The Ten-Day MBA 4th Ed.

by Steven A. Silbiger

  Industry Analysis

  Competitive Strategies

  Signaling

  Portfolio Strategies

  Globalization

  Synergy

  Incrementalism

  Strategy is the most exciting course in the MBA curriculum because it gives you the chance to put all your new skills to work. Most professors insist that strategy be taught after completing most of the core courses, because it requires a background in all the MBA disciplines. Strategy classes place students in the chairman of the board’s chair, and MBAs love that feeling. As my strategy professor told us, exposure to strategy concepts alters the way you look at businesses. Strategic thinking involves a comprehensive analysis of a business in relation to its industry, its competitors, and the business environment in both the short and the long term. Ultimately, strategy is a company’s plan to achieve its goals.

  Corporate managements often do not know clearly what they want or how they’ll get there. When this is the situation, a boardroom discussion could resemble a scene from Lewis Carroll’s Alice’s Adventures in Wonderland:

  ALICE: Would you tell me, please, which way ought I to go from here?

  CHESHIRE CAT: That depends a good deal on where you want to get to.

  ALICE: I don’t much care where—.

  CHESHIRE CAT: Then it doesn’t matter which way you go.

  Corporations need well-thought-out strategic plans or inevitably they will become victims of the marketplace instead of being the victors who shape it.

  STRATEGY AS PART OF AN ORGANIZATION: THE SEVEN S MODEL

  Strategic plans cannot be formed in a vacuum; they must fit organizations, just as marketing plans must be suited to products. Two separate stages characterize strategic planning: formation and implementation. Strategists should always devise their plans with an eye toward implementation. Thomas J. Peters, of In Search of Excellence fame, created the Seven S model showing that strategy ought to be interwoven within the fabric of an organization. Actually Peters created the model with Robert H. Waterman and Julien R. Phillips, but Peters, an exceptional speaker, is usually given most of the credit. Their model provides a structure with which to consider a company as a whole, so that the organization’s problems may be diagnosed and a strategy may be developed and implemented. If a strategy requires radical reorganization, it’s called reengineering. If not, it is described as organizational tinkering. The Seven S’s are:

  Structure

  Systems

  Skills

  Style

  Staff

  Superordinate Goals/Shared Values

  Strategy

  The diagram illustrates the “multiplicity” and “interconnectedness” of elements that influence an organization’s ability to change. The other notable feature in the diagram is that there is “no starting point or implied hierarchy.” In any one organization, different factors may drive the business. In an “excellent” organization, each of the S’s complements the others and consistently advances the company’s goal. This is not any different from a marketing plan, which should be internally consistent and mutually supportive, as explained in the first chapter. The Seven S model is a helpful tool to organize one’s thoughts in order to define and effectively attack complicated problems.

  THE SEVEN S MODEL

  Reprinted from Business Horizons, June 1980. © 1980 by the Foun-dation for the School of Business at Indiana University. Used with permission.

  If you recall the basic organizational model outlined in the organizational behavior chapter, the Seven S’s should look familiar. Strategy theorists borrow ideas and concepts from other MBA disciplines and integrate them. Here the same S’s appear but with some additions and deletions.

  Structure. A corporation’s structure affects its strategic planning and its ability to change. As explained in the OB chapter, a company’s structure may have a customer or a geographic focus. For instance, if a company decides to alter its strategy to become more responsive to its customers, it may need to adopt a customer structure, which will channel all the skills of a company to meet customers’ specific needs. In the case of a power tool manufacturer, the competition may demand a change from a functional form, which separates manufacturing, sales, and finance, to an organization with two customer divisions. One division would serve household consumers and the other industrial customers. These market segments have different needs that could most effectively be serviced by two focused divisions. In special situations, a temporary structure such as a matrix could be overlaid to form project teams skilled in developing new products.

  Strategy. This refers to the actions that a company plans in response to or in anticipation of changes in its external environment, its customers, and its competitors. The spectrum of strategies a company can use is the focus of this chapter.

  Style. It sounds like a new addition to the basic organizational model, but this S is more closely related to culture. Culture or style is the aggregate of behaviors, thoughts, beliefs, and symbols that are conveyed to people throughout an organization over time. Since it is hard to change a company’s ingrained culture, it is important to bear it in mind when developing a new strategy. If a consumer products company has a conservative bent, it will need to be convinced, beyond a shadow of a doubt, of the efficacy or viability of a new product. Historically, Procter & Gamble was in the slow-to-innovate category, but lately its behavior has been changing. P&G had test-marketed Bounce fabric softener for years before introducing it across the country. By contrast it rolls out new products in months now.

  Staff. With no warm bodies, there’s no company. By staff Peters means the human resource systems, which include appraisals, training, wages, and the intangibles, such as employee motivation, morale, and attitude. With a motivated workforce, companies are able to adapt and compete. Top management often ignores this S because they feel that it is not significant on one hand and too touchy-feely on the other. “Let the human resources department deal with it” is the common attitude. This soft factor is essential, however, because without employee cooperation a company will not have the ability to succeed.

  Skills. Closely related to staff are the distinctive abilities and talents that a company possesses. Skills may range from the ability of a staff to speak Spanish, to an understanding of statistics, to computer literacy, for instance. Certain companies are strong in particular areas. Du Pont and 3M are known for their superb research and development capabilities. IBM’s and General Electric’s strengths lie in their ability to provide superior service support for their products. International companies need people with language skills and in-depth knowledge of other cultures and customs. American Express for one acquires these skills by hiring knowledgeable nationals in the markets in which it competes.

  Systems. The procedures, both formal and informal, by which an organization operates and gathers information constitute the systems of a company. As I mentioned, Peters considers the systems relating to personnel part of staff. With this S, Peters is concerned with the systems that allocate and control money and materials as well as gather information.

  When a company confronts a major challenge in the marketplace, management must have detailed data about its operations, customers, and competition to determine the gravity of the situation. Managerial accounting systems provide operational data about production and costs. Marketing research and sales tracking systems give information about the customers. Competitive intelligence systems provide insight as to what other companies are up to.

  Superordinate Goals. This last S is at the core of an organization. According to Peters, “The word superordinate literally means of higher order.” Superordinate goals are the guiding concepts—values and aspirations, often unwritten—that go beyond the conventional statements of corporate objectives. “Superordinate goals are the fundamental ideas around which a business is built.” For example, Peters wrote in 1980 that Hewlett-Packard’s superordinate goal was to have “innovative people at all leve
ls in the organization.” 3M’s superordinate goal was to produce “new products,” while IBM’s was “customer service.”

  Mission Statements. These are often mentioned when companies speak about their goals. A mission statement should be a short and concise statement of goals and priorities. Unfortunately they are often long, bland, and tedious documents. When senior executives return from expensive executive programs from one of the Top Ten schools, frequently they form a mission statement task force or hire a consultant for this purpose. This exercise has a large element of “keeping up with the Joneses.” If a company incorporates a mission statement in its annual report, then all of its competitors go off to cook up theirs. Chrysler’s and Campbell’s (soup) annual reports boast well-written mission statements:

  Chrysler’s primary goal is to achieve consumer satisfaction. We do it through engineering excellence, innovative products, high quality, and superior service. And we do it as a team.

  Our goals are to maximize profitability and shareholder value by marketing consumer food products that lead in quality and value; and to build and defend the first or second position in every category in which we compete.

  Their goals were clear. Chrysler focused on consumer satisfaction, while Campbell’s main goal was to satisfy its shareholders. The wording of the mission statement is often crafted to address the most important constituency at the time. Chrysler focused on making even more sales. Controlled by the Dorrance family, Campbell’s wrote its statement at a time when the company was said to be managed for the sole benefit of the family, and not for the public shareholders. Apart from the politics involved in its creation, a mission statement can be a useful surrogate for a firm’s superordinate goal, if it doesn’t have one.

  A SEVEN S MODEL EXAMPLE

  When all of a company’s S’s move in concert, it can be a formidable competitor. The early success of Apple Computer can be said to have been derived from the balance of its S’s. It had an entrepreneurial style fostered by its founders that attracted the brightest and most creative staff. With their cutting-edge technological skills, the founders organized Apple in a loose corporate matrix structure that fit the personalities of the people and the task of creating new products. Apple developed reinforcing systems to reward innovation and to track operations. Their rewards supported Apple’s shared values of teamwork and fun to achieve its superordinate goal—placing the best user-friendly computer in every household. Apple’s strategy was to create a proprietary, user-friendly system for the home, school, and graphics markets. All the S’s fit together well and were mutually supportive of its goals.

  Do your own MBA analysis of your favorite organization. List the Seven S’s on a sheet of paper and dig in. A strategic consultant with an MBA would do exactly the same thing you can now do with the Seven S model. But a consulting firm would accompany the study with fancy computer graphics, put it in a binder, and charge your company a small fortune.

  THE VALUE CHAIN AND INTEGRATION

  When an MBA begins the strategic analysis of any company, one of the first questions should be “What business is it in?” The value chain and integration concepts help to answer that question.

  VALUE CHAIN

  After the basic question has been answered, the next step for a strategic analyst is to assess the value a company adds to its products. The apparel industry’s value chain looks like this:

  Wool → Fiber → Yarn → Cloth → Clothing → Distribution → Retailing → Consumer

  At each link in the chain, a channel participant adds value to the product as it makes its way to the consumer. First, the raw materials must be produced, harvested, or mined. These factors of production—wool, cotton, and chemicals—are combined to manufacture clothing. Once it is produced, marketers must promote, distributors transport, and retailers sell the clothing to the consumer.

  INTEGRATION

  Forward and Backward Integration. A company can perform at any link in the value chain. When a company operates in areas further down the value chain, it is said to be forwardly integrated toward the consumer. For example, if an orchard owner grew and sold his fruit to the public, he would be considered forwardly integrated toward the buyer. The grower could decide to sell at a lower price than the grocery store or to sell at the grocery’s price and make the additional profit.

  If a business operates in areas closer to the raw materials, then the company is said to be backwardly integrated. International Paper, which owns its own forests and paper-manufacturing facilities, would be classified as being backwardly integrated.

  You can see a company as either forwardly or backwardly integrated depending on the point in the value chain at which you view that company. If you consider the orchard owner primarily as a grower, then you might view his business as forwardly integrated toward the retailing end of the chain. If you believed that his main business was retailing fruit to the public, then you could say that his business is backwardly integrated because he grows what he sells. International Paper is backwardly integrated to its timberland operations and forwardly integrated to its consumer paper-product manufacturing and distribution activities.

  Forestry ← Backward Integration ← International Paper → Forward Integration → Consumer Paper

  Vertical and Horizontal Integration. Industries can also be viewed vertically and horizontally. Vertically integrated is a term used for companies that participate at many levels of the value chain in an industry. International Paper is vertically integrated because it owns both the trees and the paper mills. The term can describe both forwardly and backwardly integrated companies. The key is that several value-adding functions are being performed by one firm.

  When Exxon purchased Mobil in 1999, it acquired a competitor at the same level in the value chain. This is called horizontal integration. Exxon chose not to move to another value-adding activity. Instead Exxon moved sideways or horizontally. If the new Exxon-Mobil had bought Apache Oil Exploration, it would be vertically integrated. In this hypothetical case, a new value function would have been added to ExxonMobil’s manufacturing operations in the automobile industry.

  Strategic analysts review industries’ value chains to identify current and future sources of competition. When chemical companies sought higher profits, they forwardly integrated into higher “value added” products such as fibers for cloth and carpet. With the likes of Du Pont, the fiber link of the chain became more competitive. Similarly, The Limited integrated the manufacturing, distribution, and retailing links in the value chain, unleashing even more competitive activity in the already cutthroat apparel industry.

  Integration strategies may result in obvious benefits such as secured inputs and lower costs, but the disadvantages include a higher exposure to the downturns in a single industry. All of the corporation’s eggs are in one basket. In lean times, an ExxonMobil refinery can’t squeeze concessions from its oil suppliers if the supplier is ExxonMobil. In the same way, General Motors can’t dump excess engine inventories on its customers if the only user is the company itself.

  LEVELS OF STRATEGY

  Strategy is a broad term. It commonly describes any thinking that looks at the “big picture.” In fact, it is more complex. There are three levels of strategy to be considered:

  Functional Strategy—The value activities engaged in

  Business Strategy—How to fight the competition, tactics

  Corporate Strategy—What businesses should I be in?

  When putting on the strategy hat, you must ask yourself, “At what level do I wish to think? Functional, business, or corporate?”

  FUNCTIONAL STRATEGY

  Functional strategies are those operational methods and “value-adding” activities that management chooses for its business. The functional strategy of Altria Group’s Philip Morris, for example, has been to lower costs by utilizing the most advanced processing technologies. If Philip Morris felt vulnerable to a single supplier of tobacco, a good functional strategy would dictate tha
t it use multiple suppliers.

  BUSINESS STRATEGY

  Business strategies are those battle plans used to fight the competition in the industry that a company currently participates in. They are on a higher level than functional strategies, but there is obviously an overlap between how a company operates and how it competes. Philip Morris’s business strategy has been to beat its competition by crowding store shelves with many different brands and by spending heavily on advertising to promote its brands. Using these strategies, the large tobacco companies preserve market share and prevent new competitors from gaining a foothold in their industry.

  CORPORATE STRATEGY

  Corporate strategy looks at the whole gamut of business opportunities. Philip Morris’s corporate name change to Altria made it clear. Altria’s corporate strategy led the company to diversify away from tobacco products and toward consumer goods. Altria’s executives reviewed the tobacco industry’s growth potential, the legal environment, and the increased health awareness among consumers and concluded that it was wise to be in more “healthful” businesses. Its purchases of General Foods, Kraft, Nabisco, and Miller Brewing were made with that corporate strategy in mind. By 2009 Altria sold all those businesses to maximize shareholder value as the market found Philip Morris to be toxic when the legal environment for tobacco turned negative. Corporate strategy is dynamic.

  EXPANSION STRATEGIES

  Academics love to create diagrams to show off their theories and to make them easier to use. One of the simplest of the strategic diagrams is the Ansoff matrix. H. I. Ansoff created it in 1957 as a clear way to classify routes for business expansion. What determines the strategy classification is the newness of the product to the company and the firm’s experience with the intended market. The “newness” of the product or market is determined by how “new” it is to the company contemplating the strategy, not by the age of the product or market itself.