Essentials of Contemporary Management 7th Edition Jones Solutions Manual

Essentials of Contemporary
Management 7th Edition Jones

Solutions Manual
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Chapter 06 - Planning, Strategy, and Competitive Advantage
Chapter 06
Planning, Strategy, and Competitive
Advantage
CHAPTER CONTENTS
Learning Objectives 6-2

Key Definitions/Terms 6-2
Chapter Overview 6-4
Lecture Outline 6-4
Lecture Enhancers 6-17
Management in Action 6-18
Building Management Skills 6-20
Managing Ethically 6-21
Small Group Breakout Exercise 6-22
Be the Manager 6-23
Case in the News 6-24
Supplemental Features 6-25
Manager’s Hot Seat 6-25
Self-Assessment(s) 6-25
Test Your Knowledge 6-25
Instructor’s PowerPoint Slides 6-26
6-1
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
LEARNING OBJECTIVES
LO 6-1. Identify the three main steps of the planning process and explain
the relationship between planning and strategy.
LO 6-2. Differentiate between the main types of business-level strategies

and explain how they give an organization a competitive advantage
that may lead to superior performance.
LO 6-3. Differentiate between the main types of corporate-level strategies

and explain how they are used to strengthen a company’s business-
level strategy and competitive advantage.
LO 6-4. Describe the vital role managers play in implementing strategies to

achieve an organization’s mission and goals.
KEY DEFINITIONS/TERMS
differentiation strategy: Distinguishing an
business-level plan: Divisional managers’ organization’s products from the products of
decisions pertaining to divisions’ long-term goals, competitors on dimensions such as product design,
overall strategy, and structure. quality, or after-sales service.
business-level strategy: A plan that indicates how diversification: Expanding a company’s business
a division intends to compete against its rivals in an operations into a new industry in order to produce
industry new kinds of valuable goods or services.
concentration on a single industry: Reinvesting a exporting: Making products at home and selling
company’s profits to strengthen its competitive them abroad.
position in its current industry.
focused differentiation strategy: Serving only one
corporate-level plan: Top management’s decisions segment of the overall market and trying to be the
pertaining to the organization’s mission, overall most differentiated organization serving that
strategy, and structure. segment.
corporate-level strategy: A plan that indicates in focused low-cost strategy: Serving only one
which industries and national markets an segment of the overall market and trying to be the
organization intends to compete. lowest-cost organization serving that segment.
6-2
Education.
franchising: Selling to a foreign organization the

rights to use a brand name and operating know-how related diversification: Entering a new business or
in return for a lump-sum payment and a share of the industry to create a competitive advantage in one or
profits. more of an organization’s existing divisions or
businesses.
functional-level plan: Functional managers’
decisions pertaining to the goals that they propose strategic leadership: The ability of the CEO and
to pursue to help the division attain its business- top managers to convey a compelling vision of
level goals. what they want the organization to achieve to their
subordinates.
functional-level strategy: A plan of action to
improve the ability of each of an organization’s strategy: A cluster of decisions about what goals to
functions to perform its task-specific activities in pursue, what actions to take, and how to use
ways that add value to an organization’s goods and resources to achieve goals.
services.
strategic alliance: An agreement in which
global strategy: Selling the same standardized managers pool or share their organization’s
product and using the same basic marketing resources and know-how with a foreign company,
approach in each national market. and the two organizations share the rewards and
risks of starting a new venture.
hypercompetition: Permanent, ongoing, intense
competition brought about in an industry by strategy formulation: The development of a set of
advancing technology or changing customer tastes. corporate, business, and functional strategies that
allow an organization to accomplish its mission and
importing: Selling products at home that are made achieve its goals.
abroad.
time horizon: The intended duration of a plan.
joint venture: A strategic alliance among two or
more companies that agree to jointly establish and SWOT analysis: A planning exercise in which
share the ownership of a new business. managers identify organizational strengths (S) and
weaknesses (W) and environmental opportunities
licensing: Allowing a foreign organization to take (O) and threats (T).
charge of manufacturing and distributing a product
in its country or world region in return for a synergy: Performance gains that result when
negotiated fee. individuals and departments coordinate their
actions.
low-cost strategy: Driving the organization’s costs
down below the costs of its rivals. unrelated diversification: Entering a new industry
or buying a company in a new industry that is not
mission statement: A broad declaration of an related in any way to an organization’s current
organization’s purpose that identifies the businesses or industries.
organization’s products and customers and
distinguishes the organization from its competitors. vertical integration: Expanding a company’s
operations either backward into an industry that
multidomestic strategy: Customizing products and produces inputs for its products or forward into an
marketing strategies to specific national conditions. industry that uses, distributes, or sells its products.
planning: Identifying and selecting appropriate wholly owned foreign subsidiary: Production
goals and courses of action; one of the four operations established in a foreign country
principal tasks of management. independent of any local direct involvement.
6-3
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
CHAPTER OVERVIEW
This chapter explores the manager’s role both as planner and as strategist. First, we discuss the nature and
importance of planning, the kinds of plans managers develop, and the levels at which planning takes
place. Second, we discuss the three major steps in the planning process: (1) determining an organization’s
mission and major goals, (2) choosing or formulating strategies to realize the mission and goals, and (3)
selecting the most effective ways to implement and put these strategies into action. We also examine
several techniques, such as scenario planning and SWOT analysis that can help managers improve the
quality of their planning. We discuss a range of strategies managers can use to give their companies a
competitive advantage over their rivals. By the end of this chapter, students will understand the vital role
managers carry out when they plan, develop, and implement strategies to create a high-performing
organization.
LECTURE OUTLINE
NOTE ABOUT INSTRUCTOR’S POWERPOINT

SLIDES
The Instructor PowerPoint Slides include most Student

PowerPoint slides, along with additional material that
can be used to expand the lecture. Images of the
Instructor PowerPoint slides can be found at the end of
this chapter on page 6-26.
(INSTRUCTOR’S POWERPOINT SLIDE 1)

Chapter Title
Management Snapshot (pp. 193-194 of text)

Toy Retailer Implements Turnaround Plan
How Can Identifying Corporate Strengths and Weaknesses Lead to Better Planning and Strategy?
Despite its growth, 2013 was not a good year for Toys ―R‖ Us. Net sales were down, and the company’s
net loss was $1 billion. To counteract this trend, the company announced a plan it called ―TRU
Transformation.‖ The plan was grounded in consumer research and customer insights and was anchored
by three guiding principles—Easy, Expert, Fair.
The plan identified four areas of weaknesses for Toys ―R‖ Us and discussed how the weaknesses could be
turned into strengths. First, the retailer said that it had provided a weak customer experience both in stores
and online. Toys ―R‖ Us therefore sought to make stores easy, uncluttered places with a well-trained sales
staff. Second, there was a perception that prices at Toys ―R‖ Us were higher than at other retailers. The
company wanted to be sure that its prices were perceived as fair by reducing the many exclusions to its
price-matching policy. Third, the retailer had struggled with inventory management. Customers often
6-4
Education.
found that sought-after items were out of stock The company was expanding its ability to ship online
orders from stores and distribution centers in order to get the right goods into stores at the right times, and
it was increasing clearance sales to move stagnant merchandise. Finally, the company was assessing its
business structure and operations to increase efficiency and effectiveness. One year into the ―TRU
Transformation‖ plan, Toys ―R‖ Us saw significant progress.
PLACE SLIDE 2 HERE
LO 6-1: Identify the three

I. Planning and Strategy main steps of the
planning process
A. Planning is a process managers use to identify and and explain the
select appropriate goals and courses of action for an relationship
organization. The organizational plan that results from between planning
the planning process details how managers intend to and strategy.
attain those goals. The cluster of managerial decisions
POWERPOINT SLIDES 6-3 TO
and actions to help an organization attain its goals is 6-6
its strategy. Planning is a three-step activity:
1. The first step is determining the organization’s

mission and goals. A mission statement is a broad
declaration of an organization’s purpose that
identifies the importance of the organization’s
products to its employees and customers and
distinguishes the organization from its
competitors.
2. The second step is formulating strategy.
3. The third step is implementing strategy.

6-2: Differentiate between
II. The Nature of the Planning Process the main types of
business-level
A. To perform the planning task, managers: strategies and explain
how they give an
1. establish and discover where an organization is organization a
at the present time, competitive advantage
that may lead to
2. determine where it should be in the future, and superior performance.
POWERPOINT SLIDES 6-7 TO

3. decide how to move it forward to reach that 6-19
future state.
B. Why Planning Is Important
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Education.
1. Planning is necessary to give the organization a

sense of direction and purpose.
2. Planning is a useful way of getting managers to

participate in decision making about the
appropriate goals and strategies for an
organization.
3. Planning helps coordinate managers of the

different functions and divisions of an
organization to ensure that they all pull in the same
direction and work to achieve its desired future
state.
4. Planning can be used as a device for controlling

managers within an organization.
C. Henri Fayol said that effective plans should have

four qualities:
1. Unity means that at any time only one central

plan is put into operation.
2. Continuity means that planning is an ongoing

process.
3. Accuracy means that managers should attempt

to collect and use all available information.
4. The planning process should have enough

flexibility so that the plans can be altered and
changed if the situation changes.
D. Levels of Planning: In large organizations,

planning usually takes place at three levels of
management: corporate, business or division, and
department or functional.
1. At the corporate level are the CEO, other top

managers, and their support staff.
2. At the business level are the different divisions

or business units that compete in distinct industries
of the company, usually led by a divisional
manager.
3. Each division has its own set of functions or

departments, such as manufacturing, marketing,
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Education.
R&D, human resources, etc.

E. Levels and Types of Planning
1. The corporate-level plan contains top

management’s decisions pertaining to the
organization’s mission and goals, overall strategy,
and structure.
2. Corporate-level strategy indicates in which

industries and national markets an organization
intends to compete and why.
3. At the business level, the managers of each

division create a business-level plan detailing
long-term divisional goals that will allow the
division to meet corporate goals and the division’s
business-level strategy and structure.
4. Business-level strategy states the methods a

division or business intends to use to compete
against its rivals in an industry.
5. A functional-level plan states the goals that the

managers of each function will pursue to help the
division attain its business-level goals.
6. Functional-level strategy is a plan of action to

improve the ability of each of an organization’s
functions to perform its task-specific activities in
ways that add value to an organization’s goods and
services.
F. Time Horizons of Plans: Plans differ in their time
horizon, the periods of time over which they are
intended to apply.
1. Long-term plans have a horizon of five years

or more.
2. Intermediate-term plans have a horizon

between one and five years.
3. Short-term plans have a horizon of one year or

less.
4. A corporate-level or business-level plan that

extends over several years is typically treated as a
rolling plan, a plan that is updated and amended
every year to take account of changing conditions
in the external environment.
6-7
Education.
G. Standing Plans and Single-Use Plans
1. Standing plans are used in situations in which

programmed decision making is appropriate.
Standing plans include a policy, a rule, and a
standard operating procedure.
2. Single-use plans are developed to handle

nonprogrammed decision making. They include:
a. Programs, which are integrated sets of

plans for achieving certain goals.
b. Projects, which are specific action plans

created to complete various aspects of a
program.
III. Determining the Organization’s Mission POWERPOINT SLIDES 6-20
TO 6-22
and Goals
A. Defining the Business: To determine an

organization’s mission, managers must first define its
business by asking three questions:
1. Who are our customers?
2. What customer needs are being satisfied?
3. How are we satisfying customer needs?
B. Establishing Major Goals: Once the business is

defined, managers must then establish a set of primary
goals to which the organization is committed. These
goals give the organization a sense of direction or
purpose.
1. Strategic leadership, the ability of the CEO

and top managers to convey a compelling vision of
what they want the organization to achieve to their
subordinates.
2. Goals typically possess the following

characteristics:
a. They are ambitious, that is, they stretch the

organization, and require managers to improve
its performance capabilities.
b. They are challenging but realistic—a goal

that is impossible to attain may prompt
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Education.
managers to give up.
c. The time period in which a goal is expected

to be achieved should be stated. This injects a
sense of urgency and acts as a motivator.
POWERPOINT SLIDES 6-23
IV. Formulating Strategy TO 6-26
TEXT REFERENCE
A. In strategy formulation, managers work to
develop the set of strategies that will allow an
organization to accomplish its mission and achieve its
goals.
Manager as a Person:
1. A SWOT analysis is a planning exercise in
GM’s Barra Confronts
which managers identify internal organizational Challenges
strengths (S), weaknesses (W), opportunities (O),
and threats (T). Based on a SWOT analysis,
managers at each level of the organization identify When Mary Barra took over as
strategies that will best position the organization to chief executive officer of
achieve its mission and goals. General Motors in 2014, the
company had declared
a. The first step in SWOT analysis is to bankruptcy and was still on the
mend. Also, within weeks of
identify an organization’s strengths and
taking the CEO job, Barra
weaknesses that characterize the present state began the recall of more than
of the organization. 2.5 million cars that General
Motors had manufactured
b. The next step requires managers to identify between 2003 and 2007. The
potential opportunities and threats in the cars had faulty ignition switches
environment that affect the organization in the that would turn off the car while
present or may affect it in the future. it was being driven, causing
accidents and preventing the air
bags from deploying.
c. On completion of the SWOT analysis,
managers can begin developing strategies that
allow the organization to attain its goals by Barra has taken ownership of
taking advantage of opportunities, countering the recall and the company’s
threats, building strengths, and correcting failings, publicly stating that
organizational weaknesses. problems within General
Motors allowed the ignition
2. The Five Forces Model: Michael Porter’s five switch to reach market. She has
forces model is another well-known model that vowed to make the
development process much
helps managers focus on the most important faster in the future and has
competitive forces, or potential threats, in the taken steps to improve the
external environment. They are: company’s vehicle safety
department.
a. the level of rivalry among organizations
within an industry Barra is maintaining the
company’s strategy while not
b. the potential for entry into an industry ignoring the company’s
strengths, weaknesses,
opportunities, and threats. She
c. the power of large suppliers sees an opportunity for General
6-9
Education.
Motors to grow globally and to

d. the power of large customers pursue technological trends,
such as fuel efficiency.
Concerning threats faced by the
e. the threat of substitute products. company, she has noted the
costs of materials and the
3. The term hypercompetition applies to competition from other brands
industries that are characterized by permanent, in Europe. The ongoing
ongoing, intense competition brought about by investigation of the ignition
advancing technology or changing customer tastes, switch and the timing of the
fads and fashions. recall is also a threat, but Barra
V. Formulating Business-Level Strategies has received praise for handling
the threat well. (Box in text on
pp. 204-205)
A. Michael Porter formulated a theory of how
managers can select a business-level strategy to give
them a competitive advantage in a particular market or
industry. According to Porter, to obtain higher profits,
managers must choose between two basic ways of POWERPOINT SLIDES 6-27
increasing the value of an organization’s products: TO 6-29
1. Differentiating the product to increase its value
2. Lowering the costs of making the product
Porter also argues that managers must choose

between serving the whole market or serving just
one segment.
B. Low-Cost Strategy
1. With a low-cost strategy, managers try to gain

a competitive advantage by focusing the energy of
all the organization’s departments on driving the
organization’s costs down below the costs of its
industry rivals.
2. Organizations pursuing a low-cost strategy can

sell a product for less than their rivals, and still
make a good profit.
C. Differentiation Strategy
1. With a differentiation strategy, managers try

to gain a competitive advantage by focusing all the
energies of the organization’s departments on
distinguishing the organization’s products from
those of competitors.
2 As the process of making products unique and

different is expensive, organizations that
successfully pursue a differentiation strategy often
6-10
Education.
charge a premium price for their products.

D. “Stuck in the Middle”
According to Porter, a company cannot pursue a low-

cost and differentiation strategy simultaneously. He
refers to managers and organizations that have not
selected between the two as being ―stuck in the
middle.‖
E. Focused Low-Cost and Focused Differentiation

Strategies
1. Porter identified two other business-level

strategies used by companies aiming to serve the
needs of customers in one or a few segments of the
market.
2. A company pursuing a focused low-cost

strategy serves one or a few segments of the
market and aims to be the lowest-cost company
serving that segment.
3. A company pursuing a focused differentiation

strategy serves just one or a few segments of the
market and aims to be the most differentiated
company serving that segment.
VI. Formulating Corporate-Level Strategies
A. Corporate-level strategy is a plan of action that

determines the industries and countries an organization
should invest its resources in to achieve its mission
and goals.
B. Concentration on a Single Industry: This is a

corporate-level strategy in which a company reinvests
its profits to strengthen its competitive position in its
current industry.
C. Vertical Integration: It is the corporate-level
strategy that involves a company expanding its
business operations either backward into a new
industry that produces inputs for the company’s
products (backward vertical integration) or forward
into a new industry that uses, distributes, or sells the
company’s products (forward vertical integration).
1. Managers pursue vertical integration because

it allows them to either add value to their
products by making them special or unique or
to lower the costs of making and selling them.
6-11
Education.
2. Although vertical integration can increase an

organization’s performance, it can also reduce an
organization’s flexibility to respond to changing
environmental conditions.
3. Vertical integration may sometimes reduce a

company’s ability to create value when the
environment changes. Therefore, many companies
divest themselves of units that draw attention and
resources away from an organization’s primary
purpose.
D. Diversification: It is the strategy of expanding
operations into a new business or industry in order to
produce new goods or services There are two main
types of diversification: related and unrelated.
1. Related Diversification: It is the strategy of

entering a new business or industry to create a
competitive advantage in one or more of an
organization’s existing divisions or businesses.
a. Synergy is obtained when the value created

by two divisions cooperating is greater than
the value that would be created if the two
divisions operated separately.
b. To pursue related diversification LO 6-3: Differentiate

successfully, managers seek new businesses in between the main
which existing skills and resources can be types of corporate-
used to create synergies. level strategies
and explain how
2. Unrelated Diversification: Managers pursue they are used to
unrelated diversification when they establish strengthen a
divisions or buy companies in new industries that company’s
are not related to their current businesses or business-level
industries. strategy and
competitive
a. By pursuing unrelated diversification, advantage.
managers can buy a poorly performing
company and use their management skills to POWERPOINT SLIDES 6-30
turn around its business, thereby increasing its TO 6-43
performance.
b. Unrelated diversification allows managers

to engage in portfolio strategy, which is the
practice of apportioning financial resources
among divisions to increase financial returns
and spread risks among different businesses.
6-12
Education.
E. International Expansion: Corporate-level TEXT REFERENCE

managers must decide on the appropriate way to
compete internationally.
1. If an organization needs to sell its products

abroad or compete in more than one national MANAGEMENT INSIGHT:
market, managers must ask themselves to what Revised Strategy Puts Crocs on
extent should their company customize its Sound Footing
product’s features and marketing campaign to suit
Croc makes shoes from
different national conditions. Croslite, a trademarked resin
that makes their shoes
2. Global strategy is selling the same comfortable, soft, and
standardized product and using the same basic lightweight. Founded in 2002,
marketing approach in each national market. Croc hit a popularity peak in
2007, when it sold 50 million
3. If managers decide to customize products and pairs.
marketing strategies to specific national
Yet by 2009, the company was
conditions, they adopt a multidomestic strategy. struggling. Sales were hurt by
the recession and by knockoff
4. The major advantage of global strategy is the shoes that cut into sales of
significant cost savings associated with not having Crocs and helped saturate the
to customize products and marketing approaches. market. Also, there was a
The major disadvantage is that by ignoring backlash from consumers.
national differences, managers are vulnerable to Some people hated the footwear
local competitors. enough to start a social media
campaign against Crocs.
5. The major advantage of multidomestic strategy To recover, the company
is that by customizing product offerings and expanded its shoe line to
market approaches, managers are able to gain include more fashionable—but
market share or charge higher prices. The major still comfortable—shoes. In
disadvantage is that customization raises 2013, the company fired its
production costs and puts the company at a price CEO and secured a $200
disadvantage. million investment from the
private equity firm Blackstone.
F. Choosing a Way to Expand Internationally:
To reduce losses in 2014, the
Before setting up foreign operations, managers must company closed stores and laid
analyze the forces in the environment of a particular off employees in an effort to
country and choose the best method to expand and return to profitability. (pp. 210-
respond to those forces in the most appropriate way. 211)
1. Importing and Exporting: A company

engaged in exporting makes products at home and
sells them abroad. A company engaged in
importing sells products at home that are made
abroad (products it makes itself or buys from other
companies).
2. Licensing and Franchising:
a. In licensing, a company allows a foreign

organization to take charge of both
6-13
Education.
manufacturing and distributing one or more of TEXT REFERENCE

its products in the licensee’s country or region
of the world in return for a negotiated fee.
b. In franchising, a company sells to a foreign

organization the rights to use its brand name
and operating know-how in return for a lump Management Insight:
sum payment and a share of the franchiser’s Would You Like Some
profits. Fritos with That Diet Pepsi?
3. Strategic Alliances: In a strategic alliance, The history of PepsiCo tells a

managers pool or share their organization’s tale of related and unrelated
resources and know-how with those of a foreign diversification. Best known for
company, and the two organizations share the the soda from which it gets its
rewards or risks of starting a new venture in a name, it merged with Frito-Lay,
foreign company. Inc., in 1965 to become
PepsiCo.
a. A joint venture is a strategic alliance
among two or more companies that agree to Along the way, it has
jointly establish and share the ownership of a diversified into many products
new business. related and unrelated to its
beverage and packaged snack–
b. Risk is reduced and a capital investment is food businesses. For example,
generally involved. in unrelated diversification, the
company once owned several
restaurant chains. An example
of related diversification
4. Wholly Owned Foreign Subsidiaries: When includes the 1998 purchase of
managers decide to establish a wholly owned Tropicana, which enabled
foreign subsidiary, they invest in establishing PepsiCo to move into juices.
production operations in a foreign country,
independent of any local direct involvement. This
method is much more expensive than the others but Activist investor Nelson Peltz
also offers high potential returns. would like to see PepsiCo split
its beverage and food units
VII. Planning and Implementing Strategy apart. He argues that the two
units would be stronger apart
After identifying appropriate strategies, managers than they are together by
confront the challenge of putting those strategies into offering investors stronger
action. Strategy implementation is a five-step process: growth in sales.
However, Warren Buffet

1. Allocating responsibility for implementation to
disagrees, claiming that the
the appropriate individuals or groups. beverage and food units are
both sound and work well
2. Drafting detailed action plans that specify how a together. In addition, PepsiCo
strategy is to be implemented. CEO Indra Nooyi insists that
beverages and snacks go
3. Establishing a timetable for implementation that together, both for consumers
includes precise, measurable goals linked to the and for business logistics.
attainment of the action plan.
For now, PepsiCo is keeping its
beverage and food units
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Education.
4. Allocating appropriate resources to the together.(pp. 214-215)

responsible individuals or groups.
5. Holding specific individuals or groups

responsible for the attainment of corporate,
divisional, and functional goals.
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Education.
LO 6-4: Describe the vital

role managers
play in
implementing
strategies to
achieve an
organization’s
mission and
goals
POWERPOINT SLIDES 6-44

TO 6-45
6-16
Education.
LECTURE ENHANCERS
Lecturer Enhancer 6.1

THE IMPORTANCE OF MISSION STATEMENTS
Mission statements can be defined as ―enduring statements of purpose that distinguish one organization
from similar enterprises.‖ A mission statement should define the exact nature of a company’s business for
each of its group of stakeholders with which it is involved. Business Weeks Magazine reports that firms
with well-crafted mission statements have a 30% higher return on certain financial measures than firms
that lack such documents. In addition, a number of academic studies suggest there is a positive
relationship between mission statements and organizational performance.
Researchers suggest that a well-crafted mission statement can insure unanimity of purpose, arouse
positive feelings about the firm, provide direction, serve as a focal point, provide a basis for objectives
and strategies, and resolve divergent views among managers.
In every organization, there a differing views among managers regarding direction and appropriate
strategies. Discussing these issues in the course of developing a mission statement can help resolve these
divergent views. This can be especially important to firms facing restructuring, downsizing, or faltering
performance.
A mission statement should also be inspiring. The reader should want to be a part of an organization after
reading it. It should also be enduring, project a sense of worth, intent, and effectively communicate shared
organizational expectations. The intrinsic value of the firm’s product should also be clearly articulated.
Some research suggests that there is a great deal of room for improvement in the mission statements of
some companies. The expected payoff from improving its mission statement is enhanced communication,
understanding, and commitment among managers and employees. This translates into enhanced
individual and organizational performance.
Adapted from” It’s Time to Redraft Your Mission Statement,” Journal of Business Strategy, Vol. 24, No.1,
p. 11.
Lecturer Enhancer 6.2

SCENARIO PLANNING
Consider the horrors of 9/11 and the anthrax scares that followed, the Enron scandal, and the economic
jitters caused by heightened tensions in the Middle East. Each of these occurrences has contributed
significantly to the turbulence of the current business environment. If scenario planning was unable to
help managers foresee and prepare for these specific developments, does that mean that it should be
discredited as a managerial activity? Not if you understand what scenario planning is designed to do,
believes Paul Schoemaker, a research director at the University of Pennsylvania’s Wharton School. He
says scenario planning was never intended to be substitute for crisis planning. It is, in fact, the opposite of
a one-track preparation for a single event. If a company is using scenario planning to prepare for specific
crises, they are missing the point. The purpose of scenario planning is to broaden the array of possible
future paths that are being contemplated by an organization. Those future paths can hold either
opportunities or threats. If a company sees that they are on a different path than the one they are expected
to be on, scenario planning provides the option to switch.
6-17
Education.
Below are a few examples of companies that have engaged in scenario planning. Past events have taught
them to prepare for the future by envisioning a variety of paths that may need to be traveled, given the
uncertainty in which we all live.
WHAT IF your risk profile shifts dramatically? U.S. insurers rethought risk-sharing in the wake of 1992's
Hurricane Andrew, which caused a then-record $16.8 billion in losses. Primary insurers (think Allstate)
began to share risk more broadly among themselves and sell off more to reinsurers (think Lloyds of
London), which provide surplus coverage for major losses. These insurers upgraded their computer
models to predict payouts and avoid overextending themselves. As a result, the insurance industry expects
to fare better today even though the damages from future attacks could easily surpass those of Hurricane
Andrew.
WHAT IF demand suddenly falls off? How can a company quickly find allies who could help it
consolidate the industry and save jobs? Arrow Electronics (Melville, N.Y.), a distributor of electronic
components and computer products, faced such a dilemma when computer sales flattened in 1985. Arrow,
the industry's scrappy No. 2 player, was able to acquire the No. 3 player. This swift move catapulted
Arrow to the No.1 position, which it still holds. Chairman Stephen Kaufman says his company's outward
focus has enabled it to react more quickly than its competitors. Companies today should take a cue from
Arrow reviewing their competitive landscape and thinking through merger scenarios.
WHAT IF global events disrupt your supply chain? Compare General Motors' plight in the days after
September 11th to Dell's. GM had to close down factories in Ontario due to parts delays at the Canadian
border. Dell, which has built one of the world's best supply chain networks, chartered an airliner to fly
parts from Taiwan to its Texas factory, ran factories day and night, and converted three 18-wheel trucks
into mobile technology and support facilities in order to supply 24,000 computers to New York City and
Washington, D.C.
WHAT IF prices drop precipitously? The high-cost producer sets the price during boom times, and most
competitors make money. In difficult times, the low-cost producer sets the price, thereby controlling the
level of competitors' profit margins. Intel has cut
prices on its microprocessors by 35%. Dell halved its prices and still makes money—not so for some of
its competitors. The speed of the economy's decline underscores the importance of relative cost position.
Therefore, firms must scrutinize their purchasing costs and cycle times relative to their competitors, detect
the inefficient processes, and fix them.
Adapted from “Five Reasons why You Still Need Scenario Planning,” Harvard Management Update,
June 2002 and “How to Think Strategically in a Recession, Harvard Management Update, November
2001
MANAGEMENT IN ACTION
Notes for Topics for Discussion and Action
DISCUSSION
1. Describe the three steps of planning. Explain how they are related.
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Education.
The first step in planning involves determining the organization’s mission and goals. The second step is
formulating strategy in which managers analyze the organization’s current situation and then conceive
and develop the strategies necessary to attain the organization’s mission and goals. The third step is
strategy implementation, in which managers decide how to allocate the resources and responsibilities
required to put those strategies into action so that change will occur within the organization. The first
step, determining the organization’s mission and goals, guides the following two steps in the planning
process by defining which strategies are appropriate and which are inappropriate.
2. What is the relationship among corporate-, business-, and functional-level strategies, and how do they
create value for an organization?
A corporate-level strategy is a plan that indicates in which industries and national markets an organization
intends to compete. A business-level strategy indicates how a division intends to compete against its
rivals in an industry. A functional-level strategy is a plan of action that managers of individual functions
can follow to improve the ability of each function to perform its task-specific activities. In a planning
process, it is important that there is a consistency in planning across the three divisions. When
consistency is achieved, the organization operates with increasing efficiency and effectiveness.
3. Pick an industry and identify four companies in the industry that pursue one of the four main business-
level strategies (low-cost, focused low-cost, etc.).
Within the commercial airline industry, American Airlines attempts to differentiate itself by maintaining a
reputation of providing superior service on a national level. Jet Blue pursues a focused differentiation
strategy, since it also attempts to distinguish itself by providing superior service but only in secondary
hubs. Southwest has successfully executed a low cost strategy for many years. Sprint Airlines is also
pursuing a low cost strategy, but like Jet Blue, is restricted to servicing only secondary hubs.
4. What is the difference between vertical integration and related diversification?
Related diversification is a strategy that entails entering a new business or industry with the intention of
creating a competitive advantage by capitalizing on a current strength or core competency. Related
diversification adds values to the company when managers can find ways for its various divisions or
business units to share their valuable skills or resources so that synergy is created. Vertical integration is a
strategy that entails entering a new business that either produces inputs for the company’s products
(backward vertical integration) or assists in the distribution or selling of the company’s products (forward
vertical integration).
ACTION
6. Ask a manager about the kinds of planning exercises he or she regularly uses. What are the purposes of
these exercises, and what are their advantages or disadvantages?
(Note to Instructors: Student answers will vary. The answers could include the techniques given below,
or similar planning techniques.)
The text discusses two types of strategy planning, SWOT Analysis and the Five Forces Model. SWOT
analysis is the process by which managers identify organizational strengths (S), weaknesses (W),
environmental opportunities (O) and threats (T.) Based on the results of this analysis, managers at the
different levels of the organization then select the corporate-, business-, and functional-level strategies to
best position an organization to achieve its mission and goals.
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Education.
Michael Porter created the Five Forces Model to help managers identify forces in the environment that are
potential threats. He identified five principal factors that are major threats because they affect how much
profit organizations competing with the same industry can expect to make. These five forces include:
1. The level of rivalry among organizations in an industry
2. The potential for entry into an industry
3. The power of the suppliers
4. The power of the customer
5. Substitute products.
7. Ask a manager to identify the corporate- and business-level strategies used by his or her organization.
(Note to Instructors: Students’ answers should include the following information.)
A corporate-level strategy is a plan of action concerning which industries and countries an organization
should invest its resources in to achieve its mission and goals. Corporate-level strategies that managers
use include: (1) concentration on a single business, (2) diversification, (3) international expansion, and (4)
vertical integration.
A business-level strategy is a plan to gain a competitive advantage in a particular market or industry.

Managers choose to pursue one of four basic kinds of business-level strategies: a low-cost strategy, a
differentiation strategy, a focused low-cost strategy or a focused-differentiation strategy.
AACSB: Analytic
BUILDING MANAGEMENT SKILLS

How to Analyze a Company’s Strategy
Pick a well-known business organization that has received recent press coverage and that provides its
annual reports at its Web site. From the information in the articles and annual reports, answer these
questions:
(Note to Instructors: Prior to assigning this activity, it would be beneficial to ensure that your
institution’s library maintains ten years of stockholder reports. Otherwise, it could be an extremely time
consuming process for your students to track down this information. An alternative is to reduce the length
of time covered by the assignment. Students’ answers will vary based on the company that they have
chosen.)
1. What is (are) the main industry(ies) in which the company competes ?
(Note to Instructors: Students’ answers may vary. The answer given below is indicative.)
Victory Suitings Inc. was a clothing line established in 1970. It was mainly aimed at businessmen and
executives. Its suits and other formal wear were in great demand among the business class. The company
began its production with shirts, trousers, and suits, but quickly moved onto ties and shoes. In 2004, it
decided to expand its market by establishing a clothing line exclusively for children called Victory
Kidswear. This establishment focused on casual and formal clothes for children. Today, it attracts many
customers toward both its clothing lines.
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Education.
2. What business-level strategy does the company seem to be pursuing in this industry? Why?
When the company first started, it pursued a focused differentiation strategy, in which it only served the
business -class. Later, it used a differentiation strategy wherein it introduced formal wear for children
which were absent in most of its competitors. This allowed the company to appeal to all kinds of
consumers and to establish its own brand image.
3. What corporate level strategies is the company pursuing? Why?
The company is pursuing the corporate-level strategy of concentration on a single industry, wherein it has
never detached itself from the clothing line. This allowed the managers to increase its efficiency as it is
only focusing on a single industry. It has also used the related diversification strategy, wherein it has tried
to create a competitive advantage within its own organization. Through related diversification, the
company has obtained synergy, wherein the two divisions coordinate their actions to improve the
performance of the company.
4. Have there been any major changes in its strategy recently? Why?
The company has not made any recent changes to its strategies because focusing on a single industry has
allowed the company to satisfy all the customers’ needs. If there is an indication of an increased level of
competition, the company can pursue other strategies to expands its businesses.
AACSB: Analytic
MANAGING ETHICALLY
1. Either by yourself or in a group, decide if this business practice of paying bribes is ethical or unethical.
In a market economy, it is assumed that an organization’s ability to generate revenue is the result of its
ability to develop a quality product with an attractive price and successfully market it. By distorting free
market mechanisms over the long run, can impede the ability of a nation’s economy to grow. Bribery also
impedes economic growth by discouraging foreign direct investment from investors who are unwilling to
incur the additional cost of paying a bribe to a middleman who adds no value to the end product.
Allowing a small handful of government officials to benefit at the expense of an entire nation and its
economy is clearly an unethical and unbalanced situation.
2. Should IBM allow its foreign divisions to pay bribes if all other companies are doing so?
The payment of bribes violates the U.S. Foreign Corruption Practices Act, which forbids payment of
bribes by U.S. companies to secure contracts abroad. Companies in violation of this law can be
prosecuted in the U.S. Also, IBM takes a rigorous stance toward ethical issues. Allowing the practice of
bribery would send the wrong message to its employees. Mature ethical development requires that
managers remain committed to their organization’s values, regardless of what is going on around them.
3. If bribery is common in a particular country, what effect would this likely have on the nation’s
economy and culture?
6-21
Education.
Bribery by its competitors, according to one U.S. government study, cost American business $11 billion
in a single year. In Germany, a legislator estimated that companies in his nation spend as much as $5.6
billion a year on bribes. Clearly, the diversion of such a large amount of any nation’s resources from its
production efforts creates inefficiency in its economy and is therefore counterproductive to growth.
Bribery also encourages a creeping erosion of honesty, trust, and other human values that rest at the
foundation of a healthy culture.
AACSB: Analytic
AACSB: Reflective Thinking
SMALL GROUP BREAKOUT EXERCISE

Low Cost or Differentiation?
Form groups of three or four people, and appoint one member as the spokesperson who will communicate
your findings to the class when called on by the instructor.
1. Using SWOT analysis, analyze the pros and cons of each alternative.
A. Option #1: Buy abroad, lower prices, and pursue low cost strategy.
PROS:
We can effectively compete with the threats of Target and Wal-Mart, focus upon attracting a larger
volume of customers, and thereby increase our market share. Also, relationships we build with foreign
suppliers may serve as means of allowing us to create a new opportunity by expanding our sales into
foreign markets. Doing this strategy will make our low-cost clothing a strength and eliminate the potential
weakness of our high-end clothing.
CONS:
A great deal of time must first be devoted to research, if this strategy is to be implemented effectively. To
make our low-cost clothing into a strength, we must first identify a reliable foreign manufacturer capable
of producing high quality clothing at a lower cost. We must then build a relationship with them and
determine a way of maintaining control over a manufacturing process that is occurring in a distant part of
the world. Also, our marketing department must develop less expensive ways of effectively reaching our
target audience. Sufficient resources (time, money, and knowledge) must be made available to conduct
this research.
Option #2: Differentiate and concentrate on high end of market.

PROS:
We can effectively compete with the threat of mall boutiques that are stealing our high-end customers.
We can charge premium prices and justify them with the superior quality of our products, thereby
creating a strength for our company. By focusing on the high end of the market, we can create a new
opportunity by building brand image of superiority and quality. Such a brand image can help us build a
cadre of loyal consumers, which contributes greatly to long-term viability of the business.
CONS:
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Education.
This strategy is expensive. To make high-end clothing into a strength, we will have to increase spending
on product design or R&D to differentiate their product, forcing costs upward as a result. We must spend
more money on advertising, in an attempt to create a unique image for our store. In addition, it may prove
difficult to develop a competitive advantage that allows the consumer to perceive us as superior and
unique, in comparison to well-established boutiques. Even if we match the high quality of their products,
we may not be able to provide the individual attention that is found at smaller stores. The entrenched
brand loyalty that many of these boutiques enjoy can be hard to overcome. Therefore, pursuing this
strategy could develop a weakness instead of a strength for our company.
Option #3: Pursue a low cost and differentiation strategy.

PROS:
The ability to pursue both strategies simultaneously will result in maximum profitability, since we can
justify premium pricing while also enjoying low costs. Also, we can attract two very different categories
of consumers – those seeking value and those seeking superior quality. By doing this, we can handle the
threats posed by both the low-cost clothing companies and the boutique companies. The broad range of
our clothing will become our strength.
CONS:
We may be courting disaster, since it is very difficult to pursue both of these strategies at the same time.
Very few companies have successfully done so. Differentiation usually causes costs to rise, which makes
discount pricing prohibitive. Porter refers to this as ―stuck-in-the-middle.‖ As a result, the threats posed
by the low-cost clothing companies and the boutique companies will increase and the broad range of our
clothing will become a major weakness.
2. Think about the various clothing retailers in your local malls and city, and analyze the choices they
have made about how to compete with one another along the f low cost and differentiation dimensions.
One way high-end retailers attempt to differentiate themselves is by providing a great deal of customer
service. Salespersons are always available to assist customers and answer their questions. Their return
policy is usually very liberal. Other examples of personalized customer service include keeping track of
customers’ birthdays and telephoning to alert them of special events or promotions related to their
favorite brands. These stores also use attractive physical appearance as a means of differentiating
themselves from their low cost competitors. Their stores are brightly lit and attractive, the aisles are wider
and carpeted, and soft music is played. Displays are attractive and merchandise is always neatly arranged.
While both types of retailers hold sales to attract customers, low cost retailers engage in this promotional
technique much more frequently. The low cost competitors usually have fewer salespersons available to
assist customers and their buildings are less appealing visually.
AACSB: Reflective Thinking
BE THE MANAGER
Questions
1. List the supermarket chains in your city and identify their strengths and weaknesses.
6-23
Education.
Answers to this question will vary, depending upon the area of the country in which the students reside
and the size of the local shopping area. You could recommend using a SWOT approach to compare the
various each of the competitors in your specific area. This industry has many different types of
competitors, ranging from mass merchandisers such as Meijers and Kmart to small mom-and-pop grocers
and farmers' markets. After identifying all of the competitors, students can begin analysis of each using
the planning tools presented in the chapter.
2. What business-level strategies are these supermarkets currently pursuing?
Discounters such as Cub and Aldi (www.aldifoods.com) are using a low-cost strategy. Specialty retailers
such as Wild Oats and Whole Foods are using a differentiation strategy.
3. What kind of supermarket would do best against the competition? What kind of business-level strategy
should it pursue?
The response to this question depends upon the variety of competitors identified in the first question.
Answers should include a rationale that explains why a particular strategy would work. For example, if
students feel that a new store should use a focused differentiation strategy to compete effectively, possible
justifications may include demographic data that is descriptive of households in the surrounding
community or awareness of a potentially lucrative market niche currently untapped by the competition.
AACSB: Analytic
BLOOMBERG BUSINESSWEEK CASE IN THE NEWS
Case Synopsis: Microsoft CEO Satya Nadella Looks to Future Beyond Windows
Microsoft had come to be perceived as an out-of-touch behemoth that relied too much on its
Windows operating system and failed to move into new markets, like mobile. The company’s
new CEO, Satya Nadella, has aggressively looked outside of Windows to develop new business
models. Since December, Microsoft has bought two small companies that focus on mobile
productivity apps. In Nadella’s first year, Microsoft stock rose 14 percent, and sales increased 12
percent. Also, the new CEO, unlike his predecessor Steve Ballmer, is popular with investors,
venture capitalists, and startups.
The big issue Nadella faces is how to generate more revenue with new software and features,
such as cloud subscriptions and free apps that replace pricey Windows and Office licenses.
Windows, which once dominated computing and ran on more than 90 percent of computing
devices, now runs on 11 percent of computers and gadgets.
Nadella uses the Power BI dashboard to track and compile huge amounts of information on
product usage and financial performance to see what works and what doesn’t. Nadella also
measures and coordinates executive performance with metrics from the dashboard. Nadella has
also changed the way engineering teams are structured, eliminating testers to speed up software
releases and adding data scientists and designers to the teams.
6-24
Education.
Questions
1. What kind of planning missteps helped cause Microsoft’s decline over the past few years?
Microsoft relied too much on its Windows operating system and failed to move into new markets,
like mobile. Key products such as Microsoft Office—the suite of applications that includes Word
and Excel—had been designed around Windows, with only parts converted to work on Apple’s
iOS and Google’s Android systems.
2. How is Nadella trying to eliminate some of the bureaucracy that has hurt the company’s
ability to innovate?
Nadella told employees at a town hall that they should skip meetings if they don’t really need to
be there. And he’s advised workers to come to him directly if they feel the bureaucracy is stifling.
Nadella also changed the way engineering teams are structured, eliminating testers to speed up
software releases and adding data scientists and designers to the teams. He’s looking at cutting
some middle managers to make decisions faster and to eliminate layers of bureaucracy.
3. What business strategies has Nadella implemented that will help revitalize the technology
giant?
Microsoft bought two small companies that focus on mobile productivity apps and released a
new dashboard for data analysis. Nadella uses the Power BI dashboard to track and compile
huge amounts of information on product usage and financial performance to see what works and
what doesn’t. Nadella also measures and coordinates executive performance with metrics from
the dashboard.
AACSB: Analytic
SUPPLEMENTAL FEATURES
MANAGER’S HOT SEAT (MHS)

Project Management: Steering the Committee
SELF-ASSESSMENT(S)
There is no self-assessment for this chapter
TEST YOUR KNOWLEDGE
6-25
Education.
Elements of Planning Process

SWOT Analysis
Porter’s Five Forces
INSTRUCTOR’S POWERPOINT SLIDES
These Instructor’s PowerPoint slides can be used to supplement the lecture material.
INSTRUCTOR’S INSTRUCTOR’S INSTRUCTOR’S

POWERPOINT SLIDE 1 POWERPOINT SLIDE 2 POWERPOINT SLIDE 3
Chapter Title Learning Objectives Planning and Strategy

Question? Mission Statement Figure 6.1 - Three Steps in
Planning
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Education.

Why Planning is Important Why Planning is Important Why Planning is Important

Figure 6.2 - Levels of Levels and Types of Figure 6.3 - Levels and
Planning at General Planning Types of Planning
Electric

Levels and Types of Levels and Types of Time Horizons of Plans
Planning: Business-Level Planning: Functional Level
6-27
Education.

Types of Plans Standing Plans Single-use Plans

Figure 6.4 - Three Mission Defining the Business Establishing Major Goals
Statements

Strategic Leadership Figure 6.5 - Planning and Formulating Strategy:
Strategy Formulation SWOT Analysis
Low-cost and
Differentiation
6-28
Education.

The Five Forces Model The Five Forces Model: Formulating Business-
Hypercompetition Level Strategies

“Stuck in the Middle” Focused Low-cost and Formulating Corporate-
Focused Differentiation Level Strategies
Strategy

Vertical Integration Figure 6.6 - Stages in a Question?Global Strategy
Vertical Value Chain
6-29
Education.

Diversification Related Diversification Unrelated Diversification

International Expansion Multidomestic Strategy Figure 6.7 - Four Ways of
Expanding Internationally
INSTRUCTOR’S POWERPOINT INSTRUCTOR’S POWERPOINT INSTRUCTOR’S POWERPOINT

SLIDE 40 SLIDE 41 SLIDE 42
Exporting and Importing Licensing and Franchising Strategic Alliance and Joint
Venture
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Education.

Wholly Owned Foreign Planning and Implementing Planning and Implementing
Subsidiary Strategy Strategy

Be the Manager Topics for Discussion Topics for Discussion
INSTRUCTOR’S POWERPOINT INSTRUCTOR’S POWERPOINT

SLIDE 49 SLIDE 50
Topics for Discussion Topics for Discussion
6-31
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McGraw-Hill Education.

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Essentials of Contemporary

Management 7th Edition Jones

Learning Objectives 6-2

LO 6-2. Differentiate between the main types of business-level strategies

LO 6-3. Differentiate between the main types of corporate-level strategies

LO 6-4. Describe the vital role managers play in implementing strategies to

franchising: Selling to a foreign organization the

NOTE ABOUT INSTRUCTOR’S POWERPOINT

The Instructor PowerPoint Slides include most Student

(INSTRUCTOR’S POWERPOINT SLIDE 1)

Management Snapshot (pp. 193-194 of text)

PLACE SLIDE 2 HERE

LO 6-1: Identify the three

1. The first step is determining the organization’s

2. The second step is formulating strategy.

3. The third step is implementing strategy.

POWERPOINT SLIDES 6-7 TO

B. Why Planning Is Important

1. Planning is necessary to give the organization a

2. Planning is a useful way of getting managers to

3. Planning helps coordinate managers of the

4. Planning can be used as a device for controlling

C. Henri Fayol said that effective plans should have

1. Unity means that at any time only one central

2. Continuity means that planning is an ongoing

3. Accuracy means that managers should attempt

4. The planning process should have enough

D. Levels of Planning: In large organizations,

1. At the corporate level are the CEO, other top

2. At the business level are the different divisions

3. Each division has its own set of functions or

R&D, human resources, etc.

1. The corporate-level plan contains top

2. Corporate-level strategy indicates in which

3. At the business level, the managers of each

4. Business-level strategy states the methods a

5. A functional-level plan states the goals that the

6. Functional-level strategy is a plan of action to

1. Long-term plans have a horizon of five years

2. Intermediate-term plans have a horizon

3. Short-term plans have a horizon of one year or

4. A corporate-level or business-level plan that

G. Standing Plans and Single-Use Plans

1. Standing plans are used in situations in which

2. Single-use plans are developed to handle

a. Programs, which are integrated sets of

b. Projects, which are specific action plans

A. Defining the Business: To determine an

1. Who are our customers?

2. What customer needs are being satisfied?

3. How are we satisfying customer needs?

B. Establishing Major Goals: Once the business is

1. Strategic leadership, the ability of the CEO

2. Goals typically possess the following

a. They are ambitious, that is, they stretch the

b. They are challenging but realistic—a goal

managers to give up.

c. The time period in which a goal is expected

Motors to grow globally and to

1. Differentiating the product to increase its value

2. Lowering the costs of making the product

Porter also argues that managers must choose

1. With a low-cost strategy, managers try to gain

2. Organizations pursuing a low-cost strategy can