Richard L. Daft - Management. 9th ed., 2010
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PART 3 PLANNING190
love it. Now, even branded food makers want a slice of the Save-A-Lot pie. Procter & Gamble,
f
or example, developed a low-priced version of Folgers, and the chain also sells low-priced
brands of cheese from Kraft and cereal from General Mills.
17
As a new manager, can you identify the core competence of your team or department
and identify ways that it can contribute to the overall organization’s strategy? Who
are your team’s or department’s customers, and how can you deliver value?
Levels of Strategy
Another aspect of strategic management concerns the organizational level to which
strategic issues apply. Strategic managers normally think in terms of three levels of
strategy, as illustrated in Exhibit 7.1.
18
▪ What Business Are We In? This is the question managers address when they con-
sider corporate-level strategy. Corporate-level strategy pertains to the organiza-
tion as a whole and the combination of business units and product lines that make
up the corporate entity. Strategic actions at this level usually relate to the acqui-
sition of new businesses; additions or divestments of business units, plants, or
product lines; and joint ventures with other corporations in new areas. An exam-
ple of corporate-level strategy is Brunswick, which was once associated primar-
ily with billiard tables and bowling gear. CEO George Buckley is transforming
Brunswick into the “Toyota of boating” by selling off unpro table businesses and
buying companies such as Sea Pro, Hatteras, and Princecraft to give Brunswick a
slice of every boating niche.
19
▪ How Do We Compete? Business-level strategy pertains to each business unit
or product line. Strategic decisions at this level concern amount of advertising,
direction and extent of research and development, product changes, new-product
development, equipment and facilities, and expansion or contraction of product
and service lines. Many companies have opened e-commerce units as a part of
business-level strategy. For example, NutriSystem Inc. was bankrupt a decade
ago, but managers reinvented the company as an Internet distributor, shipping
customers a month’s worth of shelf-stable diet food. People can track their prog-
ress online and get virtual counseling when they need a boost. The Internet strat-
egy and a new approach to advertising pushed sales from just $27 million in 2002
to more than $775 million in 2007.
20
TakeaMoment
c
c
c
c
c
cor
porate-level strateg
y
T
T
T
T
T
T
he level of strate
gy
gy
concerne
d
d
w
w
w
wit
w
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w
wit
ht
h
t
he
he
que
que
sti
sti
on
on
“
Wh
Wh
at
at
bus
bus
i-
i
n
n
n
n
n
nes
n
n
s
a
r
e
w
e
i?
i
n
?
”P
”
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t
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r
t
i
ai
n
t
s
t
t
o
t
h
e
he
e
o
o
o
o
o
rganization as a w
h
o
l
e an
d
t
h
e
e
e
c
c
c
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co
o
m
b
ination o
f
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usiness units
a
a
a
a
an
nd
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ro
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ines t
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at ma
k
e
i
i
i
it
t
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p
.
b
b
b
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b
usiness-
l
eve
l
strate
gy
The
e
l
l
l
l
e
e
e
ve
l
o
f
strategy concerne
d
w
w
w
w
w
w
w
it
h
t
h
e question “How
d
o
w
w
w
w
w
w
w
e com
p
ete?” Pertains to eac
h
b
b
b
b
b
b
b
usiness unit or
p
roduct line
w
w
w
w
wi
wit
wit
w
w
hin
the or
g
a
g
nization
.
EXHIBIT 7.1 Three Levels of Strategy in Organizations
SOURCES: Milton Leontiades, Strategies for Diversifi cation and Change (Boston: Little, Brown, 1980): 63; and Dan E. Schendel and Charles W. Hofer, eds., Strategic
Management: A New View of Business Policy and Planning (Boston: Little, Brown, 1979): 11–14.
CHAPTER 7 STRATEGY FORMULATION AND IMPLEMENTATION 191
Planning
3
Go to the ethical dilemma on page 207 that pertains to business- and functional-
level strategy.
▪ How Do We Support the Business-Level Strategy? Functional-level strategy per-
tains to the major functional departments within the business unit. Functional strate-
gies involve all of the major functions, including nance, research and development,
marketing, and manufacturing. The functional-level strategy for NutriSystem’s mar-
keting department, for example, is to feature real-life customers in direct-response
print and television ads that steer dieters to the company’s Web site.
THE STRATEGIC MANAGEMENT PROCESS
The overall strategic management process is illustrated in Exhibit 7.2. It begins when
executives evaluate their current position with respect to mission, goals, and strate-
gies. They then scan the organization’s internal and external environments and identify
strategic factors that might require change. Internal or external events might indicate a
need to rede ne the mission or goals or to formulate a new strategy at either the corpo-
rate, business, or functional level. The nal stage in the strategic management process
is implementation of the new strategy.
Strategy Formulation Versus Execution
Strategy formulation includes the planning and decision making that lead to the
establishment of the rm’s goals and the development of a speci c strategic plan.
21
Strategy formulation may include assessing the external environment and internal
problems and integrating the results into goals and strategy. This process is in contrast to
strategy execution, which is the use of managerial and organizational tools to direct
resources toward accomplishing strategic results.
22
Strategy execution is the adminis-
tration and implementation of the strategic plan. Managers may use persuasion, new
equipment, changes in organization structure, or a revised reward system to ensure
that employees and resources are used to make formulated strategy a reality.
TakeaMoment
EXHIBIT 7.2 The Strategic Management Process
f
f
f
f
fu
fu
fun
ctional-level strategy
T
T
T
T
T
T
he
T
level of strate
gy
concerne
d
d
w
w
w
w
w
ith the
que
que
sti
o
n
o
“How d
o
o
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w
w
w
w
w
e
w
support t
h
e
b
usiness-
l
l
le
e
e
v
le
l
e
l
strate
gy
?
gy
” Pertains to a
ll
o
o
o
o
f
o
o
f
the
the
or
or
gan
gan
iza
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tio
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ma
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jor
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artments.
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s
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s
s
trategy
f
ormu
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ation Th
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ic mana
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anning
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ecision ma
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is
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ment o
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o
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rganization’s goa
l
s an
d
o
f
a
s
s
s
s
sp
p
ecifi c strategic plan.
s
s
s
s
s
trate
gy
execut
i
on
Th
e stag
e
e
e
e
o
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o
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f
strategic management t
h
at
i
i
in
n
n
n
vo
l
ves t
h
e use o
f
manageria
l
a
a
a
a
an
nd
organizationa
l
too
l
s
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direct resources toward
a
a
a
a
ac
ac
ac
ch
ievin
g
g
strate
g
i
g
c outcomes
.
PART 3 PLANNING192
SWOT Analysis
Formulating strategy often begins with an assessment of the internal and exter-
nal factors that will affect the organization’s competitive situation. SWOT analysis
includes a search for strengths, weaknesses, opportunities, and threats that affect
organizational performance. External information about opportunities and threats
may be obtained from a variety of sources, including customers, government
reports, professional journals, suppliers, bankers, friends in other organizations,
consultants, or association meetings. Many rms hire special scanning organiza-
tions to provide them with newspaper clippings, Internet research, and analyses
of relevant domestic and global trends. In addition, many companies are hiring
competitive intelligence professionals to scope out competitors, as we discussed in
Chapter 3, and using intelligence teams, as described in Chapter 6.
Executives acquire information about internal strengths and weaknesses from a
variety of reports, including budgets, nancial ratios, pro t and loss statements, and
surveys of employee attitudes and satisfaction. Managers spend 80 percent of their
time giving and receiving information. Through frequent face-to-face discussions and
meetings with people at all levels of the hierarchy, executives build an understanding
of the company’s internal strengths and weaknesses.
Go to the experiential exercise on pages 206–207 that pertains to strategy formulation
and strategy execution. Before reading further, you might also want to review your
strategic strengths as determined by your responses to the questionnaire at the
beginning of this chapter.
Internal Strengths and Weaknesses Strengths are positive internal char-
acteristics that the organization can exploit to achieve its strategic performance
goals. Weaknesses are internal characteristics that might inhibit or restrict the orga-
nization’s performance. Some examples of what executives evaluate to interpret
strengths and weaknesses are given in Exhibit 7.3. The information sought typi-
cally pertains to speci c functions such as marketing, nance, production, and
R&D. Internal analysis also examines overall organization structure, management
competence and quality, and human resource characteristics. Based on their under-
standing of these areas, managers can determine their strengths or weaknesses
compared with other companies.
TakeaMoment
Management and
Organization Marketing Human Resources
Management quality
Staff quality
Degree of centralization
Organization charts
Planning, information,
control systems
Distribution channels
Market share
Advertising effi ciency
Customer satisfaction
Product quality
Service reputation
Sales force turnover
Employee experience, education
Union status
Turnover, absenteeism
Work satisfaction
Grievances
Finance Production
Research and
Development
Profi t margin
Debt-equity ratio
Inventory ratio
Return on investment
Credit rating
Plant location
Machinery obsolescence
Purchasing system
Quality control
Productivity/effi ciency
Basic applied research
Laboratory capabilities
Research programs
New-product innovations
Technology innovations
EXHIBIT 7.3
Checklist for Analyzing
Organizational Strengths
and Weaknesses
S
S
S
S
S
SWO
T ana
ly
sis
Ana
Ana
lys
lys
is
is
of
of
t
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st
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ren
ren
ren
gth
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wea
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o
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pp
ortunities, and threats
(
(
(
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OT) that affect or
g
anization
a
al
l
l
l
p
p
pe
per
per
per
er
p
p
p
p
for
mance
CHAPTER 7 STRATEGY FORMULATION AND IMPLEMENTATION 193
Planning
3
External Opportunities and Threats Threats are
characteristics of the external environment that may pre-
vent the organization from achieving its strategic goals.
Opportunities are characteristics of the external environ-
ment that have the potential to help the organization
achieve or exceed its strategic goals. Executives evaluate
the external environment with information about the ten
sectors described in Chapter 3. The task environment sec-
tors are the most relevant to strategic behavior and include
the behavior of competitors, customers, suppliers, and the
labor supply. The general environment contains those sec-
tors that have an indirect in uence on the organization but
nevertheless must be understood and incorporated into
strategic behavior. The general environment includes tech-
nological developments, the economy, legal-political and
international events, natural resources, and sociocultural
changes. Additional areas that might reveal opportunities
or threats include pressure groups, interest groups, credi-
tors, and potentially competitive industries.
Social networking company Facebook, which was at
rst a site for college students, provides an example of
how managers can use SWOT analysis in formulating an
appropriate strategy.
MySpace is still in the lead in online social networking, but Facebook is getting all the atten-
tion. The startup grew rapidly in the fi rst four years after 23-year-old Mark Zuckerberg
founded it while still a student at Harvard University. To keep Facebook growing, the young
CEO made some strategic decisions that can be understood by looking at the company’s
strengths, weaknesses, opportunities, and threats.
Facebook’s strengths include technological know-how and an aggressive and innovative
culture. In addition, Facebook has a major partnership with Microsoft, which has invested
$240 million, brokers banner ads for the company, and is developing tools that make it
easy to create links between Windows applications and Facebook’s network. Since Face-
book expanded beyond students, membership has boomed, and Facebook is preferred over
MySpace by older users and the Silicon Valley tech set. Work networks on Facebook are
exploding. The primary weakness is a lack of management expertise to help the company meet
the challenges of growing up.
The biggest threat to the company is that Facebook is still spending more cash than it
is bringing in. In addition, Zuckerberg is gaining a reputation in the industry as an arrogant
and standoffi sh manager, which could hurt Facebook’s chances of successful partnerships.
Opportunities abound to expand the company’s operations internationally and to take advan-
tage of Facebook’s popularity to introduce features that can command higher Web advertis-
ing rates and bring in more revenue.
What does SWOT analysis suggest for Facebook? Zuckerberg is trying to capitalize on
Facebook’s popularity by making it a place for companies to provide services to members.
For example, Prosper.com developed a Facebook application for its service that allows mem-
bers to lend one another money at negotiated interest rates. Non-Internet companies such
as Red Bull have also developed Facebook applications to reach Facebook’s vast customer
base. Companies that put applications on the Facebook Web site can experience a sort of
viral popularity as word spreads among millions of members.
To implement the strategy, Zuckerberg is bringing in executives with more strategy experi-
ence than himself, such as Chamath Palihapitiya, a former AOL manager, as vice president
of product marketing, and Sheryl Sandberg, formerly of Google, as chief operating offi cer.
These managers have the traditional skills Facebook needs to execute the new strategy both
in the United States and internationally.
23
It’s too soon to tell if Facebook’s strategy is working.
24
Zuckerberg is continuing
his efforts to build a more seasoned executive team to keep growing and avoid dam-
aging mistakes as Facebook pursues its strategy.
Facebook Inc.
Innovative Way
© ATEF HASSAN/CORBIS
The effects of this oil fi re in Iraq were
felt thousands of miles away—in the executive suites at companies
such as United Airlines, US Airways, and Delta in the United States.
The major air carriers, already struggling, were devastated when the
price of fuel spiked in the spring and summer of 2008. Uncertainty
about oil costs and supplies is a signifi cant external threat to the
nation’s airlines. Other threats include stiff competition from low-
cost carriers and the lingering fear of terrorism.
PART 3 PLANNING194
FORMULATING CORPORATE-LEVEL STRATEGY
Portfolio Strategy
Individual investors often wish to diversify in an investment portfolio with some
high-risk stocks, some low-risk stocks, some growth stocks, and perhaps a few
income bonds. In much the same way, corporations like to have a balanced mix of
business divisions called strategic business units (SBUs). An SBU has a unique busi-
ness mission, product line, competitors, and markets relative to other SBUs in the
corporation.
25
Executives in charge of the entire corporation generally de ne an over-
all strategy and then bring together a portfolio of strategic business units to carry it
out. Portfolio strategy pertains to the mix of business units and product lines that
t together in a logical way to provide synergy and competitive advantage for the
corporation. Managers don’t like to become too dependent on one business. For
example, at United Technologies Corporation (UTC), the aerospace-related business
units have been struggling through one of the worst slumps in history. However,
UTC’s Otis Elevator division is keeping the corporation’s sales and pro ts strong.
Otis has a commanding share of the worldwide market for new elevators and escala-
tors. In addition, the unit provides a steady revenue stream from elevator mainte-
nance, repair, and upgrade. The elevators in the Waldorf-Astoria, for example, were
installed in 1931 and have been steadily upgraded by Otis ever since.
26
One useful
way to think about portfolio strategy is the BCG matrix.
The BCG Matrix
The BCG (for Boston Consulting Group) matrix is illustrated in Exhibit 7.4. The
BCG matrix organizes businesses along two dimensions—business growth rate and
market share.
27
Business growth rate pertains to how rapidly the entire industry is
increasing. Market share de nes whether a business unit has a larger or smaller share
than competitors. The combinations of high and low market share and high and low
business growth provide four categories for a corporate portfolio.
EXHIBIT 7.4
The BCG Matrix
s
s
s
s
st
str
ategic business unit
(
(
(
(SB
U)
Ad
A
d
ivi
ivi
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mis
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sio
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pro
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e, competitors, an
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k
ets
r
r
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re
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ative to ot
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er
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s in t
h
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me cor
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orat
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on
.
p
p
p
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ort
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gy
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he
o
o
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or
r
ganization’s mix o
f
strategic
b
b
b
b
bu
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siness units an
d
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ine
s
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at
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t toget
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er in suc
h
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a
a
a
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as
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to
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rovide the cor
p
oration
w
w
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ith s
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and competitive
a
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CG matr
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concept
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-
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op
p
e
d
b
y t
h
e Boston Consu
l
tin
g
g
G
G
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roup that evaluates strategic
b
b
b
b
bu
u
siness units with res
p
ect to
t
t
t
h
h
he
t
d
im
e
n
s
i
o
n
s
o
f
bus
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e
ss
g
g
g
g
gr
gr
gro
ro
g
wth rate and market shar
e.
.
CHAPTER 7 STRATEGY FORMULATION AND IMPLEMENTATION 195
Planning
3
The star has a large market share in a rapidly growing industry. The star is impor-
tant because it has additional growth potential, and pro ts should be plowed into this
business as investment for future growth and pro ts. The star is visible and attractive
and will generate pro ts and a positive cash ow even as the industry matures and
market growth slows.
The cash cow exists in a mature, slow-growth industry but is a dominant business
in the industry, with a large market share. Because heavy investments in advertising
and plant expansion are no longer required, the corporation earns a positive cash
ow. It can milk the cash cow to invest in other, riskier businesses.
The question mark exists in a new, rapidly growing industry, but has only a small
market share. The question mark business is risky: It could become a star, or it could
fail. The corporation can invest the cash earned from cash cows in question marks
with the goal of nurturing them into future stars.
The dog is a poor performer. It has only a small share of a slow-growth market.
The dog provides little pro t for the corporation and may be targeted for divestment
or liquidation if turnaround is not possible.
The circles in Exhibit 7.4 represent the business portfolio for a hypothetical corpora-
tion. Circle size represents the relative size of each business in the company’s portfolio.
Most large organizations, such as General Electric (GE), have businesses in more than
one quadrant, thereby representing different market shares and growth rates.
Since he took over as General Electric’s CEO, Jeff Immelt has been reshuffl ing the corpora-
tion’s mix of businesses in a way that he believes will better position GE for the long term. GE
is investing heavily in its stars and question marks to ensure that its portfolio will continue to
include cash cows in a future that might be very different from today’s world.
The most famous cash cows in General Electric’s portfolio are the appliance division and
lighting, which hold a large share of a stable market and account for a big portion of sales
and profi ts. The GE Security division has star status, and GE is pumping money into devel-
opment of new products for hot areas such as fi re safety, industrial security, and homeland
security. GE Healthcare is also a star, and managers are investing research dollars to become
a leader in the growing business of biosciences and personalized medicine. Some products
under development might not hit the marketplace for a decade but hold the promise of huge
returns.
GE’s renewable energy business is still a question mark. The company moved into wind
and solar power and biogas with acquisitions such as Enron Wind. Managers hope the divi-
sion can become a star, but the potential demand for renewable energy is uncertain at this
point.
GE’s consumer fi nance division is also a question mark. Top executives are currently over-
hauling the brand image of consumer fi nance to see whether it will revive the division enough
to keep it in the portfolio. If they decide the division is a dog, GE will sell it off as they did the
less profi table and slow-growing insurance business.
28
Diversifi cation Strategy
The strategy of moving into new lines of business, as GE did by getting into health-
care, nance, and alternative forms of energy, is called diversi cation. Other exam-
ples of diversi cation include Apple’s entry into the mobile phone business with
the iPhone, the move by News Corporation into online social networking with the
acquisition of MySpace, and Nestlé’s entry into the pet food business with the pur-
chase of Ralston.
The purpose of diversi cation is to expand the rm’s business operations to produce
new kinds of valuable products and services. When the new business is related to the com-
pany’s existing business activities, the organization is implementing a strategy of related
diversi cation. For example, GE’s move into renewable energy and Nestlé’s move into
pet foods are linked to these rms’ existing energy and nutrition businesses. Unrelated
diversi cation occurs when an organization expands into a totally new line of
General Electric
Innovative Way
d
d
d
d
d
div
e
r
s
ifi
cat
i
o
n
A
strategy
o
o
o
o
f
o
o
moving into new lines o
f
b
b
b
b
us
b
in
ess.
r
r
r
r
r
e
l
ate
d
d
iversi
fi
cation
M
M
M
M
M
M
ov
M
M
ing into a new
b
usiness
t
t
t
h
h
h
h
a
t
t is r
l
e
l
a
d
te
d
to
h
t
h
e company
’
s
’s
s
e
e
ex
xi
e
ex
xi
e
sti
sti
ng
ng
bus
bus
ine
ine
ss
ss
act
act
ivi
ivi
tie
tie
s
s
.
u
u
u
u
u
nre
l
ate
d
d
iversi
fi
cation
E
E
E
E
E
E
xpan
d
ing into a tota
ll
y new
l
l
li
i
i
ne o
f
b
usiness.
PART 3 PLANNING196
business, such as GE’s entry into consumer nance or food company Sara Lee’s move
into the intimate apparel business. With unrelated diversi cation, the company’s
lines of business aren’t logically associated with one another; therefore, it can be dif-
cult to make the strategy successful. Most companies are giving up on unrelated
diversi cation strategies, selling off unrelated businesses to focus on core areas.
A rm’s managers may also pursue diversi cation opportunities to create value
through a strategy of vertical integration. Vertical integration means the company
expands into businesses that either produce the supplies needed to make products
or that distribute and sell those products to customers. For example, E & J Gallo
Winery started a new business to make its own wine bottles rather than buying them
from a supplier.
29
Gallo could make bottles more cheaply than it could buy them,
enabling managers to reduce costs. In addition, the new division enabled the com-
pany to distinguish its wines with unique bottle shapes. An example of diversify-
ing to distribute products comes from Apple, which opened retail stores to increase
visibility and sell its innovative products to customers. The strategy was a big suc-
cess. Customers can try the products before they buy and get free help on how to
use Macintosh computers, iPods and iPhones, Apple software, and accessories like
digital cameras.
30
FORMULATING BUSINESS-LEVEL STRATEGY
Now we turn to strategy formulation within the strategic business unit, in which the
concern is how to compete. A popular and effective model for formulating strategy
is Porter’s competitive forces and strategies. Michael E. Porter studied a number of
business organizations and proposed that business-level strategies are the result of
ve competitive forces in the company’s environment.
31
More recently, Porter exam-
ined the impact of the Internet on business-level strategy.
32
New Web-based technol-
ogy is in uencing industries in both positive and negative ways, and understanding
this impact is essential for managers to accurately analyze their competitive environ-
ments and design appropriate strategic actions.
Porter’s Five Competitive Forces
Exhibit 7.5 illustrates the competitive forces that exist in a company’s environment
and indicates some ways Internet technology is affecting each area. These forces help
determine a company’s position vis-à-vis competitors in the industry environment.
1. Potential new entrants. Capital requirements and economies of scale are exam-
ples of two potential barriers to entry that can keep out new competitors. It is far
more costly to enter the automobile industry, for instance, than to start a special-
ized mail-order business. In general, Internet technology has made it much easier
for new companies to enter an industry by curtailing the need for such organiza-
tional elements as an established sales force, physical assets such as buildings and
machinery, or access to existing supplier and sales channels.
2. Bargaining power of buyers. Informed customers become empowered customers.
The Internet provides easy access to a wide array of information about products,
services, and competitors, thereby greatly increasing the bargaining power of
end consumers. For example, a customer shopping for a car can gather exten-
sive information about various options, such as wholesale prices for new cars or
average value for used vehicles, detailed speci cations, repair records, and even
whether a used car has ever been involved in an accident.
3. Bargaining power of suppliers. The concentration of suppliers and the availabil-
ity of substitute suppliers are signi cant factors in determining supplier power.
The sole supplier of engines to a manufacturer of small airplanes will have great
power, for example. The impact of the Internet in this area can be both positive
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CHAPTER 7 STRATEGY FORMULATION AND IMPLEMENTATION 197
Planning
3
and negative. That is, procurement over the Web tends to give a company greater
power over suppliers, but the Web also gives suppliers access to a greater number
of customers, as well as the ability to reach end users. Overall, the Internet tends
to raise the bargaining power of suppliers.
4. Threat of substitute products. The power of alternatives and substitutes for a com-
pany’s product may be affected by changes in cost or in trends such as increased
health consciousness that will de ect buyer loyalty. Companies in the sugar
industry suffered from the growth of sugar substitutes; manufacturers of aero-
sol spray cans lost business as environmentally conscious consumers chose other
products. The Internet created a greater threat of new substitutes by enabling new
approaches to meeting customer needs. For example, offers of low-cost airline
tickets over the Internet hurt traditional travel agencies.
5. Rivalry among competitors. As illustrated in Exhibit 7.5, rivalry among competi-
tors is in uenced by the preceding four forces, as well as by cost and product
differentiation. With the leveling force of the Internet and information technol-
ogy, it has become more dif cult for many companies to nd ways to distinguish
themselves from their competitors, which intensi es rivalry. Porter referred to the
“advertising slugfest” when describing the scrambling and jockeying for position
that occurs among erce rivals within an industry. Nintendo and Sony are ght-
ing for control of the video game console industry, Net ix and Blockbuster are
competing for the mail order movie rental business, and Pepsi and Coke are still
battling it out in the cola wars.
EXHIBIT 7.5 Porter’s Five Forces Affecting Industry Competition
SOURCES: Based on Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980); and
Michael E. Porter, “Strategy and the Internet,” Harvard Business Review (March 2001): 63–78.
PART 3 PLANNING198
As a new manager, examine the competitive forces that are affecting your organization.
What can you do as a lower-level manager to help the fi rm fi nd or keep its competitive
edge through a differentiation, cost-leadership, or focus strategy?
Competitive Strategies
In nding its competitive edge within these ve forces, Porter suggests that a com-
pany can adopt one of three strategies: differentiation, cost leadership, or focus. The
organizational characteristics typically associated with each strategy are summarized
in Exhibit 7.6.
▪ Differentiation. The differentiation strategy involves an attempt to distinguish
the rm’s products or services from others in the industry. The organization may
use creative advertising, distinctive product features, exceptional service, or new
technology to achieve a product perceived as unique. Examples of products that
have bene ted from a differentiation strategy include Harley-Davidson motor-
cycles, Snapper lawn equipment, and Gore-Tex fabrics, all of which are perceived
as distinctive in their markets. Service companies such as Starbucks, Whole Foods
Market, and IKEA also use a differentiation strategy.
A differentiation strategy can reduce rivalry with competitors if buyers are
loyal to a company’s brand. Successful differentiation can also reduce the bar-
gaining power of large buyers because other products are less attractive, which
also helps the rm ght off threats of substitute products. In addition, differen-
tiation erects entry barriers in the form of customer loyalty that a new entrant
into the market would have dif culty overcoming.
▪ Cost leadership. With a cost leadership strategy, the organization aggressively
seeks ef cient facilities, pursues cost reductions, and uses tight cost controls to
produce products more ef ciently than competitors. A low-cost position means
that the company can undercut competitors’ prices and still offer comparable
quality and earn a reasonable pro t. For example, Comfort Inn and Motel 6 are
low-priced alternatives to Four Seasons or Marriott.
TakeaMoment
EXHIBIT 7.6
Organizational
Characteristics of Porter’s
Competitive Strategies
Strategy Organizational Characteristics
Differentiation Acts in a fl exible, loosely knit way, with strong coordination among departments
Strong capability in basic rewards
Creative fl air, thinks “out of the box”
Strong marketing abilities
Rewards employee innovation
Corporate reputation for quality or technological leadership
Cost Leadership Strong central authority; tight cost controls
Maintains standard operating procedures
Easy-to-use manufacturing technologies
Highly effi cient procurement and distribution systems
Close supervision, fi nite employee empowerment
Focus Frequent, detailed control reports
May use combination of above policies directed at particular strategic target
Values and rewards fl exibility and customer intimacy
Measures cost of providing service and maintaining customer loyalty
Pushes empowerment to employees with customer contact
SOURCES: Based on Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: The Free
Press: 1980); Michael Treacy and Fred Wiersema, “How Market Leaders Keep Their Edge,” Fortune (February 6, 1995): 88–98;
and Michael A. Hitt, R. Duane Ireland, and Robert E. Hoskisson, Strategic Management (St. Paul, MN: West, 1995), p. 100–113.
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CHAPTER 7 STRATEGY FORMULATION AND IMPLEMENTATION 199
Planning
3
Being a low-cost producer provides a successful
strategy to defend against the ve competitive forces
in Exhibit 7.5. The most ef cient, low-cost company
is in the best position to succeed in a price war while
still making a pro t. Likewise, the low-cost producer
is protected from powerful customers and suppli-
ers, because customers cannot nd lower prices
elsewhere, and other buyers would have less slack
for price negotiation with suppliers. If substitute
products or potential new entrants occur, the low-
cost producer is better positioned than higher-cost
rivals to prevent loss of market share. The low price
acts as a barrier against new entrants and substitute
products.
33
▪ Focus. With a focus strategy, the organization concen-
trates on a speci c regional market or buyer group.
The company will use either a differentiation or cost
leadership approach, but only for a narrow target mar-
ket. Save-A-Lot, described earlier, uses a focused cost
leadership strategy, putting stores in low-income areas.
Edward Jones Investments, a St. Louis-based brokerage
house, uses a focused differentiation strategy, building
its business in rural and small town America and pro-
viding clients with conservative, long-term investment
advice. Management scholar and consultant Peter
Drucker once said the safety- rst orientation means
Edward Jones delivers a product “that no Wall Street
house has ever sold before: peace of mind.”
34
Managers should think carefully about which strat-
egy will provide their company with its competitive
advantage. Gibson Guitar Corporation, famous in the
music world for its innovative, high-quality products,
found that switching to a low-cost strategy to compete
against Japanese rivals such as Yamaha and Ibanez actu-
ally hurt the company. When managers realized people
wanted Gibson products because of their reputation, not their price, they went
back to a differentiation strategy and invested in new technology and market-
ing.
35
In his studies, Porter found that some businesses did not consciously adopt
one of these three strategies and were stuck with no strategic advantage. Without
a strategic advantage, businesses earned below-average pro ts compared with
those that used differentiation, cost leadership, or focus strategies. Similarly, a
ve-year study of management practices in hundreds of businesses, referred to
as the Evergreen Project, found that a clear strategic direction was a key factor that
distinguished winners from losers.
36
NEW TRENDS IN STRATEGY
Organizations have been in a merger and acquisition frenzy in recent years. J. P. Morgan
Chase and Bank One merged, AT&T bought Cingular Wireless, and Disney merged
with ABC. Some companies still seek to gain or keep a competitive edge by acquiring
new capabilities via mergers and acquisitions. Yet today, a decided shift has occurred
toward enhancing the organization’s existing capabilities as the primary means of
growing and innovating. Another current trend is using strategic partnerships as an
alternative to mergers and acquisitions.
COURTESY OF CRISPIN PORTER + BOGUSKY
The MINI’s trademarked
term “Whiptastic Handling” is one of the ways the company
distinguishes itself in the automobile industry. MINI, a division
of BMW of North America, is thriving with its differentiation
strategy. The company trademarked the Whiptastic name to
emphasize that driving a MINI Cooper is unlike anything else.
Customers seem to agree; sales are zooming.
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