©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

........................................................................................................................................................................................................................................................................................................................................................................................................................................................................................... 88 Alliances & Partnerships .......................................................................................................................................................... 107 Dilemma or Decision? ................................... 94 Why Go Into Foreign Markets? .............................. 100 Chapter 8 Ethics ................................................................................................................................................................................................................................. 115 Perpetuation & Evolution ............................................................................ 109 Why be Ethical? ........................................ 101 Ethical Philosophies ...................................... 103 Ethical Relativism .............. 114 Overview ......................... 112 Why be Socially Responsible? ...................... 107 What Drives Unethical Behavior in Business? ............................ 113 Chapter 10 Organizational Culture ............................. 92 Chapter 7 Foreign Markets ..................................................................................................................................................................................................................... 104 Integrative Social Contracts ............................................................................................................................................................................................................ 122 What Needs to Be Done ............... 107 The Billboard or Mother Rule ........................................................................................................................................ 118 Ally or Obstacle? ............................................................................................................................................................................................................ Market................................................................................................................................................ 111 A Duty to… ............................................................................................................................... 108 Managing Ethics ............................................. 106 The Golden Rule .......................................................................... 122 Some Additional Information… ........................................................................................ 105 Ethical Utilitarianism ................................................................................................................................................................................................................ 94 Overview ....................................................................................................................................... 119 Changing Culture............................................... 99 Local or Global?............................................................... 91 Mergers & Acquisitions .......................................................................... 99 Emerging Market Strategies ...................................................................................................................................................................................................... 95 Strategies for Entering Foreign Markets ................................................................................... 119 Chapter 11 Implementation............................................................................................... 94 Definitions ............................................................................................................................................. 111 Overview ...................................................................................................................................................................................................Integration .......................... & Political Differences .............................................................. 101 Ethical Universalism ................................... 110 Chapter 9 Social Responsibility .................................................................... 85 Diversification ........................................................................................................................... 101 Overview ....................... 126 ............................................................................................ 114 Key features ................................................................................................................................................................................................................. 95 Cultural.................................................................................................................................. 115 Types of Cultures ...................................................................................................

There are four basic ways to gain a competitive advantage: low-cost provider.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. take advantage of its value chain. differentiation. best cost or stuck in the middle). These tie directly to the five strategies. niche markets. focused low-cost leadership. and value chain/resource expertise. and increase performance There are five basic business-level strategies: differentiation. grow. low-cost leadership. and hybrid (aka. Notes [1] . focused differentiation.

GOALS Goals are broad statements about what the company wants to accomplish. focused low-cost leadership. These are NOT quantifiable. 3) set up new policies that require new employees to attend training within three months of being hired. Buying raw materials in bulk would be a tactic of the low-cost leadership. or hybrid strategies. ACTION PLAN The action plan details the specifics of how the company is going to achieve its objectives.Chapter 1 Definitions & Overview TACTICS Tactics are the specific ideas of how to execute the strategy. Differentiating on customer service. if our tactic is to differentiate on customer service. the objectives may be 1) Hire an HR training person in the next six months. A company should have both financial and non-financial objectives. 2) have all employees attend at least one training seminar in one-year. and a timeline for completion. Notes [2] . who is going to be responsible. our goal is to train employees. OBJECTIVES Objectives are the quantifiable statements about the goals – the specifics. for example. or hybrid strategies. So. would be tactic of a differentiation. focused differentiation. For example. our goals might be 1) to reduce customer complaints or 2) train the employees. These must be quantifiable in measurement and in time. For example.

but required accessories are expensive. For example. knowledge). Some examples are a business may sell subscriptions. equipment. have a storefront retail outlet. CAPABILITIES Things the company can do. Resources may be tangible (plant. Notes [3] . or sell product inexpensively. COMPETITIVE ADVANTAGE DEFINITIONS RESOURCES Things the company has.Chapter 1 Definitions & Overview BUSINESS MODEL How the company will make sales. the company can make dog food. The following figure shows how the parts of strategy creation work together. the company can hire people. people) or intangible (patents. generally.

not just something it does well. For example. but does VERY well. the resource or capability must have all four. then it has a competency in that area. 3) Hard to Imitate. if the company is good (efficient and effective) at making dog food. Notes [4] . COMPETITIVE ADVANTAGE A competitive advantage is a core competency that a company performs better than its rivals. CORE COMPETENCY A core competency is a competency around which the company can build the organization . 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. SUSTAINABLE COMPETITIVE ADVANTAGE A sustainable competitive advantage is a competitive advantage that lasts for a relatively long time. 2) Valuable. but to gain a sustainable competitive advantage.Chapter 1 Definitions & Overview COMPETENCY Competencies are capabilities the company does well. and 4) Nonsubstitutable. Any three characteristics are good.

Performance may be measured in a variety of ways. Notes [5] . 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. and an automobile manufacturer may consider both profit and number of vehicles sold. For example. but must suit the business. 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.Chapter 1 Definitions & Overview PERFORMANCE Performance is not necessarily measured by the “bottom line” or profits. but not every business will add value at every step. Some only add value through service for example.

HR. and service. INBOUND LOGISTICS Inbound Logistics deals with the planning. materials usage. good hiring practices lower turnover. Sales includes advertising. and building brand name and image. JIT systems. TQM. workflow. and other activities associated with product creation OUTBOUND LOGISTICS Outbound Logistics deals with the planning. receiving. For example. SALES Sales refers to those activities that create demand. sales force management. those activities that add indirect value are R&D. and control of finished products and their distribution. and raw material quality checks. pre-sale customer service. Outbound logistics deals with warehousing. sales. Direct value chain activities are inbound logistics. INDIRECT VALUE Indirect value results from an activity that increases worth in a roundabout way.Chapter 1 Definitions & Overview DIRECT VALUE Direct value is an activity that impacts the product or service in a straightforward and obvious manner. and Administration. warehousing. scheduling. contracting. OPERATIONS Operations is where the firm changes the raw materials into finished goods. which then leads to higher quality service. operations. implementation. Inbound logistics deals with things like supply chain management. and delivery to the buyer. resulting in high morale. technology. Operations deals with machinery. outbound logistics. customer relationship management. and control of raw materials coming into the firm. implementation. Notes [6] . transportation. Also called support activities.

Service includes such things as warranty work. help after the sale. HR HR encompasses such activities as employee policies. as well as the processes used in the business. R&D R&D deals with researching the features and materials used in the product. training. TECHNOLOGY Technology means both information technology and other technology used in both the product and the process. management functions.Chapter 1 Definitions & Overview SERVICE Service activities are those that happen after the sale. ADMINISTRATION Administration covers management. So is using a CRM application. Notes [7] . and other things the company must do to keep its doors open. and other human resource management issues. assistance with making the sale. determining benefits. hiring. Using robots to paint cars is an example. accounting tasks. scheduling. and maintenance. legal activities.

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. it should be removed. Each step in the supply chain adds value because each company has its own value chain.Chapter 1 Definitions & Overview SUPPLY CHAIN The supply chain indicates the suppliers and buyers for your product. Notes [8] . If a step in the supply chain does not add value.

” In order to get the best performance (remember. etc. supply chain issues. resources and capabilities. not necessarily profit). good strategy must:     Fit the resources and capabilities of the firm Fit the industry and company situation Better the company’s performance Help keep or create a Sustainable Competitive Advantage Notes [9] . In order to be successful. the structure (value chain activities. Thus. there must be “strategic fit.) must align with the strategy.Chapter 1 Definitions & Overview STRATEGIC FIT Not all strategies are equally good in any situation. business model.

MISSION.CHAPTER 2 THE STRATEGIC PROCESS STEP I: VISION. 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 [10] . VISION VS. & VALUE STATEMENTS – DETERMINE THE STRATEGY VALUES VS.

.         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. but with a different time focus Notes [11] . 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.Chapter 2 T HINGS TO REMEMBER ..

For Shareholders… A Superior Return.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 Today’s neighborhood general store. For Employees… Respect and Opportunity. and service – Every day! Mission For Customers… Convenience. serving the needs of our customers by providing convenience. and Great Prices. Quality. For Communities… A Better Life [12] . value.

by providing to motorcyclists and to the general public an expanding line of motorcycles. shareholders. Mission We fulfill dreams through the experiences of motorcycling. Government. individuals. Harley-Davidson believes the key to success is to balance stakeholders’ interests through the empowerment of all employees to focus on value-added activities. contactors. international company. affordable.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. Mission The mission of Snowy Mountain Design is to produce innovative. while fostering a family atmosphere with our employees. employees. 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. branded products and services in selected market segments. Notes [13] . and society). management. and clients. a leader in its commitment to continuously improve [its] mutually beneficial relationships with stakeholders (customers. suppliers. and creative web applications to law enforcement agencies. Snowy Mountain Design Values • Integrity above all else • Be fair • Treat others as you wish to be treated • Always do your best. and businesses.

In a nutshell. a company competes either on price or something else. The something else could be customer service. selection. The combination of market size and competitive advantage determines which strategy a company should follow. There are only five business level strategies. quality. mission. 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). These will be covered in more depth in a later chapter.Chapter 2 Strategic Process S TRATEGY Determine which of the generic business strategies best fits your vision. or any combination of things that are NOT price. Price advantage is called Low Cost Leadership. Notes [14] . location. and values.

3) set up new policies that require new employees to attend training within three months of being hired. such as training or decreasing delivery time – A driver o Lagging goals and objectives are those that indicate what has already happened. the objectives may be to 1) Hire an HR training person in the next six months. A company should have both financial and non-financial goals. our goals might be to 1) reduce customer complaints or 2) train the employees. These are NOT quantifiable. if our strategy is to differentiate on customer service. For example. So. For example. Objectives are the quantifiable statements about the goals – the specifics. our goal is to train employees.Chapter 2 Strategic Process STEP 2: SET GOALS DEFINITIONS Goals are broad statements about what the company wants to accomplish. but still obtainable Leading and Lagging o Leading goals and objectives are those that are proactive. 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 [15] . TYPES OF GOALS AND OBJECTIVES   Stretch goals o Goals and objectives that are slightly beyond reach. These must be quantifiable in measurement and in time. 2) have all employees attend at least one training seminar in one year.

Each goal should have at least one objective. [16] . To make the process easier.Chapter 2 Strategic Process BALANCED SCORECARD1 The Balanced Scorecard is a holistic way to look at goals and objectives. create a “scorecard” as illustrated below. a company should have at least one goal. The four elements of the balanced scorecard are For each of the four elements.

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 .

but are still created Top Down. also called the "top management team" or TMT. COO. the discussion will be limited to business unit strategies. functional area. Notes [18] . and operations.Chapter 2 Strategic Process STEP 3: CREATE THE STRATEGIC PLAN WHO IS INVOLVED? Usually all of the "C" level executives (the CEO. Tactics are created at four levels: Corporate. CFO. CIO. Strategies only come in two levels: Corporate and business unit. Managers at each level need to be involved. At this point. etc. and VP of Marketing. business unit.). All of these tactics must be coordinated for the chosen strategy to work.

Chapter 2 Strategic Process THE STRATEGIC MAP A strategic map is a way of visualizing the mission. each of the major goals. Notes [19] . The following graphic shows an example of a strategic map for Snowy Mountain Design. and tactics in one chart. and some of the specific tactics are shown. Notice how each of the balance elements is included. goals. objectives.

but reviewing the plan informally should happen annually. This should be done formally every three to five years at a minimum. the structure of the organization must match the strategy if a company is to get the most performance.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. use the plan. Use the scorecard and the strategic plan to judge achievements and places where changes need to be made. and adjust where necessary. STEP 5: MONITOR & ADJUST A company does not create a strategy plan once – it must read the plan. Notes [20] .

Notes [21] . opportunities. starting broad – at the general level – and narrowing to the firm itself. weaknesses. The SWOT is a recap of three other analyses. and threats (SWOT) the business faces.CHAPTER 3 ENVIRONMENTAL ANALYSIS OVERVIEW One of the most important steps in any strategic plan is determining the strengths.

capabilities. but has nothing to do with the organization itself. the business’ industry is examined.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. and Political and legal. value chain activities are investigated to determine strengths and weaknesses of the business. The macroenvironment examines the general business climate as it relates to the organization’s industry. The acronym for the macro analysis is “STEP. The internal analysis is performed at the firm level. MACRO-ENVIRONMENTAL ANALYSIS The macro-environmental analysis is the first step in creating the final SWOT Analysis. In the micro-environmental analysis. Technology. Information from the macro analysis helps ascertain opportunities and threats. Economic conditions.” Also called “PEST” – just rearrange the letters! The four areas of interest are Socio-cultural and demographics. The information generated in this analysis is used to identify additional opportunities and threats. Notes [22] . Resources. The resulting SWOT list is examined and analyzed to see if the firm’s strengths are enough to outweigh its weaknesses and help mitigate its threats and take advantage of the opportunities. The macro-environment is primarily concerned with major issues and real or predicted changes.

do NOT discuss only the target market. It is important that more people are moving to smaller cities and rural areas. smoking is not as acceptable as it once was. medicine). For example. students going to college are older. 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. people are no longer retiring at 65. science (global warming. healthy eating. and people are more aware of the environment and healthful living styles. this has an impact on the pet store industry. 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. When discussing demographics. biodegradable plastic) are just a FEW examples. It is important that people are living and working longer. Notes [23] . The changes in values and lifestyles may come from many sources: medical (smoking.Chapter 3 Environmental Analysis SOCIO-CULTURAL AND DEMOGRAPHICS Societal values and lifestyles change over time. it has become acceptable for women to work outside the home – or not. foods. exercising). living accommodations. Some changes in values and lifestyles will be important to the industry. but not to your business. in general. going “green”). over the past generation. the current trend is to adopt pets from a shelter.2 years. economic (people working longer. cultural diversity (music preferences. and technologies (Internet dating. It is not important that the population of Billings is growing. women in the workforce). It is not important that the average age of the population of Montana is 35. and the most important of these should be discussed. However. For example. rather than from a pet store.

How might these situations change if the economy improves or worsens? The economic section also deals with unemployment. and other issues that are economic in nature. production techniques – and be sure to include them in the list if they are important. loan availability. The current situation (specific to the industry) and any changes that may be forecast are important. Notes [24] .Chapter 3 Environmental Analysis TECHNOLOGY Technology encompasses more than computers! Remember that technology comes in many forms – medical devices. 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. interest rates. repair people are seeing a large increase. disposable income. new plastics. 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.

what does it tell the business owner? Present the analysis in bullet format with short complete sentences. Additionally. and federal legal information in the business and industry environment. [25] . state. General business laws such as zoning. The major laws and regulations should be discussed. minimum wage. taxes. housing. other human resource issues. or in paragraph form. MACRO-ENVIRONMENT ANALYSIS EXAMPLE Introduce the section – what is it. especially those with pending legislation. environment. veterinary care and so on.Chapter 3 Environmental Analysis POLITICAL AND LEGAL In this section. an analysis is made of pertinent local. and many other issues that may affect a business. especially if changes to the laws are pending or being discussed. taxes. For example. You may use a combination of both. But also consider political ramifications. Independents and Green – all of these parties have fundamentally different views on business. Democrats and Republicans. why do it. a pet store would deal with federal animal welfare and prohibited pet laws as wells as state laws concerning animal cruelty. and OSHA should be mentioned. if needed. an industry may have specific laws and regulations. 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.

generally large cities that are mostly surrounded by rural communities. laws. 2) technology.g. therefore. and legislation.Chapter 3 Environmental Analysis MACRO-ENVIRONMENTAL ANALYSIS (EXAMPLE) The purpose of the macro-environmental analysis is to determine what outside influences may have an effect on the industry.   While pet ownership does not have a specific direct impact on the physical environment. The analysis examines four areas of interest: 1) societal values and lifestyles. Socio-Cultural and Demographics  Pet Adoptions – Adopting pets. 3) general economic conditions. retirement communities and long-term care facilities are allowing residents to bring small pets as companion animals. Barak Obama. regulations. this is not usually the case. however. has recently become a societal issue. Dumping – In some areas. several issues must be considered:  Exotic Pets o May be depleting natural populations o Some people release – they may replace native populations  E. assisted-living. the business. as opposed to buying them. The awareness of animals in shelters has come about from several sources: o A popular president. 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   [26] . This trend is expected to continue and the number of eldercare facilities allowing small pets is expected to increase for the foreseeable future (cite). and 4) politics. and. Some urban people think that an animal dropped at a farm will automatically be taken in by the landowner. dumping unwanted animals in those rural areas seems to be acceptable. 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.

In the next five years the number of people moving from urban or suburban areas to rural areas will increase 27% (cite). and federal laws that are generally required of businesses such as zoning. which may indicate an increased desire for pets (cite). people are spending less. with more children. Additional laws and pending regulations that are specific and important to the industry are: [27] . fancy leashes. a recovery is estimated to begin within the next 18 months. As children leave home. state. Families are larger. taxes. 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. and overtime pay. Pet ownership is deemed acceptable and desirable by most political parties. Pet Stores must adhere to all standard local. o Increase in sales in upscale pet accessories as people feel guilty for “neglecting” their pets when “times were hard. OSHA. EEOC.Chapter 3 Several key factors regarding demographics and population are     Environmental Analysis People are living longer. Economic Conditions The world economy is in a recession. However.  Current recession – In general. or a house that allows them to have pets. Two of the most important are micro chipping and advances in pet store POS systems. “empty nest” syndrome becomes important. Technology Several enhancements in technology have affected the pet store industry.”  Political and Legal Politics play no explicit role in pet stores. which may increase the need or want for companion animals (cite). Many older couples are becoming “pet parents” – lavishing the attention and money on pets rather than their children. its care. 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.

this may not be important.Chapter 3  Environmental Analysis   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. otherwise. [28] . Local Laws o Zoning – many cities or counties limit the number of animals that may be kept within specific zoning areas. 1 ABC Pets hires most of its clerks at minimum wage.65 in Montana.00 on January 1. expected to be raised to $8. 2014.

The analysis looks at five areas of interest. 4) Threat of New Entrants.Chapter 3 Environmental Analysis MICRO-ENVIRONMENTAL ANALYSIS The micro-environmental analysis is the second step in creating the SWOT Analysis. and 5) Intensity of Rivalry. which are 1) Power of the Buyers. The microenvironment examines the general business climate as it relates to the organization within its industry. 3) Threat of Substitute Products. The micro-environment is also known as Porter’s Five Forces of Competition2. Notes [29] . how these five areas interact and influence each other. The micro-environment is primarily concerned with major issues and upcoming changes in the environment. 2) Power of the Suppliers. Notice in the following diagram.

the buyers’ power increases. S IZE & N UMBER Power increases when the buyer places large volume sales. the buyer’s power goes up. D EMAND When demand for the product is weak. one does so from the firm’s point of view. 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. or dramatically slows. It is easier for them to defect to another product or brand. S WITCHING C OSTS Power of buyers is higher when buyers have low switching costs. Notes [30] . Switching costs may be either monetary or psychological or both. The results of this analysis are not clear cut. the buyers are the FIRM’S buyers. declining. Think out each issue and how important it is to the overall element. Some effects may increase power or threat and other may decrease power or threats. However. Power also increases when only a few buyers exist. it is possible that a large number of small buyers can band together in order to affect the firm. This situation is called a “buyer’s 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.Chapter 3 Environmental Analysis When discussing the five forces. Usually these indicate that the firm is dependent on the buyer for some degree of survival. the suppliers are the FIRM’S suppliers.

his power increases. lack of brand loyalty. buyer power increases. S WITCHING C OSTS Power of suppliers is lower when the firm has low switching costs. including HUMAN). (Remember this includes ALL inputs. the suppliers’ power goes up. Notes [31] . the more power he has. S UBSTITUTE P RODUCTS When the threat of substitute products is high. then buyers have higher power. their power goes up because they can compare options. If a purchase must be made immediately or very quickly. C OMMODITY If the product is a commodity (usually does not have a recognizable brand name or is readily available). and make better decisions. The more choices a buyer has. N UMBER OF S UPPLIERS When there are few suppliers of the needed good or service. It is easier for the firm to defect to another product or brand. 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. availability.Chapter 3 Environmental Analysis I NFORMATION When the quality and quantity of information to which the buyers have access is high. This is caused by low switching cost. I MMEDIACY If the buyer can postpone the purchase. Switching costs may be either monetary or psychological or both. prices. the buyer has fewer options and his power decreases. etc.

S UBSTITUTE P RODUCTS When the threat of substitute products is high. the supplier’s power is increased.” S PECIALIZATION When the product is highly specialized or customized. declining. D EMAND When demand for the product is weak. 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. if there is a strong threat that the firm can backwardly integrate (buy the supplier). When demand is strong or quantities are limited. They are the same basic product (soda). the situation is called a “seller’s market. the supplier’s power decreases. Usually this indicates that the supplier is dependent on the firm for some degree of survival. I NTEGRATION When there is a strong possibility that suppliers can integrate forward (buy its buyers – the firm) their power increases. Notes [32] . then supplier power decreases. The more choices the firm has. the more power he has. Please note that this does NOT MEAN BRAND SUBSTITUTION. They serve the same purpose – to get you somewhere else.Chapter 3 Environmental Analysis S IZE Power decreases when the firm places large volume sales. The increase happens because specialization and customization limit the number of possible suppliers. On the other hand. Traveling by train is a substitute for flying. supplier power decreases. or dramatically slows. Coke is a substitute BRAND for Pepsi. This is a substitute product (or service).

or other reasons. then the threat is higher. the threat is reduced. For example. final destination. Switching costs may be monetary or psychological. Buyers may prefer the features of the substitute product or service. thus the threat is higher. Notes [33] . the buyer has more choices. the threat is increased.Chapter 3 Environmental Analysis A VAILABILITY OF G OOD S UBSTITUTES A “good” substitute is one that is viable. A product or service usually has a substitute. the more power a buyer has to choose the substitute. if a buyer is not comfortable with the substitute product for any number of reasons. riding a horse may be a substitute for flying somewhere. S WITCHING C OSTS If a buyer has low switching costs. thus increasing the threat that the buyer will use a substitute product or service. or has better features. C OMFORT L EVEL When a buyer is comfortable with a substitute. the key question one must ask is “is it a good substitute?” The more good substitutes available. but it may not be a “good” substitute because of time constraints. cost. the threat that they will choose a substitute product or service is increased. or based on the ease of substitution. On the other hand. F EATURES If the substitute is basically the same. P RICE When a substitute is attractively priced.

etc.) are high. The ideal situation for a firm is to be in an industry where entry barriers are high and exit barriers are low.Chapter 3 Environmental Analysis 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. G APS If current competition has gaps in product/service segments or geographic coverage. This allows firms to exit easily.the more profitable the industry. then the threat of a new entrant is lower. but limits the number that will increase competition. thus the threat is lowered. the threat of new entrants increases . When it is easy for a company to leave an industry (exit barriers). the chances that someone will come in to fill the void increases. patents. capital. Notes [34] . the higher the threat. the threat increases as well. C USTOMER L OYALTY The more loyal customers are to existing brands. the less chance the buyers will switch to another brand. P ROFIT When an industry is profitable.

the advantage is with the firm. the higher the intensity of rivalry. price. firms in the industry will become more aggressive. The more attractive the industry. or when sellers have excess inventory or capacity. When supplier power is low. generally the intensity decreases. D EMAND When buyer demand is slowing.Chapter 3 Environmental Analysis I NDUSTRY A TTRACTIVENESS – I NTERACTION OF THE 5 F ORCES When buyer power is low. Finally. Each firm is fighting against issues such as brand loyalty. A low threat of substitute products also makes an industry attractive to a potential rival. features. High power of buyers and suppliers make firms more aggressive. thereby increasing the attractiveness of the industry. When demand exceeds supply. thus increasing the attractiveness of the industry. switching costs. thus increasing the rivalry. Notes [35] . the advantage is also with the firm. as does a high threat of substitute products. etc. the higher the threat that a new competitor will enter the industry. the industry is more attractive. A GGRESSION The more aggressively a firm (or small group of firms) will fight for market share. when the intensity of the competition is low. 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.

it is possible that smaller competitors may not be as aggressive and may not have the intensity of rivalry seen in larger competitors. 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. because the very indication of commodity is that it is generic. Thus. the entire micro-environmental analysis goes in the main body of a business plan. Most people do not have a brand preference – as long as the dog likes the toy. MICRO-ENVIRONMENT ANALYSIS EXAMPLE Introduce the section – what is it. Present the analysis in bullet format with short complete sentences. Identify the issue in each category. [36] . Thus. The most wanted breeds are Labradors and Beagles. sometimes part of the force is high. Unlike the macro-environmental analysis. C OMMODITIES When products are commodities. but other parts are low. or sustainable competitive advantages. when an industry has several competitors of equal size. the supplier power of dog toys is low. what does it tell the business owner? Each of the five forces is ranked on a high to low scale. However. C OMPETITIVE A DVANTAGE When one or two firms have powerful competitive advantage. A pet store has many suppliers of dog toys. the pet store also sells purebred dogs. There are a small number of breeders in the area. the intensity among those rivals is intense. However.Chapter 3 Environmental Analysis S IZE AND N UMBER Generally. if needed. The sheer number of competitors in an industry can increase rivalry. Therefore. the supplier power of dogs is high. rivalry is increased as firms try to increase marketshare through pricing or other differentiation. the rivalry has a tendency to increase as these firms fight over marketshare. the brand is not generally important. it is acceptable. why do it. Competing on features is very hard.

adoption)  Infrequent purchase  Some substitutes available (mongrels. training supplies) is generally limited. 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. 4) the threat of new entrants. 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 [37] . especially in rural areas  Brand is not. and 5) the intensity of rivalry. 2) the bargaining power of the suppliers. by and large. “designer” brands of food. Power of Buyers (Medium High) Purebred Animal Buyers – High  Many options for obtaining animals (pet store. The five forces that are studied are 1) the bargaining power of the buyers.. grooming supplies.Chapter 3 Environmental Analysis 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. farm supply)  Options for purchasing specialty supplies (e. breeder.g. 3) the threat of substitute products or services.

Chapter 3 Environmental Analysis 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. the threat is very high.g. Consequently. cat) or breed. the threat could be rated as medium. Frisbees. Therefore. Pet Supplies – Medium  Pet food does not have a substitute other than table scraps or homemade products.) o And so on    [38] .g.  Pet toys have many substitute products. etc.. Thus. and laser pointers. human combs and brushes) and others do not (e.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. pet carriers). the threat is very low.. tennis balls. 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. for example socks.  Other supplies may have good substitutes (e. string/yarn. 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. collars. neither of which is a good substitute.89 (up from $38.

Buyer power. and threat of substitute products are all at the medium threat level. the outlook in the pet store industry is favorable for a sole proprietor or small partnership pet store in a rural area. but intensity of rivalry and the threat of new entrants in the rural market are low.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. supplier power.Chapter 3 Environmental Analysis 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  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. [39] .

Chapter 3 Environmental Analysis INTERNAL ENVIRONMENTAL ANALYSIS The internal environment is the final step in gathering information for the SWOT Analysis. and competencies should be evaluated with respect to goals. For example. The following lists will help identify what types of RC&C items that need to be considered. and determining what competitive advantages (hopefully sustainable) the organization has. AND COMPETENCIES Resources. it really does not help your competitive position. capabilities. Not every RC&C needs to be included in the evaluation – only those that will eventually lead to a competitive advantage. and competencies (in the form of the value chain). If anything is missing from the organization’s 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 [40] . Unless you have a cleaning service. CAPABILITIES. capabilities. you have a top-notch janitorial staff. The internal analysis consists of identifying resources. strategy. RESOURCES. A FEW examples are listed – this is NOT an exhaustive list! Write down all the important RC&C items. and the vision statement of the organization. and then narrow the list to the ones that may lead to a competitive advantage.

cooperative or joint ventures Environmental Analysis    Notes [41] . effective.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. partnerships. efficient management structure o Alliances.

. and prior performance.Chapter 3 Environmental Analysis C APABILITIES Capabilities are generally assessed through the value chain and. benchmarking may also be accessed through efficiency and effectiveness. 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. Accounts Payable). primary competition. Efficiency types of measures should be used in conjunction with standard financial measures of benchmarking. Benchmarking may be done on several levels: industry. If anything is missing from the organization’s 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 organization’s resources and capabilities and benchmarking. hours of downtime for machine X. Again. or number of days from sale to delivery. Notes [42] . Some examples of efficiency benchmarking might be number of defective widgets produced.g. Remember that value may be in the form of cost efficiencies. such as days in inventory or asset turnover ratios. Although often focused primarily on cost.

you might consider it rare. it is somewhat rare. 2. the ultimate goal is to create a SUSTAINABLE competitive advantage. management. In order for a resource and/or capability to provide the basis for a sustainable competitive advantage. If it is general knowledge. 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. and so can a location. how it works. Is the resource or capability rare? Do rival firms have the resource or capability? If not. A great location may be rare – depends upon whether a competitor could get a location that is as good. the inputs (resources and capabilities) must be examined. special details? Can the knowledge be easily replicated? If the knowledge of the product. and if it is somewhere in-between. For example. Determining the rarity of a recourse or capability is a judgment call on the part of the analyst. then the contract is rare because no one else can get a contract. A brand name can have value. the knowledge of the owner may be rare – it depends on the type of knowledge the owner has. However. it would not be rare.Chapter 3 Environmental Analysis 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. Is it in depth knowledge of contracts. how to manage and sell it is very in depth and impressive. 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. In order to assess whether a competitive advantage is sustainable or not. four questions must be answered in the positive: 1. Notes [43] . If the company has an exclusive contract with a special supplier.

or specialized knowledge is not important to the customer. For example. Financial resources are not generally non-imitable. use of proprietary knowledge. 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. Notes [44] . 4. 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.Chapter 3 Environmental Analysis 3. Locations may be somewhat non-imitable. Patents (and other intellectual products) are non-substitutable. then the resource (metal grill) is not non-substitutable. 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. location. While exclusive contracts are definitely non-imitable. would good customer service take the place of a good location? Are customers willing to drive farther to get great service or is the company’s location so convenient that service wouldn’t matter? If the location is so convenient that price. The lack of imitation may be caused by long time frames needed to develop the resource/capability. protection by copyrights or patents. or costs. 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. the resource/capability is considered non-substitutable.

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. If the chart shows a “yes” in all five categories. 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 [45] . Create a chart. it is most likely a source of sustainable competitive advantage. 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. to list the most important competitive advantages.Chapter 3 Environmental Analysis 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. the resource or capability is not exploitable.In that situation. Remember the janitorial example above . perhaps. like the one shown below.

Chapter 3 Environmental Analysis 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-à-vis market needs o R&D vis-à-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 [46] .

Chapter 3 Environmental Analysis BENCHMARKING K EY S UCCESS F ACTORS Compare the organization’s 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. Notes [47] . as not all competencies are as important as others are. Determine what the KEY factors (competencies) are and list them in the chart. A weighted chart is used.

Notes [48] . the product selection accounts for 20% of the success of a business in this industry. The total MUST equal 100%. Try to limit the list to ten items – after ten. the information becomes meaningless. The example uses 1 through 10. Step 6: Identify those items where the company has much lower scores than the industry and competition. Scores that are much higher scores than the industry and competition could indicate strengths. but any scale (usually 1 to 5) will work. If the scores are higher than the direct competition. One is always the low point. Example. Rating lower than the industry leader is not unusual (unless the company is #2!). How well is it performing? Does it have a great reputation? Then that item should rank high on the scale. Step 3a: Choose a rating scale. Repeat steps 3 and 4 for each of the companies or industry against which the company is being benchmarked. loyalty. Step 5: Compare the total scores. Rating higher than the industry is good. Step 3b: Rate the company. If the industry has many large players. Step 4: Calculate the weighted score and add up all of the items. but not necessarily bad if the company ranks lower. The numbers that go here are judgment calls on the part of the analyst or owner. 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. this is often the case. then there isn’t too much to worry about. and sheer size to help it achieve the success factors.Chapter 3 Environmental Analysis Step 1: List the five to ten items that are most important to succeeding in the business. because it has the power of branding. Order is not important. then the company has a real problem. Step 2: Determine how important the item is to success. These could indicate weaknesses.

etc. Use either the size (sales.Chapter 3 Environmental Analysis C OMPETITIVE M AP Next. Show the competitive position on a bubble chart. profits. Step 3: Create an Excel chart (see below) Step 3a: Highlight the top titles and numbers as shown Notes [49] . Step 2: Determine the size of the bubbles.) or the third most important KSF. Step 1: Determine the two most important KSFs from the analysis above. determine how the competitors and industry look on the most important KSFs in a visual manner. This is determined by the analyst. market share.

Chapter 3 Step 3b: Create the bubble chart INSERT  OTHER CHARTS  3D BUBBLE Environmental Analysis Notes [50] .

click. Repeat for each bubble. Step 8: Format the Axes. Click. pause. Click inside the chart CHART TOOLS  LAYOUT  SHAPES  Select the Arrow  Move to appropriate bubble  Format as desired Step 7: Format the bubble color. Right Click  FORMAT DATA POINT  FILL  SOLID FILL  choose color  CLOSE.Chapter 3 Step 4: Delete the legend. 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 [51] . Click on the legend and press BACKSPACE Step 5: Add labels. Select the bubble. Environmental Analysis 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. HINT: The target company should be a different color so it stands out.

PASTE SPECIAL  PNG The final chart should look something like this. COPY Click in Word Document. Repeat for each label as shown Step 10: Clear the lines.Chapter 3 Step 9: Label the Axis’ Points. Environmental Analysis Click inside the chart CHART TOOLS  LAYOUT  TEXTBOX  Type “HIGH” Move to top of Vertical Axis. Notes [52] . Click inside the chart  LAYOUT GRIDLINES  PRIMARY HORIZONTAL GRIDLINES  NONE Step 10: Copy and Paste the Chart Select the chart.

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. 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 ′ [53] . Use the following ratios (at least one from each group) that are most appropriate to the company. the best way to create financial benchmarking is against past performance (or current performance against proforma financial statements).Chapter 3 Environmental Analysis F INANCIAL B ENCHMARKING To determine the financial resources and capabilities benchmark with financial ratios.

why do it. what does it tell the business owner? Other than the tables.Chapter 3 Environmental Analysis INTERNAL ENVIRONMENT ANALYSIS EXAMPLE The analysis of the internal environment is used throughout the business plan. Benchmarking is discussed in the operations plan. The KSF analysis is presented in the Environmental Analysis section. Introduce the section – what is it. while a KFS focusing on operations will be presented in the Operations portion of the plan. a competitor analysis (KSF) that focuses on marketing goes in the Marketing Plan section. as are the Competitive and Sustainable Competitive Advantages. [54] . 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. it is easiest if this is written in bullet points.

weaknesses. and competencies the firm has. ABC’s breeder contracts may be a source of sustainable competitive advantage. and competitive and sustainable competitive advantages. but does not compare favorably against the leading industry competitor. Additionally. The analysis leads to identification of strengths. ABC Pet Store’s strength scores are slightly above average overall when compared to the industry. On the other hand. capabilities. Key Success Factors As can be seen in the table below. ABC has very strong scores against its local competitor. 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. Mom & Pop Shop. 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 [55] .Chapter 3 Environmental Analysis INTERNAL ENVIRONMENTAL ANALYSIS (EXAMPLE) The internal analysis is an examination of the resources. Pets R Us. if those contracts are exclusive.

00 0.80 0.60 2.00 2.00 1. as some best practices used by that leader may be adaptable to small organizations such as ABC.30 0.80 0. the comparison of ABC to Pets R Us is relatively unimportant as Pets R Us only locates in cities with populations in excess of 100.80 1.Chapter 3 Scale: 1 = Very Weak to 10 = Very Strong Environmental Analysis ABC Pet Store Key Success Factor or Strength Weight Rating Weighted Score Industry Rating Weighte d Score Mom & Pop Shop Rating Weighte d Score Pets R Us Rating Weighte d Score 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 0.000 and ABC is located in a town of 35.40 0.30 0.00 1.10 7. highly reputable CFA breeders.60 0.40 0. and a USDA approved bird breeder.50 0. 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. However.80 5.90 At this time. As ABC Pet Store has several exclusive contracts with 5-star AKC breeders.80 20% 30% 100% 5 8 1.30 0.85 5 4 1.20 0.90 8 7 1.35 0.50 8 8 10 6 9 8 0.20 4.40 5.000 people.90 0.50 7 5 5 6 6 8 0. [56] . it is always important to benchmark against the industry leader.95 5 6 1. a sustainable competitive advantage in the area of quality of live pets has been established.30 0.35 0.50 0.80 6 4 5 4 8 5 0.50 0.40 0.20 0.

ABC Pet Store is performing well in the financial benchmarking analysis. ABC Pet Shop compares favorably with the competition with respect to Quality of Live Pets. Benchmarking As can be seen in the table below.Chapter 3 Environmental Analysis As can be seen in the Competitor Analysis below. 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. Reputation. (And so on) [57] . and Local Market Share.

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

[58]

Chapter 3

Environmental Analysis

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

[59]

Chapter 3

Environmental Analysis

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

[60]

It is okay to make a broad statement – but not to the level of a recommendation – about opportunities and threats you find. and weaknesses follow. if the opportunity is something over which the company has direct control (“opening a store”). Normally. List them like that! The same goes for threats. In the SWOT. For example. and culture. if you want to talk about strength in customer service. An example of how to list opportunities and threats for the mythical pet store is shown in the Appendix. It is not something the company should do. Opportunities and threats are determined from the micro and macro-environmental analysis ONLY! Normally the opportunities are listed first and threats follow. List them like that! The same goes for weaknesses. the strengths are presented first. it is either a weakness or a recommendation. you may want to discuss the strengths the company has in employee training. an opportunity is an external issue that the company may be able to exploit. Both should be organized into groups. benchmarking. etc. OPPORTUNITIES AND THREATS First. the increase in the percentage of families with pets. do not think of opportunities in the conventional sense. then it is NOT an opportunity. and KSF analyses. if you want to talk about an opportunity in demographics regarding the number of families. For example. Both should be organized into groups. Notes [61] . “Open a store in Laurel” is NOT an opportunity in the SWOT – it is a recommendation. For example. It is okay to make a broad statement – but not to the level of a recommendation – about weaknesses you find. you may want to discuss the increase in families.” Remember. The opportunity is listed as “Increasing population in Laurel. empowerment.Chapter 3 Environmental Analysis STRENGTHS AND WEAKNESSES Strengths and weaknesses are based on the evaluation of the internal environment – RC&C.

It is easiest to write this section in a bullet list. and opportunities and threats come only from the external (micro and macro) analyses. 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.Chapter 3 MOST IMPORTANT! Environmental Analysis 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. Finish with a text summary. 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 must be in the text section and vice versa. why do it. Remember two things – if it is in the recap table. [62] .

as well as its weaknesses. The most important of these. given its location and market are the quality of the products it sells and its customer service. Strengths ABC Pet Store has several strong points. 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 [63] . 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.Chapter 3 Environmental Analysis SWOT ANALYSIS (EXAMPLE) Introduction The purpose of the SWOT analysis is to determine the strengths of the firm. External forces are also analyzed and possible opportunities and threats are presented. Quality of Products ABC Pet Store maintains very high quality in both live pets and general pet merchandise.

Blah. blah. According to the analysis.    Low traffic area Rural community Not located near major shopping areas Financial Resources While operations at ABC are providing a positive cash flow. blah. ABC Pet Store has its share of weaknesses. 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. [64] . moves. ABC has strengths in other areas:    Reputation Selection of products Etc.    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. as well as when compared to its local competition. the two major areas of weakness of are location and financial resources. there is little money in retained earnings for expansions. Weaknesses As is true with most organizations.Chapter 3 Environmental Analysis Customer Service While ABC has high quality products. or taking advantage of opportunities that may appear. the location of ABC suffers greatly. it prides itself on its customer service. Location Compared to Pets R Us. To this end.

People who want purebred animals will not usually settle for cross breeds. The most important of these are:  The threat of new entrants is high. and the power of the buyers. which is high for live animals. However. qualified staff is easier to find. however. the number of people moving to rural communities. ABC must try to use its strengths and opportunities in order to combat these threats. Blah. as it does not take much investment or specialized knowledge to enter the pet store market. The major factors affecting the industry are the aging population.Chapter 3 Environmental Analysis Opportunities Several factors outside of ABC Pet Company may affect its operations. There are several possible threats on the horizon. blah. The positive forces are referred to as opportunities. Other major opportunities are:    Higher unemployment means hiring good. which ABC can use to enhance its operations. reputation. and customer loyalty may be used to lower this threat somewhat as it pertains specifically to ABC Pet Stores. If ABC can weather the economic storm. Economic conditions are currently poor. blah. blah   [65] . blah Threats The negative forces external to the organization are referred to as threats. Blah. the high level of cash flow. it should see sales increase slowly over that time. a recovery is predicted in the next 18 months.

The specifics of how ABC can offset the major negative forces will be discussed in the strategic options section of the paper. ABC Pet Store’s strengths and opportunities well outweigh its weaknesses and threats. 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 [66] .Chapter 3 Environmental Analysis Recap As shown in the table below.

Notes [67] .

the Town Car.CHAPTER 4 BUSINESS-LEVEL STRATEGIES OVERVIEW Strategy comes in two levels – business and corporate. Porter added the concept of a hybrid form that combines the competitive advantages. and the popular Fusion and Escape hybrids. the F-Series and Ranger trucks. It also has the Lincoln brand: the MK series luxury cars. Fiesta and Focus are small cars. For example. Obviously. while Lincoln has a more narrow market. as well as a luxury hybrid. Dr. The “focused” strategy was later split to match the broad market strategies and later still. these vehicles are not all designed for the entire market. Each of these “business” lines can have a different strategy. with relatively low price tags. Ford Motor Company has the Fiesta and Focus. crossovers. A company may have different strategies for different business (product or service) lines. and the Navigator. SUVs. 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). Notes [68] . This section will discuss only the business-level strategies that are available.

Some examples of firms that follow the low cost leadership strategies are WalMart. 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 [69] . 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. This is the “no frills” strategy. and IKEA. McDonald’s.Chapter 4 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.

Dr. Notes [70] . TYPES Some examples of types of differentiation are Federal Express (service). location. and so on. A differentiation strategy allows the business to command a premium price. quality. selection – anything that makes the consumer feel like the product or service is different in some way.Chapter 4 Business Level Strategies 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. 125 types of calculators) or perceived (quality). Pepper (taste). increase sales volume because of differentiation features. and 3M (technology leadership). The perception of difference may be real (16 types of calculators vs. and gain buyer loyalty. 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. Look at the BIG PICTURE! If the company is focusing on customer service. location. does NOT mean it is following an LCL strategy.

It doesn’t 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.Chapter 4 Business Level Strategies 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. sales. and customer service Notes [71] .

Notes [72] . Mercedes (quality). capabilities. and Kia (limited size). and Harvard (quality and exclusivity). and competencies rivals can’t 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.Chapter 4 Business Level Strategies 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. A firm may choose to follow a focused strategy for any number of reasons. Dollar Store (limited income). 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). Some examples of Focused Differentiation are Rolex (prestige).

” “Best Value. Toyota (quality and price). also called “Best Cost. “STUCK IN THE MIDDLE” A hybrid strategy is often called “Stuck in the Middle. and Continental Airlines (merged with United Airlines) fail at the hybrid strategy. most companies seem just to drift into this strategy – and they are the ones that will fail. Polar opposites almost. we have seen Sears/K-Mart (closing stores). Acura (lower than expected sales). Which does the firm choose? Notes [73] .the attributes of LCL and Differentiation are different. However.” or “Stuck in the Middle” is a strategy that combines the best value for the money. and it is very difficult to do the best of both well. For example. the firm can be very successful. If a company follows a hybrid strategy on purpose. LCL dictates a firm should have little or no advertising expense. On the other hand. Some examples of successful (and very few are) businesses following a hybrid strategy are. while Differentiation decrees that high advertising expenses are the norm. as difficult as that may be. and Target (service and price). This is about the only situation where a hybrid works at all.” Why? Simple .Chapter 4 Business Level Strategies HYBRID The Hybrid strategy. WHEN HYBRID WORKS BEST Hybrid strategies work best in a market where differentiation is the norm and customers are very price sensitive.

limited selection Many variations. 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.Chapter 4 Business Level Strategies RECAP The following table recaps the major attributes of each of the five generic strategies. emphasis on differentiation features Product superiority. acceptable quality. 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. any features for which buyers will pay Appealing attributes.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 [74] . Best job of meeting niche buyer needs Keys to Sustaining Economical prices Good value Manage costs year-after. wide selection.

Chapter 5 Industry Specifics CHAPTER 5 INDUSTRY SPECIFICS INDUSTRY LIFECYCLES Before venturing into an industry. the industry. one needs to be sure that the strategy. and genetic biotechnologies.” If they do not. EMERGING INDUSTRIES Emerging industries are those that are new and at the very beginning of the industry lifecycle. and the business model “fit. speech recognition technology. Notes [75] . no amount of strategic planning will help. The following information will provide some loose characteristics and guidelines for different industries along the life cycle. Some examples of emerging industries are electric cars.

switch from awareness to frequency of use and brand loyalty Price cuts Key supplier alliances Notes [76] .Chapter 5 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 don’t wait As familiarity builds.

and computer. and petroleum. 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. and services similar among competitors Reduced profitability Increased competitor consolidations (fewer. automobiles (other than electric or hybrid). C HARACTERISTICS    Rapid improvements. electronics.Chapter 5 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). Examples of maturing industries are consumer appliances. C HARACTERISTICS       Notes Increased intensity of rivalry Cost. features. but larger competitors) Buyers become more sophisticated – driving harder bargains Innovation is difficult [77] .

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 [78] . and ship building are examples of stagnant or declining industries.Chapter 5 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. mining. Tobacco. Remember .

THE .Chapter 5 Industry Specifics LEADERS OR FOLLOWERS INDUSTRY LEADERS S TAY .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 [79] .ON .

sustainable energy. and telecommunication (specifically cellular phones). and build reputation Vacant-niche Superior Product Distinctive Image Content Follower OTHER CONSIDERATIONS TURBULENT INDUSTRIES Turbulent industries are those that are changing rapidly. etc.Chapter 5 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. and are marked by fragmented market share. Some examples of turbulent industries are airlines. have high rates of entries and exits. features. C HARACTERISTICS      Rapid technological change Short product life-cycle Entry of important new rivals Competitive maneuvering Rapidly changing customer expectations Notes [80] .

Chapter 5

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

[81]

Chapter 5

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

[82]

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 firm’s 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

[83]

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 [84] . 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.Chapter 6 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. database creation. analysis. and programming.

VERTICAL INTEGRATION Vertical integration is to acquire an organization directly preceding or anteceding the firm in the supply chain. it may become advantageous to integrate outside inputs or buyers because of quality. reputational. F ORWARD I NTEGRATION When a company forward integrates – it acquires its immediate buyer(s).) Notes [85] .Chapter 6 Corporate Strategies INTEGRATION At some point in a business’ life. or cost issues. 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. locations. Adopting a vertical integration strategy should enhance productivity. etc. quality.

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.Chapter 6 Corporate Strategies B ACKWARD I NTEGRATION Backward integration refers to a firm buying an immediate supplier. Notes [86] .

backward.        Capital investment Risk Obsolete technology Outdated production methodology Capacity matching problems Radical changes in resources and capabilities Changes in design can be costly Notes [87] . or horizontal.Chapter 6 Corporate Strategies D ISADVANTAGES There are some possible disadvantages to integration whether it is forward.

or unrelated (no value chain activities are shared).Chapter 6 Corporate Strategies DIVERSIFICATION As a firm grows. The three basic types of diversification are single product (no diversification or undiversified). Degree of diversification is based on shared value chain activities. it may find that its primary industry is declining. related (some shared activities). Diversifying product lines is one option for handling these issues. Related diversification can also be broken into closely related (many shared activities). or needs to spread risk. and loosely related (only one value chain activity is shared). it needs a way to invest excess capital. Economies of Scope  Competitive Advantage  Profitability & Shareholder Value Notes [88] . related (some value chain activities are shared).

Levi Straus originally only made jeans for men. capabilities. or resources it already has. but diversified into women and children’s 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. which may be different for related and unrelated diversification strategies.Chapter 6 Corporate Strategies WHY DIVERSIFY? There are many reasons a firm would chose to diversify. 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 [89] . The diversification can be used to lower fixed costs or for more efficient management.        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.

but as a separate entity Restructure Change process.Chapter 6 Corporate Strategies STRATEGIES FOR ENTRY To become a diversified firm. position Notes [90] . it has several options:        Broaden diversification base Diversify further Divest some products and retrench Sell off – sell the firm outright Spin off – maintain control. 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. people.

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. WHY? Firms have several reasons for creating and alliance or partnership      Critical to company’s achievement of an important strategic objective Build. product.Chapter 6 Corporate Strategies ALLIANCES & PARTNERSHIPS An alliance or partnership is when two or more companies join to achieve a mutual goal or mutual benefit. 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 [91] .

competencies (most notably. Alliances are generally good for short-term goals. 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. Some of the reasons alliances fail are     Diverging goals over time Inability to work together (cultures and management) Changing conditions (market. In a merger. the companies join on an equal footing.Chapter 6 Corporate Strategies WHY THEY FAIL Many strategic alliances (60% to 70%) fail. management) Market rivalry (become rivals instead of partners) Interestingly enough. the more likely it is that the alliance will be successful for a longer time. technology) Invent a “new” industry Diversify or Integrate Notes [92] . on the other hand. capabilities. is when one company buys the other and subsumes its resources. capabilities. An acquisition. the more often a firm creates a strategic alliance. and competencies. MERGERS & ACQUISITIONS Merger and acquisition are two terms for combining the operations of two companies. but not for long-term competitive advantage.

Chapter 6 Corporate Strategies 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 [93] .

with respect to international business. have four different classifications. DEFINITIONS Markets.  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 [94] . each broader and farther reaching than the others.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.

cultural differences. some cultures encourage siestas. Some of the strategic questions and issues that need to be considered are market differences. Notes [95] . In some places. some do not have human rights. as those are the people who first settled this country. in others. Hispanic. The country’s culture must be taken into account when deciding whether to move into that market – and how you will do so. obviously. the US also has subcultures – Eastern European. 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. it is acceptable to bribe officials in order to get building permits. Some are similar to ours – many are very different. and so on. in some child labor is acceptable. & POLITICAL DIFFERENCES Foreign markets. while others don’t start the workday until late morning. different from those in the US. However. workers. CULTURAL DIFFERENCES Everyone has a culture. a minimum level of work is okay. workers are expected to work long hours in order to get promotions. and business climates are. others are very strict about HR issues such as family leave. The general culture in the US is based on Western European cultures.Chapter 7 Foreign Markets WHY GO INTO FOREIGN MARKETS? Businesses have many reasons to enter a foreign market. MARKET. Asian (in its many forms). and political differences. In some countries. Foreign countries also have cultures.

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.Chapter 7 Foreign Markets How you deal with cultural issues both in the US and in the host country (from financial management to ethics. the company must ask. use of child labor) Religion MARKET DIFFERENCES In addition to working differences caused by culture. P RODUCT O FFERINGS Products may be customized for a specific market or they may be standardized. in turn. bowing. are less concerned than fundamentalist cultures).. and social behavior (e.g. The most obvious of these are social differences such as language. Additionally. personal space). Preferences include color preferences (Red and Black are a no-no in Germany. who. Thus.. Notes [96] . alcohol or dietary restrictions).g. religion (e. Coke in the US is not as sweet or sugary as that found in Mexico. many Asian countries consider white to be the color of mourning). and advertising style (Many European and Asian countries are more open about displays of nudity and sexual innuendos than those in the US. there are also differences in the marketing of goods. shaking hands. eye contact. should we offer a standardized product worldwide?” E THNICITY Ethnic backgrounds also affect how and what products can be sold in foreign markets. cultural preferences exist with respect to marketing and distributions. For example. quality (underdeveloped counties are not as concerned with quality as are the developed nations). size (US preferences are for the “large economy size” while many markets prefer smaller sizes suitable for weekly or daily use).. before entering a foreign market. “Should we customize our product or service for each different country market to match local tastes? Or.g.

Chapter 7

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 won’t 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

[97]

Chapter 7

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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Chapter 7

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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this philosophy takes an approach of treating each market as a stand-alone unit. Advertising . Local locations have control over most issues. and so on. and a global mindset is the norm. THINK-GLOBAL. THINK-LOCAL. Headquarters maintain more control over the locations. ACT-GLOBAL The think-global. Local communities take precedence over global needs. although there are some overarching controls in place at the corporate level. There are three basic philosophies. which was ignored by Apple) are ignored. THINK-GLOBAL. act-local. products. the norms are used in areas such as advertising. ACT-LOCAL Generally. culture are all treated as if the company was a local business concerned only with the market in which it is located. Cultural differences are considered and whenever possible. products are not standardized and many cultural norms (China’s aversion to long-term contracts. act-local (sometimes referred to as “glocal”) is a hybrid. Notes [100] . marketing.Chapter 7 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. hiring. act global school of thought is opposite that of the think-local. and reports are forwarded to the international headquarters at specified times. product sizes. All business functions are handled by the “local” firm. ACT-LOCAL The think-global. In this case.

” The choice to use labor in China is NOT an ethical dilemma. Does a manager use child labor. There are three levels of “ethics”    Legal Ethical Moral Legal does not mean ethical or vice versa. business ethics are the same as general ethics. an ethical dilemma is when a manager must decide between “two evils. Using child labor is. ETHICAL PHILOSOPHIES A decision is not an ethical dilemma. Notes [101] . An ethical man may think about cheating on his wife. A moral man will not think of cheating on his wife. but will not because it is not ethical. which is condoned or encouraged in the country in which the firm does business? It will help the child’s family survive. but it deprives the child of an education. An example of the difference between the three levels: A legal man may cheat on his wife because it is not illegal.CHAPTER 8 ETHICS OVERVIEW Generally.

      Ethical Universalism o Right is right – wrong is wrong Ethical Relativism o “When in Rome. and two guiding principles. 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 [102] .Chapter 8 We will review four popular philosophies.

or other differences – they are “universally accepted. culture.” Universalism is considered absolutist (or applies to everyone in every situation).Chapter 8 Ethics ETHICAL UNIVERSALISM Ethical Universalism is the position that some behaviors are considered ethical regardless of race. or some other higher power. Ethical Universalism is determined by God. It is wrong for everyone. The reason doesn’t matter. right is right and wrong is wrong for everyone. EXAMPLE Killing someone is wrong. sex.” Whose interpretation of God’s (or other Higher Power’s) word determines what is right and wrong? Notes [103] . Everyone understands and agrees with this tenet. In a nutshell. nationality. 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.

The death penalty is accepted in the US. When one is in a culture.Chapter 8 Ethics ETHICAL RELATIVISM Ethical Relativism is the position that nothing is objectively (or factually) right or wrong.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 [104] . and twenty-four other countries. Different groups have different standards of right and wrong. Culture determines what is right and wrong. Syria. but depends on the view of a particular culture or individual. North Korea. Nearly 140 counties have abolished the death penalty. rather than a higher power. Chine. Ethical Relativism is a pluralist (understands that groups are different) position.or herself. do as the Romans. In a nutshell. he or she should adhere to the norms of the culture in which he or she finds him. “When in Rome.” EXAMPLE The death penalty is a good example of ethical relativism.

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 [105] . but not in others.” yet because of cultural values. EXAMPLE Bribery is a good example of ISC. Is the banning of bribes a universal norm or not? Bribery is acceptable to some cultures. ISC is primarily a business view of ethics. Some values are universal and others follow the cultural or national norms.Chapter 8 Ethics INTEGRATIVE SOCIAL CONTRACTS Integrative Social Contracts (ISC) falls somewhere between Ethical Universalism and Ethical Relativism. or is it? PROS     Easy to understand Situations are not always “black and white. and universal norms are more important than cultural norms.

ultimately. What harm (psychological. world) Notes [106] . groups. EVERYONE doing this. Net benefit is benefit after considering harm. The theory says one should torture the prisoner to get information that would prevent a further attack. the second question.Chapter 8 Ethics ETHICAL UTILITARIANISM 5 Ethical Utilitarianism is the position that one should choose the action that brings the most “net benefit”6 to society. The benefits of the many outweigh the harm being done to the single terrorist.” this is not “happiness” as one would normally consider it. the answer in this situation would be do not torture the terrorist. Thus. one must dig deeper. 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.” EXAMPLE Whether or not to torture a terrorist would be a good example for Ethical Utilitarianism. Yet. However. society. 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. Although many definitions call net benefit “happiness. 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. nation. Ethical Utilitarianism has been boiled down to “the greatest good for the greatest number. would point out that should an innocent American be accused of terrorism in another country it would NOT be acceptable. several persons.

“What would people think of this decision if they knew about it – if it were put up on a billboard?” In other words. but these three are the most pervasive in business:    Overzealous pursuit of personal gain. WHAT DRIVES UNETHICAL BEHAVIOR IN BUSINESS? Many things drive unethical behavior.” THE BILLBOARD OR MOTHER RULE The Billboard and Mother Rules are basically the same. The Billboard Rule asks. this principle has been around since ancient Egypt. Briefly. would one make the same decision if he or she knew that others would find out about it? The Mother Rule asks. The Golden Rule is universally applicable and is found in nearly every culture and religion in some form. 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 [107] . “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. wealth.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. the Golden Rule states “Do unto others as you would have others do unto you. both consider the issue of what would happen if the decision one made were made public. Older than the Christian bible (which is most often considered the primary source).

Notes [108] . The Malaysian people might see some benefits through increased employment.Chapter 8 Ethics DILEMMA OR DECISION? A decision is when a manager must make a choice. and shareholders will see increased dividends. “Should I close my plant in South Carolina in order to open a plan in Malaysia in order to cut costs?” Now. there is no “right” answer. So. jobs will be lost and the community will undergo hardships. However. consumers may feel this is a “sweatshop” situation and stop buying products. if the plant is moved. has no real “right” answer. One answer may be better. An ethical dilemma on the other hand. there is a dilemma. “Should I put a plant in Malaysia in order to cut costs?” This is a simple business decision. but it depends on the ethical philosophy the managers espouse. If the plant is closed in South Carolina. the company will continue to lose money and the shareholders will have reduced dividends. If the plant is not closed. For example.

They are proactive. ETHICAL Ethical managers are general considered moral. DAMAGE CONTROL Managers who fall in the damage control category will generally be immoral or amoral. Immoral managers have no standards at all. UNCONCERNED OR NON-ISSUE The managers that espouse this attitude are not concerned about ethics at all. Those who are amoral most often follow the letter of the law. Usually these managers are considered immoral.Chapter 8 Ethics MANAGING ETHICS There are three types of managers when it comes to ethics. They will not make an effort to be ethical and have an attitude that “I will worry about it when something happens. They consider ethics unimportant. They may behave in an unethical manner intentionally or unintentionally. While they are proactive. Managers who handle ethics and the fallout from unethical behavior generally have one of the following four attitudes. They generally fall into the amoral category. but perhaps not the spirit of the law. try to do the right thing even if their actions are above and beyond the law. they do only what they need to be incompliance. COMPLIANCE Managers with a compliance attitude are those who will do only what the law requires. and foster the same in their businesses’ cultures. Notes [109] . Those considered moral have the highest standards of behavior.” They are reactive rather than proactive.

Chapter 8 Ethics WHY BE ETHICAL? So why should a company be ethical? Are there any advantages? We’ve all heard the adage “Nice guys finish last.          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. there are some very good reasons a firm should act ethically. but can cost more in the long run! Notes [110] .” Yet.

CHAPTER 9 SOCIAL RESPONSIBILITY OVERVIEW Social responsibility is more than environmental responsibility! AKA     Corporate responsibility Corporate citizenship Responsible business Corporate social performance Notes [111] .

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. suppliers. This is nearly impossible. suppliers. shareholders. This is the perspective we teach now.Chapter 9 Social Responsibility PERSPECTIVES Business managers generally follow one of three theories regarding social responsibility.  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 [112] . shareholders. you must think about under. It goes along with the Utilitarian ethics. Stakeholder theory o Balance among STAKEHOLDERS. but also global impacts. For example. buyers. although ethical issues are not necessarily involved. Usually this means balancing the needs of the employees. buyers.or undeveloped nations that have employees you could be hiring. because you must consider not only the employees. and community. and community Whole World theory o Balance among everyone.

      Internal benefits Employee recruitment Cost savings Lowers risk of reputation-damaging incidents Increased buyer patronage It’s the right thing to do Notes [113] .Chapter 9 Social Responsibility WHY BE SOCIALLY RESPONSIBLE? Like ethics. there are some very nice benefits to being a socially responsible firm.

Usually though. A sub-culture is sort of a culture within a culture.CHAPTER 10 ORGANIZATIONAL CULTURE OVERVIEW Just as an ethnic group. if there’s a dramatic change in the direction of the company’s strategy. culture may become a real issue – taking up much of the manager’s time. and previous managers have done their jobs. religious group. However. if the subculture is strong yet unhealthy. or any other group. A culture can be good or bad – strong or weak – healthy or unhealthy. sometimes a “subculture” arises. it may be easy to change. perhaps. Sometimes a single department may have a culture that is at odds with the culture of the rest of the organization. However. then its symbols and values must be emphasized throughout the organization. One of the hardest jobs a manager has is aligning strategy and culture. If the subculture is one that the manager wants to foster. this should not be a problem. the subculture is problematic. In addition to a culture. to the point of firing the employees of that department. If the manager is lucky. the manager may have to take dramatic steps to effect change: going so far. If the subculture is weak. The main thing to remember is that a culture of any kind is hard to change – and change must come from the top. Notes [114] . so do businesses. can have a culture. Culture is a strange thing.

Chapter 10 Organizational Culture KEY FEATURES The main features that define a corporate culture are        Values. 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. during the interview process. 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. why. despite everything done. principles. 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. How does a firm perpetuate a culture? How do members of the culture make sure the culture stays intact? And. Often. Notes [115] . the first interview is to find out if the candidate has the required skills and qualifications.

and so on. It’s a great place to get noticed. Notes [116] . The ceremony has a big build up. firms will usually conduct some sort of training and/or hiring process. and awards (diplomas and honor cords). reporting structure. Other stories are private. For example. A mentor may be provided who will handle the “water cooler” code – corporate status symbols such as windows in an office. All the managers and senior partners go. the stories are a way for members of the culture to pass on knowledge and wisdom. just as heroic stories and fables such as those told by Aesop. told only to insiders. C EREMONIES Another way to pass on cultural values is through ceremonies. an organization has legends and stories it passes on.Chapter 10 Organizational Culture S YSTEMATIC I NDOCTRINATION Once a person is hired. convocation. how the football pool works. and other pre-commencement activities all indicate to members of the culture the importance of the upcoming ceremony. an absence will be noted as well. or is not. and not only is it a great place to be noticed. S ENIOR M EMBERS In addition to an official mentor. too. the employee is told about the dress code. etc. rituals (the moving of the tassel and shaking the hand of the officials). work hours. There are special uniforms (caps and gowns that have special meaning to the culture). But. Some of these stories are public knowledge – articles printed in the newspaper or the organization’s newsletter. S TORY T ELLING Like ethnic cultures. senior members of the organization will indoctrinate junior members through general conversations. One of the biggest ceremonies business students experience is commencement. a senior member may say something like “I hope to see you at Fred’s barbeque this weekend. During this process. ordering regalia. Announcements. they let other members know what is. acceptable behavior in the culture. who really knows how to handle a given situation.” Statements like these let a junior member know that attendance is just one step under mandatory.

As each firm has a unique culture. and social desirability (e. newsletter mention.g. bonuses. management (e. Some of the major effects on culture are though changes in technology (how and who does what). EVOLUTION Despite members’ and management’s best efforts. plaques. A culture may also change when a merger or acquisition happens and two cultures combine or collide. poor economy or increased demand). there are bound to be adaptations by both the acquiring and acquired cultures. cultural changes are inevitable.g.. Certificates.. no smoking). all things change. business prospects (e.Chapter 10 Organizational Culture V ISIBLE R EWARDS Visible rewards for those who follow the cultural norms are yet another means of perpetuating corporate values. Notes [117] . new ideology). and so on let other members of the culture see the benefits of following the norms.g. A parking space for the employee-of-the-month lets everyone know the attributes shown by the employee are important to the firm.

inwardly focused Unethical. 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. greed-driven [118] .Chapter 10 Organizational Culture 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.

and work practices that are supportive of the strategy. If the culture does not support or actually hinders the carrying out of the strategy. inappropriate.      Identify the problem – what works and what does not work. the longer it will take. especially a weak. Culture. procedural. Additionally. 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 [119] . behaviors. Finally. the members of the culture can help find problems with either the culture or the strategy.Chapter 10 Organizational Culture ALLY OR OBSTACLE? A strong (and appropriate) culture can greatly enhance a strategy by encouraging actions. it must be changed. Here are some steps that can be taken to change a culture. a strong culture can create a powerful commitment and identification with the strategy. Specify actions and behaviors of new culture though policy. or unhealthy culture can be an obstacle to strategy implementation and performance. ASAP! CHANGING CULTURE Changing a culture takes a long time. if the culture is tightly matched with strategy. the stronger the culture is. and personnel changes.

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. This cannot be over emphasized. o TAKES FOREVER! (at least a few years) Notes [120] .Chapter 10 o o Organizational Culture  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.

“BUILDING A HIGH PERFORMANCE CULTURE” HTTP://WWW.CHANGEEXCELLENCE.COM/WHITE_PAPERS/CULTURE_CHANGE_WHITE_PAPER. 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.PDF Notes [121] .Chapter 10 Organizational Culture Values are harder to change than behaviors and norms.

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.CHAPTER 11 IMPLEMENTATION The NUMBER ONE reason strategy fails is bad IMPLEMENTATION! WHAT NEEDS TO BE DONE BUILD THE CAPABILITIES. 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 [122] .

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 [123] .

performance tracking. 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. information systems Control over empowered employees Technology can be used for measuring quality and efficiency Make sure to implement as needed! Notes [124] .Chapter 11 Implementation I NCENTIVE P ACKAGES Achievement.

create.Chapter 11 Implementation INSTILL CORPORATE CULTURE   Strong culture that enhances strategy Change. or adapt as needed EXERCISE STRONG LEADERSHIP    Strong and able leadership Exercise beliefs and values Lead by example Notes [125] .

This can be more important than additional investments in plant. the organization must be ready to retain them as well. they are too entrenched in the corporate culture. and other projects. However.” Notes [126] . Some companies hire the TMT from within. others hire their top management team from outside the company. equipment.Chapter 11 Implementation SOME ADDITIONAL INFORMATION… TOP MANAGEMENT TEAMS (TMT) While putting together a strong and talented management team is of utmost importance.” In other words. some firms feel that promotion into the TMT from within the organization gives these top management team members “blinders. Outside TMT members provide "new blood. 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. Each has pros and cons.

A CEO must understand what he or she is getting into when starting this drastic measure. Designing and implementing a BPR is a long and involved process. The blue line indicates radical or revolutionary change. Think of TQM and Six Sigma as continuous ways to improve.Chapter 11 Implementation BUSINESS PROCESS REENGINEERING The one item I would really like to stress in this chapter is BPR – business process reengineering. The red line indicates incremental or evolutionary change. Notice the difference! Types of Change Business Process Reengineering Six Sigma or TQM Notes [127] . Specifically. understand that a company does not “just decide” one day to undertake business process reengineering. on the other hand. The period during the BPR is a dangerous and chaotic time for many organizations. BPR. and many businesses do not make it through a BPR. is a radical change – redesigning ALL of the business’ processes from scratch. Look at this chart.

who lived in England during the eighteenth and nineteenth centuries. 1980) 4 The Death Penalty World Wide.html 6 Jeremy Bentham.infoplease.com/ipa/A0777460.scu. [128] .html 5 http://www.END NOTES 1 2 (Kaplan & Norton. 1996) Invalid source specified. http://www.edu/ethics/publications/iie/v2n1/calculating. 3 (Porter.

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