STRATEGIC MANAGEMENT

IN HOSPITALITY AND
TOURISM
Module 3: Strategy Content

Prepared by:
.

. JOHN RENALD DAEL

.

JEFFRY H. PUDPUD
 MODULE 3, CHAPTER 5:

BUSINESS-LEVEL STRATEGIES
After reading this chapter, you should be able to:

• Recognize the parameters of competitive strategy

• Understand the basis of a good strategy
• Define positioning and generic strategies
• Understand the industry lifecycle and competitive dynamics
• Discuss the importance of resources, capabilities, and
competencies
• Define causal ambiguity, inimitability, and sustainable
competitive advantage

TIME FRAME: 3 HOURS

ACTIVITY & ANALYSIS:

Choose a top-performing company in 2020 and discuss

thoroughly its competitive marketing strategy.
ABSTRACTION
Business-level strategy is an organized and orchestrated collection of commitments and
actions that it employs to achieve a competitive advantage by leveraging core
competencies in particular product markets. It identifies the decisions the company has taken
on how it will succeed in specific product markets. The decisions are important because a
company's long-term success is influenced by its strategies. Given the difficulty of competing
effectively in the global economy, deciding how the company can compete can be
challenging.

Moreover, the goal of a business-level strategy is to distinguish the firm's position from
that of its competitors. A company must determine whether it wants to differentiate itself from
rivals by performing activities differently or by performing different activities. The course that
provides the direction of actions to be taken by the organization's leaders is defined by
strategy.

What is a competitive strategy?

A competitive strategy is identified as a company's long-term strategy for gaining a
competitive advantage over its rivals in the industry. Its goal is to establish a defensive position
in a given industry while also producing a higher return on investment (Return on Investment).
When the market is highly competitive and customers are offered almost identical goods, such
tactics are critical.
Before developing a competitive strategy, one must first assess all of the industry's
strengths, weaknesses, opportunities, and risks before moving forward with a strategy that will
give them a competitive advantage. Understanding the competition, researching consumer
desires, assessing strengths and weaknesses, and so on are all crucial aspects of marketing
strategy. Companies will research and measure their market share, SWOT analysis, and other
factors, which will ultimately help them drive company and sales revenue.

Types of competitive strategies by Porter

According to Michael Porter, competitive strategy is devised into 4 types:
1. Cost Leadership
Here, the objective of the firm is to become the lowest cost producer in the industry
and is achieved by producing in large scale which enables the firm to attain economies of
scale. High-capacity utilization, good bargaining power, high technology implementation is
some of factors necessary to achieve cost leadership. e.g. Micromax phones

2. Differentiation leadership
Under this strategy, firm maintains unique features of its products in the market thus
creating a differentiating factor. With this differentiation leadership, firms target to achieve
market leadership. And firms charge a premium price for the products (due to high value-
added features). Superior brand and quality, major distribution channels, consistent
promotional support etc. are the attributes of such products. E.g., BMW, Apple

3. Cost focus
Under this strategy, firm concentrates on specific market segments and keeps its
products low priced in those segments. Such strategy helps firm to satisfy sufficient consumers
and gain popularity. E.g. Sonata watches

4. Differentiation focus
Under this strategy, firm aims to differentiate itself from one or two competitors, again
in specific segments only. This type of differentiation is made to meet demands of border
customers who refrain from purchasing competitors’ products only due to missing of small
features. It is a clear niche marketing strategy. E.g. Titan watches
Without following anyone of above-mentioned competitive strategies, it becomes
very difficult for firms to sustain in competitive industry.

Examples of competitive strategy

There can be several examples based on the four parameters given by Michael Porter. Some
examples are given below:

1. Cost leadership: Micromax smart phones and mobile phones are giving good quality
products at an affordable price which contain all the features which a premium phone like
Apple or Samsung offers

2. Differentiation leadership: BMW offers cars which are different from other car brands. BMW
cars are more technologically advanced, have better features and have got personalized
services

3. Cost focus: Sonata watches are focused towards giving wrist watches at a low cost as
compared to competitors like Rolex, Titan, Omega etc

4. Differentiation focus: Titan watches concentrates on premium segment which includes

jewels in its watches.
Industry Life Cycle
Industry Life Cycle shows the five stages in which industry goes through. 5 stages are
introduction or embryonic, growth, shakeout, maturity, and decline.

The competitive dynamics shift as companies interact with one another. The number
of rivals, the competitive thrust, profitability, competition strength, and the focus on
innovation have all changed.

1. Introduction/Embryonic
Firms in the introduction stage is busy with creating awareness about the product/service,
educating the customers.
At the introduction, the stage where the firm’s competition is none or very low, innovation is
at maximum and investment in distribution channels and marketing is very high.
If a firm able to develop proper distribution channels, increase consumer awareness and
provide a better-quality product or service than the rest of the competition will see sales
numbers growing.
At the introduction/embryonic stage:

innovation is the highest,

high focus on distribution channels,
large investment in marketing to establish consumer awareness.
2. Growth

At this stage, the growth rate of sales and market share accelerates for a strong firm. There is
a standard for the product that is imposed or agreed upon by the government and other
standard-setting agencies.
The innovation process is looking for ways to make the existing product better by creating a
better manufacturing process, better delivery method, and more.
Firms try to optimize their marketing, distribution channel, product in a way that will maximize
the market share and reduce competition.
So, at the growth stage;

sales rate increases for strong firms,

market share grows,
 industry standards are set,
innovation is for making existing products better.
3. Shakeout
During the shakeout stage of the cycle, the percentage growth rate declines. Firms face
competition for market share from other firms.
Firms that are weak in their innovation, marketing, customer support, product quality, and
after-sales support; start to lose market share and eventually are forced out of the industry.
On the other hand, strong firms start to gain more market share.
At this stage, competitors have a fierce battle based on price wars, capacity within
the industry grows but the demand does not keep pace.
The unviable organizations lose out in this phase.
So, at the shakeout stage;
strong firms start to gain more market share,
strong innovation, marketing, customer support, product quality, and after-sales
support is needed to increase sales,
competition increases and companies use marketing and pricing techniques to
grow among the competition.
4. Maturity
At this stage; the market reached the maximum size where industry growth is likely zero or
negative.
Companies that are strong in policy and sales numbers survive and totally dominate the
marketplace. The market situation basically becomes an oligopoly where only a few large
firms exist.
Sales numbers are due to a replacement, repeat purchases, there is no other alternative or
people looking to buy older generation products to save a few bucks.
In the maturity stage;
Consumer awareness is maximum,
The firm enjoys an oligopoly market,
Alternatives of the product is little or none
5. Decline

At this stage, the sales number drops to very low. This drop-in sale could be because of the
internal and external environment; such as;
A new alternative product has emerged,
Rules and regulation changes,
Issues with the supply of raw material,
Increased level of competition from other firms and more.
In the decline stage, a firm has four strategic options; Exit, Harvest, Maintain,
Consolidate.

Resources, capabilities and competencies

 Strategic capability means the ability of an entity to perform and prosper, by
achieving strategic objectives. It can also be described as the ability of an organization to
use its core competences to create competitive advantage. Previous chapters have
described the environment of an entity, and how an entity can succeed by exploiting
opportunities and dealing with threats that emerge in the environment. However, monitoring
the environment for opportunities and threats is not sufficient to provide an entity with
competitive advantage. Strategic capability comes from competitive advantage.
Competitive advantage comes from the successful management of resources,
competences and capabilities.

Achieving strategic capability

A resource-based view of the firm is based on the view that strategic capability comes from
competitive advantage, which comes in turn from the resources of the firm and the use of
those resources (competences and capabilities).
Resources and Competences
Resources
- An entity uses resources to provide products or services to its customers. A resource is any
asset, process, skill or item of knowledge that is controlled by the entity.

- Resources can be grouped into categories:

• Human resources. These are the leaders, managers and other employees of an entity,
and their skills.
• Physical resources. These are the tangible assets of an entity, and include property,
plant and equipment, and also access to sources of raw materials.
• Financial resources. These are the financial assets of the entity, and the ability to
acquire additional finance if this is required.
• Intellectual capital. This includes resources such as patents, trademarks, brand names
and copyrights. It also includes the acquired knowledge and ‘know-how’ of the entity.
Competences
- Competences are activities or processes in which an entity uses its resources. They are
created by bringing resources together and using them effectively. Competences are used
to provide products or services, which offer value to customers.

- A competence can be defined as an ability to do something well. A business entity must

have competences in key areas in order to compete effectively.

- Threshold competences are activities, processes and abilities that provide an entity with

the capability to provide a product or service with features that are sufficient to meet
customer needs (the ability to provide ‘threshold’ product features).

- Core competences are activities, processes and abilities that give the entity a capability of
meeting the critical success factors for products or services and achieving competitive
advantage.
- The concept of core competence was first suggested in the 1990s by Hamel and Pralahad,
who defined core competence as: ‘Activities and processes through which resources are
deployed in such a way as to achieve competitive advantage in ways that others cannot
imitate or obtain.’
Capabilities
- Capabilities are the ability to do something. An entity should have capabilities for gaining
competitive advantage. These come from using and coordinating the resources and
competences of the entity to create competitive advantage. Capabilities arise from a
complex combination of resources and core competences, and they are unique to each
business entity.
- Threshold capabilities are the minimum capabilities needed for the organization to be able
to compete in a given market. For example, threshold competencies are competencies:
• where the entity has the same level of competence as its competitors, or
• that are easy to imitate.
- To do really well, however, an entity needs to do more than merely to meet thresholds; it
needs capabilities for competitive advantage. Capabilities for competitive advantage
consist of core competences. These are ways in which an entity uses its resources effectively,
better than its competitors, and in ways that competitors cannot imitate or obtain.
Sustainable core competences
- Core competences might last for a very short time; in which case they do not provide
much competitive advantage.

- Competitive advantage is provided by sustainable core competences. These are core

competences that can be sustained over a fairly long period of time – over a period of time
that is long enough to achieve strategic objectives.

- Sustainable competences should be durable and/or difficult to imitate.

• Durability. Durability refers to the length of time that a core competence will continue
in existence, or the rate at which a competence depreciates or becomes obsolete.
• Difficulty to imitate. A sustainable core competence is one that is difficult for
competitors to imitate, or that it will take competitors a long time to imitate or copy.

Causal ambiguity, Inimitability and Sustainable competitive advantage

Causal ambiguity

Causal ambiguity describes a lack of understanding of cause-and-effect interactions

between resources and competitive advantage. As a central construct in strategic
management, causal ambiguity constrains a firm’s ability to replicate valuable capabilities
internally, yet, simultaneously, offers a means of protecting those capabilities from imitation by
external agents. This analysis shifts the paradigm from looking at casual ambiguity as a given
characteristic within organizations and examines the causal ambiguity paradox by looking at
how organizations can strategically act on causal ambiguity as a mechanism for extending
advantages. Specifically, we suggest actions that deliberately manage causal ambiguity can
be a strategic capability and extend competitive advantages.
Resource Inimitability

If a valuable resource is controlled by only one firm it could be a source of a

competitive advantage (Barney, 1991). This advantage could be sustainable if competitors
are not able to duplicate this strategic asset perfectly (Peteraf, 1993; Barney, 1986b,). A
central proposition in strategy is that firms sustain relative performance advantages only if
their existing and potential rivals cannot imitate them (Nelson and Winter 1982, Dierickx and
Cool 1989, Barney, 1991). Imitation means the purposeful endeavor to improve performance
by copying the form and strategy of a superior rival. An imitation strategy is one of many
ways two firms may become similar in appearance and performance. Imitation fails when
either, it is physically impossible, legally prevented, economically unattractive, or the
necessary knowledge is lacking.

Sustainable Competitive Advantages

Sustainable competitive advantages are company assets, attributes, or abilities that

are difficult to duplicate or exceed; and provide a superior or favorable long-term position
over competitors.

Types and Examples of Sustainable Competitive Advantages

Low-Cost Provider/ Low pricing

Economies of scale and efficient operations can help a company keep competition
out by being the low-cost provider. Being the low-cost provider can be a significant barrier
to entry. In addition, low pricing done consistently can build brand loyalty be a huge
competitive advantage (i.e. Wal-Mart).

Market or Pricing Power

A company that has the ability to increase prices without losing market share is said to
have pricing power. Companies that have pricing power are usually taking advantage of
high barriers to entry or have earned the dominant position in their market.
Powerful Brands
It takes a large investment in time and money to build a brand. It takes very little to
destroy it. A good brand is invaluable because it causes customers to prefer the brand over
competitors. Being the market leader and having a great corporate reputation can be part
of a powerful brand and a competitive advantage (i.e. Coca-Cola (KO).

Strategic assets
Patents, trademarks, copy rights, domain names, and long-term contracts would be
examples of strategic assets that provide sustainable competitive advantages. Companies
with excellent research and development might have valuable strategic assets
(i.e. International Business Machines (IBM).

Barriers to Entry
Cost advantages of an existing company over a new company is the most common
barrier to entry. High investment costs (i.e. AT&T (T)) and government regulations are
common impediments to companies trying to enter new markets. High barriers to entry
sometimes create monopolies or near monopolies (i.e. utility companies).
Adapting Product Line
A product that never changes is ripe for competition. A product line that can evolve
allows for improved or complementary follow up products that keeps customers coming
back for the “new” and improved version (i.e. Apple iPhone) and possibly some accessories
to go with it.

Product Differentiation
A unique product or service builds customer loyalty and is less likely to lose market
share to a competitor than an advantage based on cost. The quality, number of models,
flexibility in ordering (i.e. custom orders), and customer service are all aspects that can
positively differentiate a product or service.

Strong Balance Sheet / Cash

Companies with low debt and/or lots of cash have the flexibility to make opportune
investments and never have a problem with access to working capital, liquidity, or solvency
(i.e. Johnson & Johnson (JNJ).The balance sheet is the foundation of the company.

Outstanding Management / People

There is always the intangible of outstanding management. This is hard to quantify, but
there are winners and losers. Winners seem to make the right decisions at the right time.
Winners somehow motivate and get the most out of their employees, particularly when
facing challenges. Management that has been successful for a number of years is a
competitive advantage.

APPLICATION
As a future tourism manager, explain the importance of
understanding the Industry Life Cycle.

ASSESSMENT
Search for a research article online about business-level
strategies, provide a brief introduction about the article and
discuss its results.
 MODULE 3, CHAPTER 6:

CORPORATE-LEVEL STRATEGIES
After reading this chapter, you should be able to:
• Understand corporate strategy
• Recognize the relationship between corporate strategy and
adding value
• Discuss creating and sustaining the multi-business
advantage

TIME FRAME: 3 HOURS

ACTIVITY
Compare and contrast business-level and corporate-level
strategies.

ANALYSIS:
Explain how an effective strategic plan affects the overall
results of achieving organizational goals?
ABSTRACTION
Corporate strategy is the organization's highest business plan, defining the company's
priorities and determining how to accomplish them through strategic management.
Corporate strategy is the organization's highest-level business plan, defining the
company's general priorities and directions, as well as how they can be accomplished by
strategic management activities.

It is a long-term, clearly established vision of a company's or organization's direction. It

aids in determining the organization's overall worth, as well as setting strategic targets and
motivating employees to achieve them. It lays out a general plan for what needs to be done
and when. Strategic priorities and basic milestones are used to accomplish this. However,
corporate strategy is also a continuous process that must be able to respond appropriately to
changing conditions and surroundings - the market situation.
All facets of the company, as well as the entire product portfolio, must be considered
and influenced by corporate strategy.

What should a corporate strategy include and cover?

Clearly named vision and mission should be part of the strategy. Numerous analytical
techniques are used to develop the strategy (see PESTLE, SWOT, VRIO). When implementing
the strategy, for example, the BSC is used for the implementation.
The way an organization generates value is influenced by its corporate strategy. This
implies that it must address both the product portfolio as well as the assumptions - both in
terms of capital and operational aspects.
The product portfolio serves as the foundation for the entire business and, as a result, the
strategic direction. The business must be transparent on what it wants to sell, to whom it
wants to deliver it, what its main competitive advantages are, pricing strategies, and so on.
They are either incorporated into a corporate plan or detailed in different but related
strategic documents such as business plans, marketing strategies, and so on.

Company resources are necessary to deliver products and to propel processes. A simple
evaluation of current resources (e.g., using VRIO) and a roadmap for acquiring new
resources must be included in the business strategy in order to achieve the strategic
objectives. This summary is either included in the corporate plan as is or is detailed in partial
strategic documents (human resources strategy, financial strategy, IT strategy, etc.).
Companies' operations are hampered by a lack of resources. Human capital is often in short
supply. Companies often lack financial capital, sometimes lack adequate technology, and
often fail to obtain a building permit to construct a production facility. People are the most
limited resource; a shortage of suitably trained employees is the most common explanation
for a company's failure to meet its business objectives.

The organizational model then tells how to set up processes, organizational structure, and
overall operating principles to achieve strategic goals. Laws of activity, procedures,
protocols, organizational structure, management framework, and people's powers and
obligations must all be established so that they can efficiently facilitate the achievement of
strategic objectives. There is no perfect model in this regard; it is always important to use a
management structure, set procedures, and organize the organization and the market in
accordance with the resources, culture, and overall situation. What fits well in one business
can be problematic in another.
Corporate Strategy is different than business strategy, as it focuses on how to manage
resources, risk, and return across a firm, as opposed to looking at competitive advantages.
Leaders responsible for strategic decision making have to consider many factors, including
allocation of resources, organizational design, portfolio management, and strategic
tradeoffs.

By optimizing all of the above factors, a leader can hopefully create a portfolio of businesses
that is worth more than just the sum of the parts.

What are the Components of Corporate Strategy?

There are several important components of corporate strategy that leaders of organizations
focus on. The main tasks of corporate strategy are:
• Allocation of resources
• Organizational design
• Portfolio management
• Strategic tradeoffs

The four pillars of corporate strategy

#1 Allocation of Resources

The allocation of resources at a firm focuses mostly on two resources: people and capital. In
an effort to maximize the value of the entire firm, leaders must determine how to allocate
these resources to the various businesses or business units to make the whole greater than
the sum of the parts.
Key factors related to the allocation of resources are:

People
• Identifying core competencies and ensuring they are well distributed across the firm
• Moving leaders to the places they are needed most and add the most value
(changes over time, based on priorities)
• Ensuring an appropriate supply of talent is available to all businesses
Capital
• Allocating capital across businesses so it earns the highest risk-adjusted return
• Analyzing external opportunities (mergers and acquisitions) and allocating capital
between internal (projects) and external opportunities

#2 Organizational Design
Organizational design involves ensuring the firm has the necessary corporate structure and
related systems in place to create the maximum amount of value. Factors that leaders must
consider are the role of the corporate head office (centralized vs decentralized approach)
and the reporting structure of individuals and business units – vertical hierarchy, matrix
reporting, etc.
Key factors related to organizational design are:
• Head office (centralized vs decentralized)
• Determining how much autonomy to give business units
• Deciding whether decisions are made top-down or bottom-up
• Influence on the strategy of business units
• Organizational structure (reporting)
• Determine how large initiatives and commitments will be divided into smaller projects
• Integrating business units and business functions such that there are no redundancies
• Allowing for the balance between risk and return to exist by separating responsibilities
• Developing centers of excellence
• Determining the appropriate delegation of authority
• Setting governance structures
• Setting reporting structures (military / top-down, matrix reporting)

#3 Portfolio Management

Portfolio management looks at the way business units complement each other, their
correlations, and decides where the firm will “play” (i.e. what businesses it will or won’t enter).

Corporate Strategy related to portfolio management includes:

• Deciding what business to be in or to be out of
• Determining the extent of vertical integration, the firm should have
• Managing risk through diversification and reducing the correlation of results across
businesses
 • Creating strategic options by seeding new opportunities that could be heavily
invested in if appropriate
• Monitoring the competitive landscape and ensuring the portfolio is well balanced
relative to trends in the market

#4 Strategic Tradeoffs
One of the most challenging aspects of corporate strategy is balancing the tradeoffs
between risk and return across the firm. It’s important to have a holistic view of all the
businesses combined and ensure that the desired levels of risk management and return
generation are being pursued.

Below are the main factors to consider for strategic tradeoffs:

• Managing risk
• Firm-wide risk is largely depending on the strategies it chooses to pursue
• True product differentiation, for example, is a very high-risk strategy that could result in
a market leadership position or total ruin
• Many companies adopt a copycat strategy by looking at what other risk-takers have
done and modifying it slightly
• It’s important to be fully aware of strategies and associated risks across the firm
• Some areas might require true differentiation (or cost leadership) but other areas might
be better suited to copycat strategies that rely on incremental improvements
• The degree of autonomy business units have is important in managing this risk
• Generating returns
• Higher risk strategies create the possibility of higher rates of return. The examples
above of true product differentiation or cost leadership could provide the most return
in the long run if they are well executed.
• Swinging for the fences will lead to more home runs and more strikeouts, so it’s
important to have the appropriate number of options in the portfolio. These options
can later turn into big bets as the strategy develops.
• Incentives
• Incentive structures will play a big role in how much risk and how much return
managers seek
• It may be necessary to separate the responsibilities of risk management and return
generation so that each can be pursued to the desired level
• It may further help to manage multiple overlapping timelines, ranging from short-term
risk/return to long-term risk/return and ensuring there is appropriate dispersion

There are three marketing ways you can sustain a competitive advantage with a focus
strategy.

Focus on a Narrow Target Market

When you focus on a narrow target market, you have the best chance to
become the leader of that niche. This is especially true when you target a segment
that is less vulnerable to substitutes or where the competitive landscape is weak. You
can choose the customer segment based on marketing trends, demographics,
 psychographics, and customer needs. You can also decide on the best types of
product and service solutions to sell to this niche.

• By focusing on a narrow target market, you also are able to contain costs. You are
able to advertise and promote your products and services in media that focuses on
your target group. Plus, you are able to contain costs of manufacturing products or
delivery of services.
• Not surprisingly, some of the world’s most successful companies started out by focusing
on narrow target markets. Walmart began by focusing on serving rural towns where
larger retailers such as Sears and Kmart did not sell. Amazon started by focusing on
consumer book buyers with Internet access. Facebook began as a service for Harvard
students.
• As you can see, your business can sustain competitive advantage by focusing on a
narrow target market. Then, as you increase your customer share, you can expand
your market and become the next leader in your industry.
• Develop Customer Intimacy
• A second way to sustain competitive advantage is to develop customer intimacy. Get
to know as much about your customers as you can. As you find out different things
about each customer, you can tailor your offering to them.
• When you focus on customer intimacy, you can anticipate what your customers want,
how they want it, when they want it, and most importantly, how you can solve it for
them.
• Over time, this strategy leads to stronger trust and customer loyalty. It can induce more
purchases by that same customer. Plus, it can lead to more referrals and new
customers.
• Proctor and Gamble’s headquarters is in Cincinnati, Ohio. However, they have their
account managers located in Bentonville, Arkansas so they can be near Walmart,
their leading retail customer.
• Dell was able to surpass Compaq in computer sales in the 1990s by focusing on
customer intimacy. Dell focused on consumers and businesses that wanted to
customize computers to their needs, rather than choose from pre-assembled models
sold through retailers and distributors. Selling directly to customers gave Dell an insight
into customer preferences and needs so it was able to fulfill them faster and better
than its competitors.
• IBM transformed its business from computer products to consulting services by focusing
its strategy on customer intimacy. IBM’s customers no longer wanted to buy
technology. They wanted solutions to their problems. So IBM, under Louis Gerstner’s
leadership, changed the culture of the company from developing superior
technological products to focusing on delivering customized technology-based
solutions to fulfill each customer’s needs.

Limit Promotional Channels

• Many executives believe their companies should advertise and promote products
through many types of media. Yet, the better and more profitable strategy is to focus
on a few advertising channels. This way you can get the most from your limited
resources, including money, time, and staff. It’s more effective to master and get the
most mileage from a few types of media.
• It often takes many impressions for a prospective buyer to respond, so why not
advertise in a few places more frequently so you can reach prospects and give them
multiple impressions of your brand? By doing so, your prospects will see your ad more
 often in a short span of time. This can speed up the time it would otherwise take for
that prospect to buy from you.
• You can determine where to advertise your brand based on where your customers are
relative to the purchase of your product or service. For example, Motel 6 has
“focused” its advertising campaign on car drivers with the same radio message, “We’ll
Leave the Light on for You” by Tom Bodett since 1986. In fact, it’s one of the longest
running advertising campaigns in history. During this campaign, Motel 6 has
grown from 200 to over 1,000 locations across the U.S. and Canada.

Focus Leads to Long-Term Success

• A focus strategy enables your company to earn profits in both the short and long term.
In fact, a focus strategy is often more profitable than a strategy that supports
expansion. Look what happened when Xerox expanded its technology expertise to
make and sell computers. It lost its focus and was not successful in the new market. The
same thing happened to Yahoo! the former search engine leader, whose focus was
on Internet search, lost its dominance when it expanded into other online services.
Google soon took over as the leader.
• The bottom line is to focus on a niche in which you can create and sustain a
competitive advantage. By doing so, you can be the king of your niche, rather than a
pawn in a crowded market.

APPLICATION
Explain the role and importance of organizational design in
the corporate-level strategy.

ASSESSMENT
Look for an example of a business portfolio and evaluate its
components and its influence in gaining a competitive
advantage.
 MODULE 3, CHAPTER 7:

NETWORK-LEVEL STRATEGIES
After reading this chapter, you should be able to:
• Understand Strategic Alliances
• Understand the concept of Franchising
• Evaluate Management Contracts

TIME FRAME: 3 HOURS

ACTIVITY & ANALYSIS

Look for a certain business or company that has applied a
network-level strategy. Discuss how its operations have been
successful because of its network and strategic partnership
with other businesses or companies.
ABSTRACTION
WHAT IS A STRATEGIC ALLIANCE?

A strategic alliance is an arrangement between two companies to undertake a mutually

beneficial project while each retains its independence. The agreement is less complex and
less binding than a joint venture, in which two businesses pool resources to create a separate
business entity.

A company may enter into a strategic alliance to expand into a new market, improve its
product line, or develop an edge over a competitor. The arrangement allows two businesses
to work toward a common goal that will benefit both.

The relationship may be short- or long-term and the agreement may be formal or informal.

Understanding the Strategic Alliance

While the strategic alliance can be an informal alliance, the responsibilities of each
member are clearly defined. The needs and benefits gained by the partnered businesses will
dictate how long the coalition is in effect.

A strategic alliance is an arrangement between two companies that have decided to

share resources to undertake a specific, mutually beneficial project.

A strategic alliance agreement could help a company develop a more effective

process.

Strategic alliances allow two organizations, individuals or other entities to work toward
common or correlating goals.

The effects of forming a strategic alliance can include allowing each of the businesses
to achieve organic growth more quickly than if they had acted alone.

The partnership entails sharing complimentary resources from each partner for the
overall benefit of the alliance.

Advantages and Disadvantages of a Joint Alliance

Strategic alliances can be flexible and some of the burdens that a joint venture could
include. The two firms do not need to merge capital and can remain independent of one
another.

A strategic alliance can, however, bring its own risks. While the agreement is usually
clear for both companies, there may be differences in how the firms conduct business.

Differences can create conflict. Further, if the alliance requires the parties to share
proprietary information, there must be trust between the two allies.

In a long-term strategic alliance, one party may become dependent on the other.
Disruption of the alliance can endanger the health of the company.

There are three types of strategic alliances: Joint Venture, Equity Strategic Alliance, and Non-
equity Strategic Alliance.
#1 Joint Venture

A joint venture is established when the parent companies establish a new child
company. For example, Company A and Company B (parent companies) can form a joint
venture by creating Company C (child company).

In addition, if Company A and Company B each own 50% of the child company, it is
defined as a 50-50 Joint Venture. If Company A owns 70% and Company B owns 30%, the
joint venture is classified as a Majority-owned Venture.

#2 Equity Strategic Alliance

An equity strategic alliance is created when one company purchases a certain equity
percentage of the other company. If Company A purchases 40% of the equity in Company
B, an equity strategic alliance would be formed.

#3 Non-equity Strategic Alliance

A non-equity strategic alliance is created when two or more companies sign a

contractual relationship to pool their resources and capabilities together.

Example of a Strategic Alliance

The deal between Starbucks and Barnes&Noble is a classic example of a strategic alliance.
Starbucks brews the coffee. Barnes&Noble stocks the books. Both companies do what they
do best while sharing the costs of space to the benefit of both companies.
Strategic alliances can come in many sizes and forms:

• An oil and natural gas company might form a strategic alliance with a research
laboratory to develop more commercially viable recovery processes.
• A clothing retailer might form a strategic alliance with a single manufacturer to ensure
consistent quality and sizing.
• A website could form a strategic alliance with an analytics company to improve its
marketing efforts.

WHAT IS A FRANCHISE?

A franchise (or franchising) is a method of distributing products or services involving a

franchisor, who establishes the brand’s trademark or trade name and a business system, and
a franchisee, who pays a royalty and often an initial fee for the right to do business under the
franchisor's name and system. Technically, the contract binding the two parties is the
“franchise,” but that term more commonly refers to the actual business that the franchisee
operates. The practice of creating and distributing the brand and franchise system is most
often referred to as franchising.

There are two different types of franchising relationships. Business Format Franchising is the
type most identifiable. In a business format franchise, the franchisor provides to the
franchisee not just its trade name, products and services, but an entire system for operating
the business. The franchisee generally receives site selection and development support,
operating manuals, training, brand standards, quality control, a marketing strategy and
business advisory support from the franchisor. While less identified with franchising, traditional
or product distribution franchising is larger in total sales than business format franchising.
Examples of traditional or product distribution franchising can be found in the bottling,
gasoline, automotive and other manufacturing industries.

Much of the information you'll need to gather in order to analyze a franchise will be
acquired through the following:

• Interviews with the franchisor

• Interviews with existing franchisees
• Examination of the franchise's Uniform Franchise Offering Circular (UFOC)
• Examination of the franchise agreement
• Examination of the franchise's audited financial statements
• An earnings-claim statement or sample unit income (profit-and-loss) statement
• Trade-area surveys
• List of current franchisees
• Newspaper or magazine articles about the franchise
• A list of the franchisor's current assets and liabilities

Through this research, you want to find out the following:

• If the franchisor--as well as the current franchisees--are profitable

• How well-organized the franchise is
• If it has national adaptability
• Whether it has good public acceptance
• What its unique selling proposition is
• How good the financial controls of the business are
• If the franchise is credible
• What kind of exposure the franchise has received and the public's reaction to it
• If the cash requirements are reasonable
• What the integrity and commitment of the franchisor are
• If the franchisor has a monitoring system
• Which goods are proprietary and must be purchased from the franchisor
• What the success ratio is in the industry

MANAGEMENT CONTRACTS
A business or an organization will hire a management company to perform specific tasks.
The management company will receive a compensation for the work. Your organization
might hire a management company to look after its marketing and under the contract, the
management company would perform marketing on your company’s behalf and receive a
fee for doing so.

Under the management contract, the operational control of the enterprise or the specific
department would be in the hands of the management company. Therefore, the
management company you would choose, would be able to make all the operational
decisions regarding the function you specified, i.e. marketing.

Your contract might limit the excess of the control, but in most instances, the contract
includes all operational functions of that specific enterprise or department. The
compensation for the management might be decided based on performance or it can be
a set sum decided between you are the management company. You might provide the
company a fixed monthly remuneration or a fixed percentage of the profit. On the other
hand, your company might pay a specified sum based on certain performance metrics the
management company is able to meet.

A management contract will always consist of three core components. The three parts are
the first things you will need to specify when seeking out a management contract. The parts
are:

• The conditions of the contract – The lengthiest and most detailed part of the
management contract is naturally the conditions of it. The contract must clearly
identify the parties involved and the functions that are being transferred to the
management company. This includes the outline of the rules and responsibilities both
parties have and the extent which either party can influence the operational functions
once the contract starts. To avoid confusion and conflict later on, the conditions must
be clarified, and the functions and operational responsibilities outlined in detail.

• The duration of the agreement – The section specifies the duration for how long the
management company will be in charge of the enterprise or department. The
duration could range from a few months to years, and you might have set specific
conditions for the duration. For example, if certain performance metrics are not met,
the contract can be terminated sooner and so on.

• The method of computing the management fees – The management contract should
also discuss the compensation method. As mentioned above, the method for
computing the management fee can range from a set percentage, a set sum or a
specified sum related to performance. An example fee could be a % of total revenue
and/or a % of gross profit.

EXAMPLES OF MANAGEMENT CONTRACTS

Management contracts are a popular choice for organizations, especially those with large-
scaling functions. The contracts are also used in a number of industries for a variety of
functions. Below are some examples of the most common management contract types and
brief description of what each contract means.

Hotel management

The hotel industry is one of the most popular industries when it comes to management
contracts. The industry has a number of examples where a larger enterprise entrusts the
operational management of a specific hotel to a management company. The
management contract is made between the owner of a hotel and a management
company, which will take operational control, often on the entirety of the hotel.

It is common for the contract to provide the management company the control to service
guests, maintain the premises, and conduct marketing and other promotional services. The
management company will also set operational policies, as well as control the human
resources of the specific hotel. The hotel management contracts tend to be long-term
agreements due to the nature of the industry.

Furthermore, the operator often has the upper hand in terms of the terms of the
management contract.

The below image clearly highlights the process of a management contract in the hotel
industry and outlines the basic principles of the process.
 Food service managers

Management contracts are also used by the public sector. Food service management
contracts are a good example of the management contracts in the sector. Under these
agreements, schools’ sports facilities, nursing homes, and public office buildings have their
food facilities and services provided and managed by a management company.

The management company often pays a specific lease and a percentage of the food sales
to the building’s owner, while taking on the operational control of preparing, serving, and
marketing the food. These sorts of management contracts can sometimes be used in the
private sector as well, with large corporations often having a management company take
charge of feeding the employees, so to speak.

APPLICATION
What are the benefits of franchising? Explain.

ASSESSMENT
What are the advantages and disadvantages of
management contracts? Explain.

Closure: Congratulations! You may now submit your output to your instructor.
ANSWER SHEET
MODULE 3, CHAPTER 5:

BUSINESS-LEVEL STRATEGIES
ACTIVITY & ANALYSIS:
Choose a top-performing company in 2020 and discuss thoroughly its competitive marketing strategy.

APPLICATION
As a future tourism manager, explain the importance of understanding the Industry Life Cycle.

ASSESSMENT
Search for a research article online about business-level strategies, provide a brief introduction about the
article and discuss its results.

MODULE 3, CHAPTER 6:

CORPORATE-LEVEL STRATEGIES
ACTIVITY
Compare and contrast business-level and corporate-level strategies.

ANALYSIS:
Explain how an effective strategic plan affects the overall results of achieving organizational goals?

APPLICATION
Explain the role and importance of organizational design in the corporate-level strategy.

ASSESSMENT
Look for an example of a business portfolio and evaluate its components and its influence in gaining a
competitive advantage.

MODULE 3, CHAPTER 7:

NETWORK-LEVEL STRATEGIES
ACTIVITY & ANALYSIS
Look for a certain business or company that has applied a network-level strategy. Discuss how its
operations have been successful because of its network and strategic partnership with other businesses
or companies.

APPLICATION
What are the benefits of franchising? Explain.

ASSESSMENT
What are the advantages and disadvantages of management contracts? Explain.