABC can weather the economic storm, it should see sales increase slowly over that time. Blah, blah, blah
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Recap
As shown in the table below, ABC Pet Stores strengths and opportunities well outweigh its weaknesses and threats. The specifics of how ABC can offset the major negative forces will be discussed in the strategic options section of the paper. POSITIVE FORCES Strength 1 Strength 2 Strength 3 Strength 4 Opportunity 1 Opportunity 2 Opportunity 3 NEGATIVE FORCES Weakness 1 Weakness 2
INTERNAL ENVIRONMENT
EXTERNAL ENVIRONMENT
Threat 1 Threat 2
Notes
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Notes
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CHAPTER 4 BUSINESS-LEVEL STRATEGIES

OVERVIEW
Strategy comes in two levels business and corporate. This section will discuss only the business-level strategies that are available. A company may have different strategies for different business (product or service) lines. For example, Ford Motor Company has the Fiesta and Focus, the F-Series and Ranger trucks, SUVs, crossovers, and the popular Fusion and Escape hybrids. It also has the Lincoln brand: the MK series luxury cars, the Town Car, and the Navigator, as well as a luxury hybrid. Obviously, these vehicles are not all designed for the entire market. Fiesta and Focus are small cars, with relatively low price tags, while Lincoln has a more narrow market. Each of these business lines can have a different strategy.
FIVE GENERIC STRATEGIES

The three generic strategies as proposed and amended by Michael Porter3 are based on the size of the target market (narrow or broad) and the competitive advantage of the firm (price or features). The focused strategy was later split to match the broad market strategies and later still, Dr. Porter added the concept of a hybrid form that combines the competitive advantages.
Notes
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Business Level Strategies
LOW COST LEADERSHIP

OVERVIEW
The Low Cost Leadership strategy is one in which price is the advantage and the market is broad. This is the no frills strategy. Some examples of firms that follow the low cost leadership strategies are WalMart, McDonalds, and IKEA.
BASED ON VALUE CHAIN ACTIVITIES

Economies of scale Experience and learning curve effects Operate facilities at full capacity Increase volume to better spread fixed costs Supply chain efficiency (inbound and outbound logistics) Substitute low cost for high cost materials Use IT for reporting, operating, and logistics efficiency Labor saving operations Bargaining power with suppliers Outsource and integrate
METHODS FOR REVAMPING THE VALUE CHAIN

Deal directly with customers instead of distributors Use faster and cheaper online technology Eliminate low-value adding processes Relocate to reduce shipping costs Frills-free products Limited product line
Notes
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WHEN LCL WORKS BEST

Intense price competition Rival products are identical and components are cheap and readily available Few ways to differentiate Buyers have low switching costs Buyers have high power Buyers use product in same way Obstruct new entrants IMPORTANT NOTE! Just because a company has lower prices than rivals, does NOT mean it is following an LCL strategy. Look at the BIG PICTURE! If the company is focusing on customer service, location, and so on, it is probably following a Differentiation strategy!
DIFFERENTIATION
OVERVIEW
A Differentiation (or Broad Differentiation) strategy is based on anything other than price! The competitive advance may be customer service, location, quality, selection anything that makes the consumer feel like the product or service is different in some way. The perception of difference may be real (16 types of calculators vs. 125 types of calculators) or perceived (quality). A differentiation strategy allows the business to command a premium price; increase sales volume because of differentiation features; and gain buyer loyalty.
TYPES
Some examples of types of differentiation are Federal Express (service), Dr. Pepper (taste), and 3M (technology leadership). Notes
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Some examples (and there are zillions) of companies following a differentiation strategy are Product Taste Color Reputation Features Availability Quality Location And so on Product Line Broad product line Customer service Technology leadership And so on Miscellaneous Location Customer Service Customization Convenience
A product may be differentiated by almost anything a consumer sees as adding value it may be tangible or intangible. It doesnt even have to exist as long as the BUYER thinks it exists.
BASED ON VALUE CHAIN ACTIVITIES

Supply chain quality Product R&D Production R&D and Technology Manufacturing quality Distribution activities (outbound logistics) Marketing, sales, and customer service
Notes
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THE BEST TECHNIQUES TO DIFFERENTIATE

Incorporate features that lower the TOTAL cost of ownership Incorporate features that raise product performance Incorporate features that raise buyer satisfaction in non-economic ways Use resources, capabilities, and competencies rivals cant match
WHEN DIFFERENTIATION WORKS BEST

Buyer needs and uses of the product are diverse Many ways to differentiate that the buyer perceives as having value Few rivals have the same differentiation approach Technology is fast paced and products have rapidly evolving features
FOCUSED
The Focused strategies (Focused Low Cost Leadership and Focused Differentiation) are the same as their broader counterparts with the exception of the size of their target markets. A firm may choose to follow a focused strategy for any number of reasons. Some of the most likely are Limited geographic coverage Extremely specialized products Ability to find overlooked niches Lack of resources to have a broad market
Some example of Focused Low Cost Leadership are Alaska Air (limited geographically), Dollar Store (limited income), and Kia (limited size). Some examples of Focused Differentiation are Rolex (prestige), Mercedes (quality), and Harvard (quality and exclusivity). Notes
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HYBRID
The Hybrid strategy, also called Best Cost, Best Value, or Stuck in the Middle is a strategy that combines the best value for the money. Some examples of successful (and very few are) businesses following a hybrid strategy are, Toyota (quality and price); and Target (service and price). On the other hand, we have seen Sears/K-Mart (closing stores), Acura (lower than expected sales), and Continental Airlines (merged with United Airlines) fail at the hybrid strategy. If a company follows a hybrid strategy on purpose, as difficult as that may be, the firm can be very successful. However, most companies seem just to drift into this strategy and they are the ones that will fail.
WHEN HYBRID WORKS BEST

Hybrid strategies work best in a market where differentiation is the norm and customers are very price sensitive. This is about the only situation where a hybrid works at all.
STUCK IN THE MIDDLE

A hybrid strategy is often called Stuck in the Middle. Why? Simple - the attributes of LCL and Differentiation are different. Polar opposites almost, and it is very difficult to do the best of both well, For example, LCL dictates a firm should have little or no advertising expense, while Differentiation decrees that high advertising expenses are the norm. Which does the firm choose? Notes
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RECAP
The following table recaps the major attributes of each of the five generic strategies.
Overall LCL Broad Differentiation Hybrid Focused LCL Focused Differentiation
Strategic Target
Broad cross section
Broad cross section
Value conscious
Narrow buyers needs are distinctly different Lower overall cost in niche market
Narrow buyers needs are distinctly different Attributes that are attractively different in niche market Features tailored to needs and wants of the niche Custom-made features tailored to niche
Basis of Competitive Advantage
Lower overall cost
Attributes that are attractively different
More value for the money
Product Line
Basic with few frills, acceptable quality, limited selection
Many variations, wide selection, emphasis on differentiation features Product superiority, any features for which buyers will pay
Appealing attributes, assorted features
Features tailored to needs and wants of the niche Continuous search for cost reductions while maintaining required niche features Budget priced product with features that fit niche expectations and needs Commit to serving niche at lowest cost do NOT add products to broaden market appeal
Production Emphasis
Continuous search for cost reductions without sacrificing acceptable quality and required features Virtue of market features that lead to low cost
Upscale features at lower costs
Marketing Emphasis
Differentiating features and premium pricing
Best value: same features with lower price OR same price with better features.
Best job of meeting niche buyer needs
Keys to Sustaining
Economical prices Good value Manage costs year-after- year in every aspect of the value chain
Constant innovation Concentrate on a few key features
Manage costs Incorporate features
Commit to serving niche with best product do NOT add products to broaden market appeal
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Industry Specifics
CHAPTER 5 INDUSTRY SPECIFICS

INDUSTRY LIFECYCLES
Before venturing into an industry, one needs to be sure that the strategy, the industry, and the business model fit. If they do not, no amount of strategic planning will help. The following information will provide some loose characteristics and guidelines for different industries along the life cycle.
EMERGING INDUSTRIES
Emerging industries are those that are new and at the very beginning of the industry lifecycle. Some examples of emerging industries are electric cars, speech recognition technology, and genetic biotechnologies. Notes
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Industry Specifics
C HARACTERISTICS
Uncertainty and guesswork What do buyers want? What is a fair price? What will demand be? Battle among technologies Which specific technology will become the standard? Battle among features Expect rapid improvements buyers will wait for 2nd or 3rd generation Low entry barriers Often high learning curve leading eventually to price reduction with economies of scale Undercapitalized companies may be swallowed up by better capitalized firms
T ACTICAL O PTIONS
High potential for experimentation Perfect technology, quality and features Merging with or acquisition of smaller firm(s) Capture first mover advantages of technology changes and emergence Induce purchase and allay fears Acquire or form alliances with complementary companies Find new customers, applications or geographic areas Easy to buy and cheap for first time buyers so they dont wait As familiarity builds, switch from awareness to frequency of use and brand loyalty Price cuts Key supplier alliances
Notes
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Industry Specifics
RAPIDLY GROWING INDUSTRIES

Rapidly growing industries (also called High Velocity) are at the stage in the lifecycle where the product or service is beginning to catch on with the mainstream buyers. Examples of rapidly growing industries are telecommunications (specifically cellular), electronics, and computer.
C HARACTERISTICS
Rapid improvements, new features Each specific model has very short lifecycle Quickly changing customer feature requirements
T ACTICAL O PTIONS
Grow faster than your competition Lower cost of production economies of scale lower price Rapid product innovation Gain additional distribution and sales outlets Expand geographic coverage Expand product line
MATURING INDUSTRIES
Maturing industries are those where demand has become stable or slowed. Examples of maturing industries are consumer appliances, automobiles (other than electric or hybrid), and petroleum.
C HARACTERISTICS
Notes Increased intensity of rivalry Cost, features, and services similar among competitors Reduced profitability Increased competitor consolidations (fewer, but larger competitors) Buyers become more sophisticated driving harder bargains Innovation is difficult
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Industry Specifics
T ACTICAL O PTIONS
Cost reductions and increased sales Prune marginal products Improve value chain Trim costs Increase sales to current customers Buy rivals at low cost Expand internationally Core competencies more flexible
STAGNANT OR DECLINING INDUSTRIES

The stagnant or declining stage occurs when the industry is not growing at all or demand is falling. Tobacco, mining, and ship building are examples of stagnant or declining industries. Remember - just because the industry is in decline does NOT mean lower profits!
C HARACTERISTICS
Few rivals Cost emphasis Little or no product innovation
T ACTICAL O PTIONS
Find the right generic strategy Focused strategy fastest growing or slowest declining segment Differentiation based on service Drive costs down become LCL
G ETTING O UT
Notes Slow Exit Greatest generation of CASH for as long as possible Fast Exit Sell out
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Industry Specifics
LEADERS OR FOLLOWERS
INDUSTRY LEADERS
S TAY - ON - THE - OFFENSIVE
Action-oriented First mover Impatient with status quo
F ORTIFY AND DEFEND

Hold on to present market share Strengthen current market position Protect competitive advantage
M USCLE FLEXING
Fight back Play hardball Arm twisting Careful of the LAW and ETHICS
Notes
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Industry Specifics
FOLLOWER FIRMS
I NCREASE MARKET SHARE
Buy smaller rivals Drive down costs dramatically through technology Differentiate! Leapfrog technology First to market with better quality, features, etc. and build reputation Vacant-niche Superior Product Distinctive Image Content Follower
OTHER CONSIDERATIONS
TURBULENT INDUSTRIES
Turbulent industries are those that are changing rapidly, have high rates of entries and exits, and are marked by fragmented market share. Some examples of turbulent industries are airlines, sustainable energy, and telecommunication (specifically cellular phones).
C HARACTERISTICS
Rapid technological change Short product life-cycle Entry of important new rivals Competitive maneuvering Rapidly changing customer expectations
Notes
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Industry Specifics
T ACTICAL O PTIONS
Invest heavily in R&D Keep products fresh let customers know change is coming Quick-response capability Partnerships for tie-in products Initiate changes every few months not just when needed Coping o React! o Respond o Defend o Anticipate! Add resources & capabilities Improve product line Strengthen distribution Lead! Force rivals to follow you
FRAGMENTED INDUSTRIES
A fragmented industry is one in which there is no real market leader. No one (or two) market leaders are available to shape the direction of the industry as a whole. Examples of fragmented industries are plant nurseries, auto repair, and clothing.
R EASONS FOR F RAGMENTATION

Often made up of many neighborhood locations (dry cleaning, flower shops) VERY diverse customer preferences (hotels) Low entry barriers (residential real estate) Absence of economies of scale (local pharmacies) Technology is so explosive you must specialize (prescription drug research) Industry is young and has many rivals (online e-tailing)
Notes
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Industry Specifics
T ACTICAL O PTIONS
Standardized outlets cost efficiency Low-cost leader Specialize by product type Specialize by customer type Focus on limited geographic area
Notes
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CHAPTER 6 CORPORATE-LEVEL STRATEGIES

OVERVIEW
As discussed earlier, there are only two levels of strategy: business and corporate. The five generic business strategies and some tactics to implement the chosen strategy have been presented. This section will cover some major corporate level strategies.
OUTSOURCING
At some point, a firm may determine that it is expending too many resources on support services or other parts of the value chain. One option is to concentrate on the firms core competencies, and let someone else do some of the other things that need done. Outsourcing can be as simple as having a janitorial service or as complex as information technology systems.
DEFINITIONS
Outsourcing: contracting a business function to someone else Insourcing: bringing a business function back into the firm, often through diversification or vertical integration Co-sourcing: Service is provided by the company AND external provider (e.g., auditing, software development) Offshoring: outsourcing to a foreign country Onshoring: domestic outsourcing Farmshoring: outsourcing to a US location with a lower cost of living (e.g., a Los Angeles firm will setup a call center in Montana) Nearshoring: outsourcing to a nearby country (i.e., Canada or Mexico) in which both companies and countries expect to see benefits.
Notes
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Corporate Strategies
TYPES
There are three basic types of outsourcing: Business Processing Outsourcing (BPO): outsourcing back office functions such as payroll or hiring Knowledge Process Outsourcing (KPO): outsourcing functions that require advanced levels of research, analysis, and technical skills such as legal services and data research Information Technology Outsourcing (ITO): outsourcing functions that are related to information technology such as data mining, database creation, and programming.
ADVANTAGES
Reduce risk Reduce cost Organizational flexibility Access to expertise quickly Gain knowledge Improve quality Concentrate on core competencies
DISADVANTAGES
Loss of control May outsource wrong activities Quality issues Security of sensitive information or processes Culture clashes NEVER! NEVER! NEVER! A company should NEVER outsource a CORE COMPETENCY! Notes
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INTEGRATION
At some point in a business life, it may become advantageous to integrate outside inputs or buyers because of quality, reputational, or cost issues.
VERTICAL INTEGRATION
Vertical integration is to acquire an organization directly preceding or anteceding the firm in the supply chain. Adopting a vertical integration strategy should enhance productivity.
F ORWARD I NTEGRATION
When a company forward integrates it acquires its immediate buyer(s). Some reasons for forward integration are Better access to buyers Lower distribution costs Lower selling price to end users Higher profits Control over distribution (displays, quality, locations, etc.)
Notes
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B ACKWARD I NTEGRATION
Backward integration refers to a firm buying an immediate supplier. Some of the reason a firm would backward integrate are Quality control Supply control To keep the supplier from working with competition Gain differentiation capabilities Reduce cost of high supply items
HORIZONTAL INTEGRATION
Horizontal integration means to acquire an organization in the same place in the supply chain. Generally, such an acquisition is done to enhance market access or gain market share.
Notes
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D ISADVANTAGES
There are some possible disadvantages to integration whether it is forward, backward, or horizontal. Capital investment Risk Obsolete technology Outdated production methodology Capacity matching problems Radical changes in resources and capabilities Changes in design can be costly
Notes
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Chapter 6
DIVERSIFICATION
As a firm grows, it may find that its primary industry is declining; it needs a way to invest excess capital; or needs to spread risk. Diversifying product lines is one option for handling these issues. Degree of diversification is based on shared value chain activities. The three basic types of diversification are single product (no diversification or undiversified), related (some value chain activities are shared), or unrelated (no value chain activities are shared). Related diversification can also be broken into closely related (many shared activities), related (some shared activities), and loosely related (only one value chain activity is shared). Economies of Scope Competitive Advantage Profitability & Shareholder Value
Notes
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WHY DIVERSIFY?
There are many reasons a firm would chose to diversify, which may be different for related and unrelated diversification strategies. Spread risk (defensive) Reduce possible market contraction Declining or stagnant markets Access to new markets (offensive) Leverage common brand name Gain economies of scale and scope The proposed addition allows the firm to use facilities, capabilities, or resources it already has. The diversification can be used to lower fixed costs or for more efficient management. Levi Straus originally only made jeans for men, but diversified into women and childrens jeans (exploited operations) and other clothing (exploited marketing and manufacturing) Opportunities that offer more profit than simple expansion (offensive) Invest excess cash (offensive)
WHEN TO DIVERSIFY?
Spot opportunities that complement current business (technology and products) Leverage existing competencies, resources and capabilities Closely related business that will cut costs Well know brand name that can be transferred to some of your other businesses driving up sales
ULTIMATE JUSTIFICATION
There are three ways to determine if a specific diversification strategy should be pursued: Industry attractiveness test: consistently good return on investment Cost-of-entry test: how much will it cost to get into this business? Can the firm make the money back? Better-off test: will the firms perform better together than they would as separate businesses?
Notes
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STRATEGIES FOR ENTRY

To become a diversified firm, the company has a few options: Acquisition/Merger: acquire an existing firm Internal startup: create the new firm from scratch Joint ventures: work with someone who has complementary resources and capabilities
LIFE AFTER DIVERSIFICATION

Once a firm has started down the path of diversification, it has several options: Broaden diversification base Diversify further Divest some products and retrench Sell off sell the firm outright Spin off maintain control, but as a separate entity Restructure Change process, people, position
Notes
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ALLIANCES & PARTNERSHIPS

An alliance or partnership is when two or more companies join to achieve a mutual goal or mutual benefit.
WHY?
Firms have several reasons for creating and alliance or partnership Critical to companys achievement of an important strategic objective Build, sustain, enhance or create competency or competitive advantage Block a competitive threat Open important new markets Mitigate risk
HOW TO SUCCEED
Pick the right partner Aware of cultural (both company and national) differences Alliance must benefit BOTH companies Ensure BOTH parties live up to their commitments Structure so actions may be taken quickly Manage and adapt agreement
ADVANTAGES
Share and gain knowledge New technology Expertise (marketing, product, manufacturing) Supply chain efficiencies Economies of scale and/or scope Faster product-to-market times Enter new geographic markets quickly Gain knowledge of unfamiliar culture and markets Access skills and competencies
Notes
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WHY THEY FAIL

Many strategic alliances (60% to 70%) fail. Alliances are generally good for short-term goals, but not for long-term competitive advantage. Some of the reasons alliances fail are Diverging goals over time Inability to work together (cultures and management) Changing conditions (market, management) Market rivalry (become rivals instead of partners)
Interestingly enough, the more often a firm creates a strategic alliance, the more likely it is that the alliance will be successful for a longer time.
MERGERS & ACQUISITIONS

Merger and acquisition are two terms for combining the operations of two companies. In a merger, the companies join on an equal footing. An acquisition, on the other hand, is when one company buys the other and subsumes its resources, capabilities, and competencies.
WHY?
Some of the most common reasons for mergers and acquisitions are To gain economies of scale or scope Expand geographic coverage Extend product categories Gain new resources, capabilities, competencies (most notably, technology) Invent a new industry Diversify or Integrate
Notes
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WHY THEY FAIL

Smaller than anticipated cost savings Corporate culture clashes Value chain activities not as similar as expected Not a good strategic fit: Resources and capabilities not as complementary as predicted
Notes
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CHAPTER 7 FOREIGN MARKETS

OVERVIEW
Obviously one could study foreign markets for years without understanding all the ins and outs. This section is an overview of those items that are most important to strategy.
DEFINITIONS
Markets, with respect to international business, have four different classifications, each broader and farther reaching than the others. Local o Few locations home country only o Expansion plans non-existent Domestic o Home country only o Expansion plans not yet in effect or non-existent International o Select countries o Expansion plans limited Global o 50+ countries o Expansion plans broad
Notes
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Foreign Markets
WHY GO INTO FOREIGN MARKETS?

Businesses have many reasons to enter a foreign market, but the primary reasons are To gain access to new customers Achieve lower costs enhance competitiveness Fewer regulations Favorable tax and/or labor laws Capitalize on core competencies Spread risk
CULTURAL, MARKET, & POLITICAL DIFFERENCES

Foreign markets, workers, and business climates are, obviously, different from those in the US. Some of the strategic questions and issues that need to be considered are market differences, cultural differences, and political differences.
CULTURAL DIFFERENCES
Everyone has a culture. The general culture in the US is based on Western European cultures, as those are the people who first settled this country. However, the US also has subcultures Eastern European, Hispanic, Asian (in its many forms), and so on. Foreign countries also have cultures. Some are similar to ours many are very different. The countrys culture must be taken into account when deciding whether to move into that market and how you will do so. In some countries, it is acceptable to bribe officials in order to get building permits; in some child labor is acceptable; some do not have human rights; others are very strict about HR issues such as family leave. In some places, workers are expected to work long hours in order to get promotions; in others, a minimum level of work is okay; some cultures encourage siestas, while others dont start the workday until late morning. Notes
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Foreign Markets
How you deal with cultural issues both in the US and in the host country (from financial management to ethics, from HR to advertising) will have a direct impact on your bottom line! Some specific issues that should be considered before entering a foreign market are Work ethics Pay expectations Standards of living Ethics (e.g., use of child labor) Religion
MARKET DIFFERENCES
In addition to working differences caused by culture, there are also differences in the marketing of goods.
P RODUCT O FFERINGS
Products may be customized for a specific market or they may be standardized. For example, Coke in the US is not as sweet or sugary as that found in Mexico. Thus, before entering a foreign market, the company must ask, Should we customize our product or service for each different country market to match local tastes? Or, should we offer a standardized product worldwide?
E THNICITY
Ethnic backgrounds also affect how and what products can be sold in foreign markets. The most obvious of these are social differences such as language, religion (e.g., alcohol or dietary restrictions), and social behavior (e.g., bowing, shaking hands, eye contact, personal space). Additionally, cultural preferences exist with respect to marketing and distributions. Preferences include color preferences (Red and Black are a no-no in Germany; many Asian countries consider white to be the color of mourning); size (US preferences are for the large economy size while many markets prefer smaller sizes suitable for weekly or daily use); quality (underdeveloped counties are not as concerned with quality as are the developed nations); and advertising style (Many European and Asian countries are more open about displays of nudity and sexual innuendos than those in the US, who, in turn, are less concerned than fundamentalist cultures). Notes
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Foreign Markets
A DVERTISING
Another issue that arises with being a truly global firm is that marketing ads and brand names do not always translate well. BE CAREFUL... Here are a few well-known examples! When Gerber started selling baby food in Africa, they used the same packaging as in the US, with the beautiful baby on the label. Later they learned that in Africa, companies routinely put pictures on the label of what's inside, since most people can't read English. Can you imagine what the Africans thought? Pepsi's "Come alive with the Pepsi Generation" translated into "Pepsi brings your ancestors back from the grave," in Chinese. Wow - you can live forever! And finally... when Parker Pen marketed a ballpoint pen in Mexico, its ads were supposed to say, "It won't leak in your pocket and embarrass you. However, the company mistakenly thought the Spanish word "embarazar" meant embarrass. Instead, the ads said, "It wont leak in your pocket and make you pregnant."
D EMOGRAPHICS
Demographics play a large part in determining whether a market is suitable. Depending on your product or service, a large, or at least growing, middle class is a must. The level of disposable income is important if your product is not a necessity. Understanding what status items are is also important. For example, a refrigerator is considered a necessity in the US, but in rural Brazil, one is considered a status symbol. Notes
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Foreign Markets
POLITICAL DIFFERENCES
Politics and legal requirements also play a large role in determining whether to enter a foreign market. Some things that need to be considered are government type, regulations, taxes and tariffs, and import and export laws, currency exchange rates to name just a few.
G OVERNMENT P OLICIES
A risk a business takes in emerging foreign markets concerns political stability. It is not unheard of, and actually has been fairly common, for a country to allow business into the country to create production facilities. The country then has a regime change, and it nationalizes a specific industry. This means the government takes over all foreign production in that industry. A famous example happened in 1972 when Saddam Hussein came into power and nationalized oil production.
L ICENSING
Another risk deals with licensing. Do you know why televisions are not built in the US anymore? That's right. In order to sell TVs in Japan, US companies had to license the technology to Japanese manufacturers. They built them cheaper and better... so no more TVs built here. Japan had the exact same problem with Korea!
E XCHANGE R ATES
Weak currency in the manufacturing country provides a competitive advantage Currency is said to be strong when the exchange rate with another country is high. For example, one dollar is worth 1.95 pounds and 1.30 Euros, but only .85 Canadian dollars and .78 Australian dollars. So, the American dollar is weak in England and Europe, but strong in Canada and Australia. If you were going to put a plant in one of these areas, based solely on exchange rate, where would you put it? Of course - Australia. When the retail country's currency is strong compared to the manufacturing company's currency, the competitive advantage is high. But as the manufacturing company's currency becomes stronger, the advantage starts to decrease. Notes
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Foreign Markets
STRATEGIES FOR ENTERING FOREIGN MARKETS

There are many ways to enter a foreign market. These can be as straightforward as exporting to as complex as setting up entire businesses. Exporting o Sending goods to a foreign market Licensing o Allowing a foreign company to make the product with an agreement Franchising Alliances and Joint Ventures o Provide some special advantages Entering the market Economies of scale Technical expertise needs Knowledge of local markets Shared distribution facilities
EMERGING MARKET STRATEGIES

Some ways to deal with emerging markets (note, this is not emerging industries!) are Low price leadership Accommodate local circumstances Change the markets Defending against Global Giants Use any home field advantages (such as local contacts, employees, etc.) Apply expertise to cross-border markets Create a new business model
Notes
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Foreign Markets
LOCAL OR GLOBAL?
Another decision that needs to be made is how the firm is going to deal with business applications and functions in general. There are three basic philosophies.
THINK-LOCAL, ACT-LOCAL
Generally, this philosophy takes an approach of treating each market as a stand-alone unit. Advertising , marketing, products, hiring, culture are all treated as if the company was a local business concerned only with the market in which it is located. Local communities take precedence over global needs. All business functions are handled by the local firm, and reports are forwarded to the international headquarters at specified times.
THINK-GLOBAL, ACT-GLOBAL
The think-global, act global school of thought is opposite that of the think-local, act-local. In this case, products are not standardized and many cultural norms (Chinas aversion to long-term contracts, which was ignored by Apple) are ignored. Headquarters maintain more control over the locations, and a global mindset is the norm.
THINK-GLOBAL, ACT-LOCAL
The think-global, act-local (sometimes referred to as glocal) is a hybrid. Cultural differences are considered and whenever possible, the norms are used in areas such as advertising, product sizes, and so on. Local locations have control over most issues, although there are some overarching controls in place at the corporate level.
Notes
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CHAPTER 8 ETHICS
OVERVIEW
Generally, business ethics are the same as general ethics. There are three levels of ethics Legal Ethical Moral
Legal does not mean ethical or vice versa. An example of the difference between the three levels: A legal man may cheat on his wife because it is not illegal. An ethical man may think about cheating on his wife, but will not because it is not ethical. A moral man will not think of cheating on his wife.
ETHICAL PHILOSOPHIES
A decision is not an ethical dilemma; an ethical dilemma is when a manager must decide between two evils. The choice to use labor in China is NOT an ethical dilemma. Using child labor is. Does a manager use child labor, which is condoned or encouraged in the country in which the firm does business? It will help the childs family survive, but it deprives the child of an education. Notes
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Chapter 8 We will review four popular philosophies, and two guiding principles. Ethical Universalism o Right is right wrong is wrong Ethical Relativism o When in Rome, do as the Romans Integrative Social Contracts o Between Universalism and Relativism Ethical Utilitarianism o The greatest good for the greatest number The Golden Rule o Do unto others as you would have them do unto you Billboard Rule / Mother Rule o How would you feel if your action were plastered on a billboard? OR o How would you feel if your mother knew what you were doing?
Ethics
Notes
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Chapter 8
Ethics
ETHICAL UNIVERSALISM
Ethical Universalism is the position that some behaviors are considered ethical regardless of race, culture, sex, nationality, or other differences they are universally accepted. Universalism is considered absolutist (or applies to everyone in every situation). Ethical Universalism is determined by God, or some other higher power. In a nutshell, right is right and wrong is wrong for everyone.
EXAMPLE
Killing someone is wrong. The reason doesnt matter. It is wrong for everyone. Everyone understands and agrees with this tenet.
PROS
Easy to understand People always know what to do in a situation Easy for government to write laws
CONS
Situations are not always black and white. Whose interpretation of Gods (or other Higher Powers) word determines what is right and wrong?
Notes
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Ethics
ETHICAL RELATIVISM
Ethical Relativism is the position that nothing is objectively (or factually) right or wrong, but depends on the view of a particular culture or individual. Ethical Relativism is a pluralist (understands that groups are different) position. Different groups have different standards of right and wrong. When one is in a culture, he or she should adhere to the norms of the culture in which he or she finds him- or herself. Culture determines what is right and wrong, rather than a higher power. In a nutshell, When in Rome, do as the Romans.
EXAMPLE
The death penalty is a good example of ethical relativism. The death penalty is accepted in the US, Chine, North Korea, Syria, and twenty-four other countries. Nearly 140 counties have abolished the death penalty.4
PROS
Takes cultural differences into account Values are not in the hands of a higher power they come from social context
CONS
Hard to determine what is a culture Conflicts about what is right and wrong
Notes
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Ethics
INTEGRATIVE SOCIAL CONTRACTS

Integrative Social Contracts (ISC) falls somewhere between Ethical Universalism and Ethical Relativism. Some values are universal and others follow the cultural or national norms; and universal norms are more important than cultural norms. ISC is primarily a business view of ethics.
EXAMPLE
Bribery is a good example of ISC. Is the banning of bribes a universal norm or not? Bribery is acceptable to some cultures, but not in others, or is it?
PROS
Easy to understand Situations are not always black and white, yet because of cultural values, people always know what to do in a situation Takes cultural differences into account Values are not in the hands of a higher power they come from social context
CONS
Who determines what is universal and what is cultural in nature? Hard to determine what is a culture Conflicts about what is right and wrong
Notes
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Chapter 8
Ethics
ETHICAL UTILITARIANISM 5
Ethical Utilitarianism is the position that one should choose the action that brings the most net benefit6 to society. Net benefit is benefit after considering harm. Although many definitions call net benefit happiness, this is not happiness as one would normally consider it. Two questions one must ask when using ethical utilitarianism are: "What effect will my doing this act in this situation have on the general balance of good over evil?" "What effect would everyone's doing this kind of action have on the general balance of good over evil?"
Ultimately, Ethical Utilitarianism has been boiled down to the greatest good for the greatest number.
EXAMPLE
Whether or not to torture a terrorist would be a good example for Ethical Utilitarianism. The theory says one should torture the prisoner to get information that would prevent a further attack. The benefits of the many outweigh the harm being done to the single terrorist. However, one must dig deeper. What harm (psychological, perhaps) may accrue to the torturers? What harm (feelings of moral superiority) would accrue to the nation? The first question asked above would indicate that MY doing this would be acceptable in order to save lives. Yet, the second question, EVERYONE doing this, would point out that should an innocent American be accused of terrorism in another country it would NOT be acceptable. Thus, ultimately, the answer in this situation would be do not torture the terrorist.
PROS
Not absolute Not guided by a higher power Takes cultures and other differences into account Considers all who are affected by the decision
CONS
Nearly impossible to assign values to intangible benefits and harms Hard to determine all benefits and harms both immediate and long term Hard to determine where the benefits and harms stop (person, several persons, groups, society, nation, world)
Notes
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Chapter 8
Ethics
THE GOLDEN RULE

The Golden Rule (also called Ethics of Reciprocity) is a position of treating others as one would wish to be treated. Older than the Christian bible (which is most often considered the primary source), this principle has been around since ancient Egypt. The Golden Rule is universally applicable and is found in nearly every culture and religion in some form. Briefly, the Golden Rule states Do unto others as you would have others do unto you.
THE BILLBOARD OR MOTHER RULE

The Billboard and Mother Rules are basically the same; both consider the issue of what would happen if the decision one made were made public. The Billboard Rule asks, What would people think of this decision if they knew about it if it were put up on a billboard? In other words, would one make the same decision if he or she knew that others would find out about it? The Mother Rule asks, What would your Mother think? Would she be proud of your decision? The Mother Rule asks if this is a decision one would be unashamed to tell others.
WHAT DRIVES UNETHICAL BEHAVIOR IN BUSINESS?

Many things drive unethical behavior, but these three are the most pervasive in business: Overzealous pursuit of personal gain, wealth, and selfish interests Heavy pressures on company managers to meet or beat earnings targets A company culture that puts the profitability and high business performance ahead of ethical behavior
Notes
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Chapter 8
Ethics
DILEMMA OR DECISION?
A decision is when a manager must make a choice. For example, Should I put a plant in Malaysia in order to cut costs? This is a simple business decision. An ethical dilemma on the other hand, has no real right answer. Should I close my plant in South Carolina in order to open a plan in Malaysia in order to cut costs? Now, there is a dilemma. If the plant is closed in South Carolina, jobs will be lost and the community will undergo hardships. If the plant is not closed, the company will continue to lose money and the shareholders will have reduced dividends. The Malaysian people might see some benefits through increased employment, if the plant is moved, and shareholders will see increased dividends. However, consumers may feel this is a sweatshop situation and stop buying products. So, there is no right answer. One answer may be better, but it depends on the ethical philosophy the managers espouse. Notes
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Chapter 8
Ethics
MANAGING ETHICS
There are three types of managers when it comes to ethics. Those considered moral have the highest standards of behavior. Immoral managers have no standards at all. Those who are amoral most often follow the letter of the law, but perhaps not the spirit of the law. They may behave in an unethical manner intentionally or unintentionally. Managers who handle ethics and the fallout from unethical behavior generally have one of the following four attitudes.
UNCONCERNED OR NON-ISSUE
The managers that espouse this attitude are not concerned about ethics at all. They consider ethics unimportant. Usually these managers are considered immoral.
DAMAGE CONTROL
Managers who fall in the damage control category will generally be immoral or amoral. They will not make an effort to be ethical and have an attitude that I will worry about it when something happens. They are reactive rather than proactive.
COMPLIANCE
Managers with a compliance attitude are those who will do only what the law requires. They generally fall into the amoral category. While they are proactive, they do only what they need to be incompliance.
ETHICAL
Ethical managers are general considered moral. They are proactive, try to do the right thing even if their actions are above and beyond the law, and foster the same in their businesses cultures.
Notes
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Chapter 8
Ethics
WHY BE ETHICAL?
So why should a company be ethical? Are there any advantages? Weve all heard the adage Nice guys finish last. Yet, there are some very good reasons a firm should act ethically. Immoral strategies and tactics are morally wrong and reflect badly on the character of the company personnel involved Ethical strategy is good business and is in the self-interest of shareholders Company reputation at risk this can cause lasting damage Rehabilitating reputation is costly and time consuming Customers shun business and may be lost forever Recruiting and retaining talented employees Unethical behavior is expensive! Many managers consider only Level 1 costs Level 3 costs can be harder to quantify, but can cost more in the long run!
Notes
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CHAPTER 9 SOCIAL RESPONSIBILITY

OVERVIEW
Social responsibility is more than environmental responsibility!
AKA
Corporate responsibility Corporate citizenship Responsible business Corporate social performance
Notes
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Chapter 9
Social Responsibility
PERSPECTIVES
Business managers generally follow one of three theories regarding social responsibility. The basic question boils down to To whom is the company responsible? Shareholder theory o What is best for the SHAREHOLDERS? Shareholders are the only real consideration. Stakeholder theory o Balance among STAKEHOLDERS. This is the perspective we teach now. Usually this means balancing the needs of the employees, shareholders, buyers, suppliers, and community Whole World theory o Balance among everyone. This is nearly impossible, because you must consider not only the employees, shareholders, buyers, suppliers, and community, but also global impacts. For example, you must think about under- or undeveloped nations that have employees you could be hiring. It goes along with the Utilitarian ethics, although ethical issues are not necessarily involved.
A DUTY TO
A socially responsible company has a duty to Notes Operate in an honorable manner Provide good working conditions for employees Be a good steward of the environment Actively work to better quality of life in Local communities where it operates and Society at large
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Chapter 9
Social Responsibility
WHY BE SOCIALLY RESPONSIBLE?

Like ethics, there are some very nice benefits to being a socially responsible firm. Internal benefits Employee recruitment Cost savings Lowers risk of reputation-damaging incidents Increased buyer patronage Its the right thing to do
Notes
[113]
CHAPTER 10 ORGANIZATIONAL CULTURE

OVERVIEW
Just as an ethnic group, religious group, or any other group, can have a culture, so do businesses. Culture is a strange thing. A culture can be good or bad strong or weak healthy or unhealthy. One of the hardest jobs a manager has is aligning strategy and culture. If the manager is lucky, and previous managers have done their jobs, this should not be a problem. However, if theres a dramatic change in the direction of the companys strategy, culture may become a real issue taking up much of the managers time. In addition to a culture, sometimes a subculture arises. A sub-culture is sort of a culture within a culture. Sometimes a single department may have a culture that is at odds with the culture of the rest of the organization. If the subculture is one that the manager wants to foster, then its symbols and values must be emphasized throughout the organization. Usually though, the subculture is problematic. If the subculture is weak, it may be easy to change. However, if the subculture is strong yet unhealthy, the manager may have to take dramatic steps to effect change: going so far, perhaps, to the point of firing the employees of that department. The main thing to remember is that a culture of any kind is hard to change and change must come from the top. Notes
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Chapter 10
Organizational Culture
KEY FEATURES
The main features that define a corporate culture are Values, principles, and ethical standards that management practices and preaches Approach to people management Spirit and character of work climate Managers and employee interactions Strength of peer pressure to conform Revered traditions and stories Manner in which the company deals with outside stakeholders
PERPETUATION & EVOLUTION

Two issues must be addressed in an existing culture. How does a firm perpetuate a culture? How do members of the culture make sure the culture stays intact? And, why, despite everything done, does evolve?
PERPETUATION
Some steps that are taken by management and members of the culture to keep the culture on going are
N EW E MPLOYEE F IT
New employees are hired because they mesh with the current culture. Often, during the interview process, the first interview is to find out if the candidate has the required skills and qualifications. It is during the second and/or third interview that the interviewers will feel out the candidate to see if he or she will fit in with the organization. Notes
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Chapter 10
S YSTEMATIC I NDOCTRINATION
Once a person is hired, firms will usually conduct some sort of training and/or hiring process. During this process, the employee is told about the dress code, work hours, reporting structure, and so on. A mentor may be provided who will handle the water cooler code corporate status symbols such as windows in an office, who really knows how to handle a given situation, how the football pool works, etc.
S ENIOR M EMBERS
In addition to an official mentor, senior members of the organization will indoctrinate junior members through general conversations. For example, a senior member may say something like I hope to see you at Freds barbeque this weekend. All the managers and senior partners go. Its a great place to get noticed. Statements like these let a junior member know that attendance is just one step under mandatory, and not only is it a great place to be noticed, an absence will be noted as well.
S TORY T ELLING
Like ethnic cultures, an organization has legends and stories it passes on. Some of these stories are public knowledge articles printed in the newspaper or the organizations newsletter. Other stories are private, told only to insiders. But, just as heroic stories and fables such as those told by Aesop, the stories are a way for members of the culture to pass on knowledge and wisdom; they let other members know what is, or is not, acceptable behavior in the culture.
C EREMONIES
Another way to pass on cultural values is through ceremonies. One of the biggest ceremonies business students experience is commencement. There are special uniforms (caps and gowns that have special meaning to the culture), rituals (the moving of the tassel and shaking the hand of the officials), and awards (diplomas and honor cords). The ceremony has a big build up, too. Announcements, ordering regalia, convocation, and other pre-commencement activities all indicate to members of the culture the importance of the upcoming ceremony. Notes
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Chapter 10
V ISIBLE R EWARDS
Visible rewards for those who follow the cultural norms are yet another means of perpetuating corporate values. A parking space for the employee-of-the-month lets everyone know the attributes shown by the employee are important to the firm. Certificates, plaques, newsletter mention, bonuses, and so on let other members of the culture see the benefits of following the norms.
EVOLUTION
Despite members and managements best efforts, cultural changes are inevitable; all things change. Some of the major effects on culture are though changes in technology (how and who does what), business prospects (e.g., poor economy or increased demand), management (e.g. new ideology), and social desirability (e.g., no smoking). A culture may also change when a merger or acquisition happens and two cultures combine or collide. As each firm has a unique culture, there are bound to be adaptations by both the acquiring and acquired cultures. Notes
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Chapter 10
TYPES OF CULTURES
STRONG
A strong culture is one that has the following attributes Deep-rooted Hard to change (may be very hard to change with strategy changes) Developed over period of years and decades Strong indoctrination and displays of approval or disapproval of actions Embedded in policies and procedures
WEAK
A weak culture is generally easy to change because it is not deeply rooted. A weak culture Lack values Is not widely shared throughout the organization Members may have some bonds with subunits, but no emotional commitment to the organization as a whole Provides little or no assistance with strategy
UNHEALTHY
An unhealthy culture is one that will hinder operations. The characteristics of an unhealthy culture are Notes Politicized Change-resistant Insular, inwardly focused Unethical, greed-driven
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Chapter 10
ALLY OR OBSTACLE?
A strong (and appropriate) culture can greatly enhance a strategy by encouraging actions, behaviors, and work practices that are supportive of the strategy. Additionally, if the culture is tightly matched with strategy, the members of the culture can help find problems with either the culture or the strategy. Finally, a strong culture can create a powerful commitment and identification with the strategy. Culture, especially a weak, inappropriate, or unhealthy culture can be an obstacle to strategy implementation and performance. If the culture does not support or actually hinders the carrying out of the strategy, it must be changed. ASAP!
CHANGING CULTURE
Changing a culture takes a long time; the stronger the culture is, the longer it will take. Here are some steps that can be taken to change a culture. Identify the problem what works and what does not work. Specify actions and behaviors of new culture though policy, procedural, and personnel changes. Talk openly about problems of old culture and advantages of new culture Follow with actions that will show management is serious Substantive o Replace people who will not follow the new changes o Promote people who are early adopters of new culture o Bring in outsiders who will fit in the new culture
Notes
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Chapter 10 o o
Mandate training for those who stay Implement and push new behaviors through policy and procedures that help the new culture o Compensation and incentives for those who are leaders in the change and early adopters of the new cultural norms Symbolic o Lead by example. This cannot be over emphasized. o Create and start new ceremonies to emphasize new cultural values o Create and tell stories that support new cultural values o Intangible and non-monetary recognition for those who are in support. o TAKES FOREVER! (at least a few years)
Notes
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Chapter 10
Values are harder to change than behaviors and norms. The following example indicates some components of corporate culture and how hard they are to change and which of them are hard to see on the surface.
BUILDING A HIGH PERFORMANCE CULTURE HTTP://WWW.CHANGEEXCELLENCE.COM/WHITE_PAPERS/CULTURE_CHANGE_WHITE_PAPER.PDF
Notes
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CHAPTER 11 IMPLEMENTATION
The NUMBER ONE reason strategy fails is bad IMPLEMENTATION!
WHAT NEEDS TO BE DONE

BUILD THE CAPABILITIES, AND COMPETENCIES NEEDED
The question here is how does the firm get the capabilities and competencies needed? Already have Build from scratch Outsource Alliance Partnership Acquisition Merger
MARSHALL THE RESOURCES

Get the right resources to the right place at the right time.
P EOPLE
People with the right skills People with the right attitude
R ESOURCES
Get the resources Align resources with strategy Right resources in the right place
Notes
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Chapter 11
Implementation
A CTIVITIES
Reward those who support strategy Help not hinder Mutually reinforcing
INSTITUTE GOOD POLICIES AND PROCEDURES

Provide top-down guidance Enforce consistency Promote positive work climate Make sure policies and procedures HELP the strategy not hinder it!
ADOPT BEST PRACTICES & QUALITY CONTROL

Benchmark Adopt and adapt Evaluate Quality Control
TIE REWARDS TO EXECUTION

T HINGS TO DO
Attractive perks and benefits Promotion from within (when possible) Ideas are valued Culture of genuine caring and respect Strategic vision in inspirational terms employee buy-in Share information with employees Knock out facilities where employees really want to work Flexible in people management
Notes
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Chapter 11
Implementation
I NCENTIVE P ACKAGES
Achievement, not effort = job performance! Performance pays off For ALL managers and ALL employees not just the top Administer fairly and objectively Direct links to performance Individual or team target achievements can affect rewards directly Time must be relevant Use non-monetary rewards Do not reward effort ONLY results
INFORMATION TECHNOLOGY
Adequate controls, performance tracking, information systems Control over empowered employees Technology can be used for measuring quality and efficiency Make sure to implement as needed!
Notes
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Chapter 11
Implementation
INSTILL CORPORATE CULTURE

Strong culture that enhances strategy Change, create, or adapt as needed
EXERCISE STRONG LEADERSHIP

Strong and able leadership Exercise beliefs and values Lead by example
Notes
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Chapter 11
Implementation
SOME ADDITIONAL INFORMATION

TOP MANAGEMENT TEAMS (TMT)
While putting together a strong and talented management team is of utmost importance, the organization must be ready to retain them as well. This can be more important than additional investments in plant, equipment, and other projects. Some companies hire the TMT from within; others hire their top management team from outside the company. Each has pros and cons. Hiring from within results in a management team that is already part of the corporate culture and gives employees an incentive to do well seeking after promotion. However, some firms feel that promotion into the TMT from within the organization gives these top management team members blinders. In other words, they are too entrenched in the corporate culture. Outside TMT members provide "new blood. Notes
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Chapter 11
Implementation
BUSINESS PROCESS REENGINEERING

The one item I would really like to stress in this chapter is BPR business process reengineering. Specifically, understand that a company does not just decide one day to undertake business process reengineering. The period during the BPR is a dangerous and chaotic time for many organizations. Designing and implementing a BPR is a long and involved process, and many businesses do not make it through a BPR. A CEO must understand what he or she is getting into when starting this drastic measure. Think of TQM and Six Sigma as continuous ways to improve. BPR, on the other hand, is a radical change redesigning ALL of the business processes from scratch. Look at this chart. The blue line indicates radical or revolutionary change. The red line indicates incremental or evolutionary change. Notice the difference!
Types of Change
Business Process Reengineering
Six Sigma or TQM
Notes
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END NOTES
1 2
(Kaplan & Norton, 1996) Invalid source specified. 3 (Porter, 1980) 4 The Death Penalty World Wide. http://www.infoplease.com/ipa/A0777460.html 5 http://www.scu.edu/ethics/publications/iie/v2n1/calculating.html 6 Jeremy Bentham, who lived in England during the eighteenth and nineteenth centuries.
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2012 Jennifer C.

CHAPTER 1 DEFINITIONS AND OVERVIEW

Definitions & Overview

Definitions & Overview

COMPETITIVE ADVANTAGE DEFINITIONS

Definitions & Overview

SUSTAINABLE COMPETITIVE ADVANTAGE

Definitions & Overview

THE VALUE CHAIN

Definitions & Overview

Definitions & Overview

Definitions & Overview

Definitions & Overview

CHAPTER 2 THE STRATEGIC PROCESS

D EVELOP A V ALUE S TATEMENT

D EVELOP A V ISION S TATEMENT

Chapter 2 S OME E XAMPLES DOLLAR GENERAL

Chapter 2 Harley Davidson

Snowy Mountain Design

STEP 2: SET GOALS

TYPES OF GOALS AND OBJECTIVES

Increase expense by 15% Increase number by 100%

12/31/2012 12/31/2015 12/31/2013 6/30/2013 12/31/2013

LEARNING & GROWTH

Number of Installations Employees Trained

All employees 100% Increase by 10%

Increase Sales Bonuses

STEP 3: CREATE THE STRATEGIC PLAN

THE STRATEGIC MAP

The four parts of implementing strategy are like a bar stool

STEP 5: MONITOR & ADJUST

CHAPTER 3 ENVIRONMENTAL ANALYSIS

SOCIO-CULTURAL AND DEMOGRAPHICS

POLITICAL AND LEGAL

MACRO-ENVIRONMENT ANALYSIS EXAMPLE

MACRO-ENVIRONMENTAL ANALYSIS (EXAMPLE)

Socio-Cultural and Demographics

Chapter 3 Several key factors regarding demographics and population are

Political and Legal

BARGAINING POWER OF BUYERS

S IZE & N UMBER

BARGAINING POWER OF SUPPLIERS

THREAT OF SUBSTITUTE PRODUCTS OR SERVICES

A VAILABILITY OF G OOD S UBSTITUTES

THREAT OF NEW ENTRANTS

E NTRY AND E XIT B ARRIERS

I NDUSTRY A TTRACTIVENESS I NTERACTION OF THE 5 F ORCES

S IZE AND N UMBER

MICRO-ENVIRONMENT ANALYSIS EXAMPLE

MICRO-ENVIRONMENTAL ANALYSIS (EXAMPLE)

Power of Buyers (Medium High)

Power of Suppliers (Medium)

Threat of Substitute Products (Medium)

Threat of New Entrants (High)

Intensity of Rivalry (Medium Low)

INTERNAL ENVIRONMENTAL ANALYSIS

RESOURCES, CAPABILITIES, AND COMPETENCIES

COMPETITIVE AND SUSTAINABLE COMPETITIVE ADVANTAGE(S)

Somewhat Yes No Yes No

Somewhat Yes Yes Yes No Somewhat Yes No Yes

Somewhat Yes Yes Yes Yes Yes

Step 3a: Highlight the top titles and numbers as shown

Chapter 3 Step 9: Label the Axis Points.

Business Policy & Strategy

Business Policy & Strategy