This survey is designed to assess an organization’s level of strategic thinking. Go to connect.mheducation.com and take Self-Assessment 6.1. When you’re done, answer the following questions:
1. What is the level of strategic thinking? Are you surprised by the results?
2. If you were meeting with an executive from the company you evaluated, what advice would you provide based on the survey results and what you learned about assessing current reality?
|Page 175Formulating the Grand Strategy|
How can three techniques—Porter’s four competitive strategies, diversification and synergy, and the BCG matrix—help me formulate strategy?
THE BIG PICTURE
Strategies may be growth, stability, or defensive strategies. Strategy formulation makes use of several concepts, including Porter’s four competitive strategies, diversification and synergy, and the BCG matrix.
After assessing the current reality (Step 2 in the strategic-management process), it’s time to turn to strategy formulation—developing a grand strategy (Step 3). Examples of techniques that can be used to formulate strategy are Porter’s four competitive strategies, diversification and synergy, and the BCG matrix.
The grand strategy must then be translated into more specific strategic plans, which determine what the organization’s long-term goals should be for the next 1–5 years. These should communicate not only the organization’s general goals about growth and profits but also information about how these goals will be achieved. Moreover, like all goals, they should be SMART—Specific, Measurable, Attainable, Results-oriented, and specifying Target dates (Chapter 5).
Three Common Grand Strategies
The three common grand strategies are growth, stability, and defensive.
1. The Growth Strategy A growth strategy is a grand strategy that involves expansion—as in sales revenues, market share, number of employees, or number of customers or (for nonprofits) clients served. Example: IBM under its previous CEO, Samuel J. Palmisano, decided to get out of low-profit businesses that were fading, such as the personal computer business, and shift to services and software, often delivered over the Internet from data centers connecting all kinds of devices—the growth business of cloud computing. 76 (Since then, however, the company has had a “rocky time,” says present CEO Virginia Rometty, as IBM found itself lagging in cloud computing sales, having lost important business to Amazon, and is now attempting to refocus its business.)77
2. The Stability Strategy A stability strategy is a grand strategy that involves little or no significant change. Example: Without much changing their product, the makers of Timex watches decided to stress the theme of authenticity (“Wear it well”) over durability (the old slogan was “It takes a licking and keeps on ticking”). In an age of smartphones and other gadgets, when people don’t need a watch to tell the time, the new theme of authenticity makes sense, according to The New York Times, “as consumers watching what they spend seek out products with longevity whose ability to stand the test of time implies they are worth buying.”78
3. The Defensive Strategy A defensive strategy, or a retrenchment strategy, is a grand strategy that involves reduction in the organization’s efforts. Example: Redbox, which installed more than 40,000 DVD movie-rental kiosks in groceries, 7-Elevens, and Walmart stores during a seven-year growth period, in 2014 began uninstalling kiosks (more than 500 in the United States) and switching to a defensive strategy. Not only had the company run out of good locations in which to place its machines, it was also contending with challenges from online streaming and more original television programs.79
Variations of the three strategies are shown on the next page. (See Table 6.3 .)
Page 176TABLE 6.3 How a Company Can Implement a Grand Strategy
FIGURE 6.3 Porter’s four competitive strategies
Porter’s Four Competitive Strategies
Porter’s four competitive strategies (also called four generic strategies) are (1) cost-leadership, (2) differentiation, (3) cost-focus, and (4) focused-differentiation. 80 The first two strategies focus on wide markets, the last two on narrow markets. (See Figure 6.3 .) Time Warner, which produces lots of media and publications, serves wide markets around the world. Your neighborhood video store (if one still exists) serves a narrow market of just local customers.
Let’s look at these four strategies.
1. Cost-Leadership Strategy: Keeping Costs & Prices Low for a Wide Market The cost-leadership strategy is to keep the costs, and hence prices, of a product or service below those of competitors and to target a wide market.
This puts the pressure on R&D managers to develop products or services that can be created cheaply, production managers to reduce production costs, and marketing managers to reach a wide variety of customers as inexpensively as possible.
Firms implementing the cost-leadership strategy include Timex, computer maker Acer, hardware retailer Home Depot, and pen maker Bic.
2. Differentiation Strategy: Offering Unique & Superior Value for a Wide Market The differentiation strategy is to offer products or services that are of unique and superior value compared with those of competitors but to target a wide market.
Because products are expensive, managers may have to spend more on R&D, marketing, and customer service. This is the strategy followed by Ritz-Carlton hotels and the makers of Lexus automobiles.
Page 177The strategy is also pursued by companies trying to create brands to differentiate themselves from competitors. Although Coca-Cola may cost only cents more than a supermarket’s own house brand of cola, Coke spends millions on ads.
3. Cost-Focus Strategy: Keeping Costs & Prices Low for a Narrow Market The cost-focus strategy is to keep the costs, and hence prices, of a product or service below those of competitors and to target a narrow market.
This is a strategy you often see executed with lowend products sold in discount stores, such as low-cost beer or cigarettes, or with regional gas stations, such as the Terrible Herbst, Rotten Robbie, and Maverik chains in parts of the West.
Needless to say, the pressure on managers to keep costs down is even more intense than it is with those in cost-leadership companies.
Focused differentiation. The world’s largest cruise ship, the 1,181-foot-long, 16-deck MS Allure of the Seas, features such amenities as four swimming pools, a skating rink, a small golf course, volleyball and basketball courts, a multi-deck dining room that can seat 3,000, and lavish lodging quarters. Clearly, there’s something here for everyone—if you can afford it.
4. Focused-Differentiation Strategy: Offering Unique & Superior Value for a Narrow Market The focused-differentiation strategy is to offer products or services that are of unique and superior value compared to those of competitors and to target a narrow market.
Some luxury cars are so expensive—Rolls-Royce, Ferrari, Lamborghini—that only a few car buyers can afford them. Other companies following the strategy are jeweler Cartier and shirtmaker Turnbull & Asser. Yet focused-differentiation products need not be expensive. The publisher Chelsea Green has found success with niche books, such as The Straw Bale House.
Single-Product Strategy versus Diversification Strategy
A company also needs to think about whether to have a single-product strategy or a diversification strategy. After all, if you have only one product to sell, what do you do if that product fails?
The Single-Product Strategy: Focused but Vulnerable In a single-product strategy, a company makes and sells only one product within its market. This is the kind of strategy you see all the time as you drive past the small retail businesses in a small town: There may be one shop that sells only flowers, one that sells only security systems, and so on.
The single-product strategy has both positives and negatives:
The benefit—focus. Making just one product allows you to focus your manufacturing and marketing efforts just on that product. This means that your company can become savvy about repairing defects, upgrading production lines, scouting the competition, and doing highly focused advertising and sales.
A small-business example: Green Toys of Mill Valley, California, makes all its toddler tea sets, toy trucks, and building blocks out of plastic recycled from milk jugs and, in a strategy called “reverse globalization,” carries out all its operations in California, a push back against offshoring and outsourcing.81 Another example: See’s Candies, a chain of 200 stores throughout the West, specializes in making boxed chocolates—something it does so well that when See’s was acquired by Berkshire Hathaway, its corporate owner chose not to tamper with success and runs it with a “hands-off” policy.Page 178
The risk—vulnerability. The risk, of course, is that if you do not focus on all aspects of the business, if a rival gets the jump on you, or if an act of God intervenes (for a florist, roses suffer a blight right before Mother’s Day), your entire business may go under.
Example: Indian Motorcycle Company, once a worthy rival to Harley-Davidson, sold only motorcycles. It went bankrupt twice, the second time because of quality problems, notably an overheating engine. (Purchased by Polaris Industries in 2011, it is presently being manufactured in Spirit Lake, Iowa.)82
The Diversification Strategy: Operating Different Businesses to Spread the Risk The obvious answer to the risks of a single-product strategy is diversification, operating several businesses in order to spread the risk. You see this at the small retailer level when you drive past a store that sells gas and food and souvenirs and rents DVD movies.
There are two kinds of diversification—unrelated and related.
Unrelated Diversification: Independent Business Lines If you operate a small shop that sells flowers on one side and computers on the other, you are exercising a strategy of unrelated diversification —operating several businesses under one ownership that are not related to one another. This has been a common big-company strategy. General Electric, for instance, which began by making lighting products, diversified into such unrelated areas as plastics, broadcasting, and financial services. Disney, Time Warner, and Sony run different divisions specializing in television, music, publishing, and the like.
Related Diversification: Related Business Lines In some parts of the world you have to do all your grocery shopping in separate stores—the butcher, the baker, the greengrocer, and so on. In most U.S. grocery stores, all these businesses appear under the same roof, an example of the strategy of related diversification, in which an organization under one ownership operates separate businesses that are related to one another. A big-company example: The famous British raincoat maker Burberry started by making and marketing outerwear clothing but since then has expanded into related business lines, including accessories such as umbrellas, children’s clothing, and even fragrances, which it sells in its own stores.
Related diversification has three advantages:
Reduced risk—because more than one product. If one product is weak, others may take up the slack. Example: When rainwear sales are slow, Bur-berry’s economic risk is reduced by sales of its other product lines, such as children’s clothes.
Management efficiencies—administration spread over several businesses. Whatever the business, it usually has certain obligatory administrative costs—accounting, legal, taxes, and so on. Example: Burberry need not have separate versions of these for each business line. Rather, it can actually save money by using the same administrative services for all its businesses.
Synergy—the sum is greater than the parts. When a company has special strengths in one business, it can apply those to its other related businesses. Example: PepsiCo can apply its marketing muscle not only to Pepsi Cola but also to 7-Up and Mountain Dew, which it also owns. This is an example of synergy —the economic value of separate, related businesses under one ownership and management is greater together than the businesses are worth separately.
An example of a company that went from a single-product strategy to a diversification strategy is Skilled Manufacturing Inc. of Traverse City, Michigan, which used to supply power-train components to the auto industry, but shuttered one of its two Michigan Page 179plants in 2005 after one of its automotive clients moved the work to Mexico. Now it has reopened the factory because it has branched out to other sectors, such as aerospace, in addition to continuing to serve the auto industry.83