Purpose and Perspective of the Chapter

To make a plan that will drive your business to success, you need to analyze your situation
and choose the best strategy that fits your specific business. You need to look at your
business and the environment around it. Determine what your business needs and the
products or services you can offer. Look at the big picture to determine how you can sell
your products and earn a profit.

What does your business do better than your competition? Why should a customer choose
to purchase from your business rather than a similar business on the Internet? Use the
answer to determine your business strategy.

A successful business has carefully chosen its strategy and executed it at every level,
regardless of its size. Understanding the different approaches to corporate strategy will
help you choose the right strategy for your business.

Part of understanding your business environment is identifying how your competition

operates and uses its competitive advantage. It is often better to establish your own
competitive advantage than it is to compete against a business leader that has already
established itself in a particular area. For example, you might have a better chance at
succeeding if you open a café that specializes in a local favorite food than if you try to start
a standard fast-food business. Every decision you make has to work with your business
strategy to move toward success.

Key Terms
BCG matrix: A concept developed by the Boston Consulting Group that evaluates SBUs
with respect to two dimensions—business growth rate and market share—and classifies
them as cash cows, stars, bright prospects, or dogs.

Business-level strategy: The plan of action that pertains to each business unit or product
line within the organization.

Competitive advantage: What sets the organization apart from others and provides it
with a distinctive edge in the marketplace.

Core competence: Something that the organization does particularly well in comparison to
others.

Corporate-level strategy: The plan of action that pertains to the organization as a whole
and the combination of business units and products that compose it.

Cost leadership strategy: Managers aggressively seek efficient facilities, cut costs, and use
tight cost controls to be more efficient than others in the industry.

Differentiation strategy: Managers seek to distinguish the organization’s products and

services from those of others in the industry.

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Diversification: The strategy of moving into new lines of business.

Embeddedness: A deep understanding and acceptance of organizational direction and

purpose throughout the organization.

Focus strategy: Managers use either a differentiation or a cost leadership approach, but
concentrate on a specific regional market or buyer group.

Functional-level strategy: The plan of action that pertains to the major functional
departments within each business unit, such as manufacturing, marketing, HR, and R&D.

Globalization strategy: Product design and advertising are standardized throughout the
world.

Glocalization strategy: Combines global coordination to attain efficiency with local

flexibility to meet needs in different countries.

Gultidomestic strategy: Competition in each country is handled independently; product

design and advertising are modified to suit the specific needs of individual countries.

Joint venture: A strategic alliance or program by two or more organizations.

Merger: Two or more organizations combine to become one.

Portfolio strategy: seeks to establish a mix of SBUs and product lines that fit together in a
logical way to provide synergy and competitive advantage.

Related diversification: Moving into a new business that is related to the corporation’s
existing business activities.

Strategic business units (SBUs): a division of the organization that has a unique business,
mission, product or service line, competitors, and markets relative to other units of the
same organization.

Strategic management: The set of decisions and actions used to formulate and
implement strategies that will provide a competitively superior fit between the organization
and its environment so as to achieve organizational goals.

Strategy: The plan of action that describes resource allocation and activities for dealing
with the environment, achieving a competitive advantage, and attaining goals.

Strategy execution: The stage of strategic management that involves the use of
managerial and organizational tools to direct resources toward achieving strategic
outcomes.

Strategy formulation: The stage of strategic management that includes the planning and
decision making that lead to the establishment of the organization’s goals and a specific
strategic plan.

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SWOT analysis: An audit or careful examination of strengths, weaknesses, opportunities,
and threats that affect organizational performance.

Synergy: The organization’s parts interact to produce a joint effect that is greater than the
sum of the parts acting alone.

Vertical integration: Expanding into businesses that either provide the supplies needed to
make the company’s products or distribute and sell those products.

Unrelated diversification: Expanding into totally new lines of business.

Chapter 8 Outline

CO 8.1: Define the components of strategic management and the three levels of
strategy.

8-1. Thinking Strategically

I. Strategic thinking means taking the long-term view and seeing the big picture of the
organization and its environment.
II. Strategic planning in for-profit organizations pertains to competitive actions in the
marketplace.
III. In nonprofit organizations, strategic planning pertains to events in the external
environment.
CO 8.2: Explain the strategic management process.

8-2. What Is Strategic Management?

I. Strategic management is the set of decisions and actions used to formulate and
execute strategies that will provide a competitively superior fit between the
organization and its environment so as to achieve organizational goals.
II. Organizational performance is determined by the choices managers make.

8-2A. Purpose of Strategy

I. Strategy is the plan of action that describes resource allocation and activities for
dealing with the environment, achieving a competitive advantage, and attaining the
organization’s goals.
II. Competitive advantage refers to what sets the organization apart from others and
provides it with a distinctive edge for meeting customer or client needs in the
marketplace. The essence of formulating strategy is choosing how the organization
will be different.
a. Targeting customers is an effective strategy that defines the customers and
which of their needs are to be served by the company.

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 b. Exploiting core competencies is another strategy. A company’s core
competence is something the organization does especially well in
comparison to its competitors.
c. Building synergy is a third strategy. Synergy occurs when organizational
parts interact to produce a joint effect that is greater than the sum of its
parts acting alone.
d. Delivering value to customers should be the heart of strategy. Value can be
defined as the combination of benefits received and costs paid.
8-2B. Levels of Strategy

I. Strategic managers think in terms of three levels of strategy: corporate-level

strategy, business-level strategy, and functional-level strategy.
a. What business are we in? Corporate level strategy pertains to the
organization as a whole and the combination of business units and product
lines that makes up the corporate entity.
b. How do we compete? Business level strategy pertains to each business unit
or product line.
c. How do we support the business level strategy? Functional level strategy
pertains to the major functional departments within the business unit.

CO 8.3: Summarize how SWOT analysis can be used to evaluate a company’s

strengths, weaknesses, opportunities, and threats.

8-3. The Strategic Management Process

I. The strategic management process begins when executives evaluate their current
position with respect to mission, goals, and strategies. Then they scan the
organization’s internal and external environments and identify strategic issues that
might require change. The final stage in the strategic management process is
execution of the new strategy.
II. Events might indicate a need to redefine the mission or goals or to formulate a new
strategy at either the corporate, business, or function level.

8-3A. Strategy Formulation Versus Execution

I. Strategy formulation comprises the planning and decision making that lead to the
establishment of the firm’s goals and the development of a specific strategic plan.
II. Strategy execution is the use of managerial and organizational tools to direct
resources toward accomplishing strategic results.
III. 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.

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8-3B. SWOT Analysis

I. SWOT analysis includes a careful assessment of the strengths, weaknesses,

opportunities, and threats (SWOT) that affect organizational performance. External
information about opportunities is obtained from customers, government reports,
professional journals, suppliers, bankers, friends, and consultants. Internal
information comes from reports, budgets, financial ratios, surveys of employee
attitudes, and meetings.
a. Strengths are positive internal characteristics organizations can exploit to
achieve strategic performance goals.
b. Weaknesses are internal characteristics that may inhibit or restrict the
organization’s performance. The information sought pertains to specific
functions such as marketing, finance, production, or R&D.
c. Threats are characteristics of the external environment that may prevent the
organization from achieving its strategic goals.
II. Opportunities are characteristics of the external environment that have the
potential to help the organization achieve or exceed its strategic goals.
III. The task environment sectors are the most relevant to strategic behavior and
include the behavior of customers, competitors, suppliers, and the labor supply. The
general environment includes technological developments, the economy, legal-
political and international events, the natural environment, and sociocultural
changes.

CO 8.4: Explain three approaches to corporate-level strategy: the portfolio, the

Boston Consulting Group (BCG) matrix, and diversification.

8-4. Formulating Corporate Level Strategy

8-4A. Portfolio Strategy

I. Corporations like to have a balanced mix of business divisions called strategic

business units (SBUs).
a. An SBU has a unique business mission, product line, competitors, and
markets relative to other SBUs in the corporation.
b. Executives generally define an overall strategy and then bring together a
portfolio of SBUs to achieve the strategy.
II. Portfolio strategy pertains to the mix of business units and product lines that fit
together in a logical way to provide synergy and competitive advantage for the
corporation.
8-4B. The BCG Matrix

I. The BCG (Boston Consulting Group) matrix organizes businesses along two
dimensions—business growth rate and market share.
a. Business growth rate pertains to how rapidly the entire industry is growing.

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 b. Market share defines whether a business unit has a larger or smaller market
share than competitors. The combination of market share and business
growth rate provides four categories to judge SBUs within a corporate
portfolio.
II. Corporate portfolios have four categories.
a. The star has a large market share in a rapidly growing industry. The star is
important because it has additional growth potential and profits should be
reinvested for future growth and profits. It will generate a positive cash flow
as industry matures and market growth slows.
b. The cash cow exists in a mature, slow-growth industry but has a large market
share. The cash cow has a positive cash flow and can be milked to feed
riskier businesses.
c. The question mark exists in a new, rapidly growing industry but only has
small market share. The question mark is risky. It could become a star or it
could fail.
d. The dog is a poor performer with small market share in a slow- growth
industry. A dog provides little profit and may be targeted for divestment or
liquidation.

8-4C. Diversification Strategy

I. The strategy of moving into new lines of business is called diversification.

a. A merger occurs when two or more organizations combine to become one.
b. A joint venture involves a strategic alliance or program by two or more
organizations.
II. The purpose of diversification is to expand the firm’s business operations to
produce new kinds of valuable products and services.
a. When the new business is related to the company’s existing business
activities, the organization is implementing a strategy of related
diversification.
b. Unrelated diversification occurs when an organization expands into a
totally new line of business.
c. Managers may also pursue diversification 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.

CO 8.5: Describe Michael Porter’s competitive forces and strategies.

8-5. Formulating Business Level Strategy

8-5A. Porter’s Five Competitive Forces

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 I. Porter’s five forces help determine a company’s position vis-à-vis competitors in the
company’s environment. The competitive environment is different for different
kinds of businesses. Most large companies have separate business lines and do an
industry analysis for each line of business or SBU.
a. Potential new entrants. Internet technology has made it much easier for new
companies to enter an industry.
b. Bargaining power of buyers. The Internet provides easy access to a wide
range of information about products, services, and competitors, thereby
greatly increasing the bargaining power of consumers.
c. Bargaining power of suppliers. Overall, the Internet tends to increase the
bargaining power of suppliers.
d. Threat of substitute products. The power of alternatives and substitutes for a
company’s product may be affected by changes in cost or in trends that will
deflect buyer loyalty. The Internet created a greater threat of new substitutes
by enabling new approaches to meeting customer needs.
e. Rivalry among competitors. Rivalry among competitors is influenced by the
preceding four forces, as well as by cost and product differentiation. With the
leveling force of the Internet and information technology, it has become
more difficult for many companies to find ways to distinguish themselves
from their competitors, which increases rivalry.

8-5B. Porter’s Competitive Strategies

I. To find a competitive edge within the specific business environment, Porter

suggests that a company can adopt one of three strategies.
a. The differentiation strategy is an attempt to distinguish the firm’s products
or services from others in the same industry.
b. With a cost leadership strategy, the organization aggressively seeks
efficient facilities, pursues cost reductions, and uses tight cost controls to
produce products more efficiently than competitors. A cost leadership
position means that the company can undercut competitors’ prices and still
offer comparable quality and earn a reasonable profit.
c. With a focus strategy, the organization concentrates on a specific regional
market or buyer group. The firm may use a differentiation (quadrant 3) or
cost leadership (quadrant 4) approach, but only for a narrow target market.

CO 8.6: Compare and contrast the globalization, multidomestic, and glocalization

strategies for global business.

8-6. Global Strategy

I. Senior executives try to formulate coherent strategies to provide synergy among

worldwide operations for the purpose of fulfilling common goals.

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 II. The first step toward a greater international presence occurs when companies begin
exporting domestically produced products to selected countries. Organizations that
pursue further international expansion must decide whether they want each global
affiliate to act autonomously or to standardize and centralize activities. This choice
leads managers to select a basic strategy alternative such as globalization versus
multidomestic strategy.
8-6A. Globalization Strategy

I. When an organization chooses a globalization strategy, product design and

advertising strategies are standardized throughout the world. This approach is
based on the theory that people everywhere want to buy the same products and
live the same way.
II. A globalization strategy can help an organization reap efficiencies by standardizing
product design and manufacturing, using common suppliers, introducing products
around the world faster, coordinating prices, and eliminating overlapping facilities.

8-6B. Multidomestic Strategy

I. When an organization chooses a multidomestic strategy, competition in each

country is handled independently of industry competition in other countries. Thus, a
multinational company is present in many countries, but it encourages marketing,
advertising and product design, to be modified and adapted to the specific needs of
each country.
II. Many companies reject the idea of a single global market.

8-6C. Glocalization Strategy

I. A glocalization strategy seeks to achieve both global standardization and national

responsiveness. This is difficult to achieve because one goal requires close global
coordination while the other goal requires local flexibility.
II. Although most multinational companies want to achieve some degree of global
standardization to hold costs down, even global products may require some
customization to meet government regulations in various countries or some
tailoring to meet customer preferences.

CO 8.7: Explain the organizational dimensions that managers use to execute

strategy.

8-7. Strategy Execution

I. The final step in the strategic management process is strategy execution—how

strategy is implemented or put into action. Execution may be the most difficult and
important part of strategic management.

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II. One key to effective strategy execution is embeddedness, which means there is a
deep understanding and acceptance of organizational direction and purpose
throughout the organization. When the strategy is embedded, everyone’s daily
decisions and actions help move the firm in the right direction, toward achieving
important goals. That is, everything is in alignment.
III. Managers use several tools to implement strategy effectively.
a. Visible leadership
b. Clear roles and accountability
c. Candid communication
d. Appropriate HR practices