SECTION ONE

STRATEGY, ALIGNMENT AND ADDING VALUE

By Kutay Kalkan for Dr. DeMicco

 OBJECTIVES

1. Understand the concept of strategic management as applied to the service

and hospitality industry.
2. Be able to describe the coalignment model and its application to the hospitality
industry.
3. Appreciate that strategic management is a way of thinking, not a process to be
performed annually and then forgotten for a year.
4. Understand the supply-and-demand and technology relationships that exist in
the service industry and how they affect strategy.
5. Understand the unique elements, especially quality and value, of the service
industry and how they affect strategy making.
6. Develop an appreciation of forces driving change in the hospitality industry and
what impact they will have on the manager of the future.
7. Understand the importance of leadership to the strategic management process.
 Objectives

1) Understand the concept of strategic management as applied to the service

and hospitality industry.

 Concept of strategic management and the manner in which it has evolved in modern times.
Ex: General Motors, Atlantic Telephone

 Please read pages 2 through 5 in the text book for further information.
 Objectives

2) Be able to describe the coalignment model and its application to the hospitality
industry.

 Please read pages 6 through 9 in the text book for further information.

Environment Strategy Firm Firm

Events Choice Structure Performance

Coalignment
 Coalignment Model - Environment Events

Environment Strategy Firm Firm

Events Choice Structure Performance

Major forces driving change in the

remote and immediate environments of the
organization. These forces, often referred to as
trends, create opportunities and pose threats to
the firm. They shape and force change in both
predictable and unpredictable patterns.
 Coalignment Model – Strategy Choice

Environment Strategy Firm Firm

Events Choice Structure Performance

The choice of competitive methods used

by the firm to take advantage of the threats
and opportunities in the business
environment. These methods should
provide the firm with sustainable
competitive Core Competencies.
 Coalignment Model – Firm Structure

Environment Strategy Firm Firm

Events Choice Structure Performance

The effective and efficient allocation

of the firm’s resources to the successful
execution of the firm’s competitive
methods.
 Coalignment Model – Firm Performance

Environment Strategy Firm Firm

Firm
Events Choice Structure Performance
Performance

• Cash Flow per share of equity

• Aggregate value of competitive methods
• EPS, ROA, ROI
• Customer service
 Objectives

3) Appreciate that strategic management is a way of thinking, not a process to be

performed annually and then forgotten for a year.

 Strategic management must be imbedded in every decision, every activity and every service
encounter with the customer.

 Please read pages 9 through 13 in the text book.

 Please read article 5 to see the performance statistics

of 1000 major US companies compared with their peers in
75 industry groups. You are going to realize that top
companies are familiar to us.

Why?
Because strategic management is not temporary.
 Objectives

4) Understand the supply-and-demand and technology relationships that exist in

the service industry and how they affect strategy.

 Please read pages 13 through 18 in the text book.

 Please read article 6 for an example of supply and demand relationships in the service industry.

In the 1990s, the supermarket and

fast–food sectors grew rapidly in Argentina.
Both were dominated by multinational firms,
and their growth drove profound change in
food market systems and farming. This
article analyses the impact of this
development on fruit and vegetables supply
chains, in particular the way the advent of
McDonald’s affected the supply chain for
frozen French fried potatoes. It shows that
there is a tendency for such changes to
favor medium and large producers, with evidence of the exclusion of small farmers.
 Objectives

5) Understand the unique elements, especially quality and value, of the service
industry and how they affect strategy making.

 Please read pages 18 through 21 in the text book.

 Objectives
6) Understand the unique elements, especially quality and value, of the service industry and how they affect
strategy making.

Forces Driving Chance (See page 22 in the text book)

 Marketing, Distribution and Capacity Management.
 Please read article 7 and article 10 to understand the growing strategic importance of technology and its contribution to
marketing, distribution and capacity management in the hospitality industry.
 Safety and Security
 Please read article 9 to understand the impact of 9/11 on the hospitality industry.
 Assets and Capital
 Please read article 8 to understand how an organization adds value and how value can be measured. You are going to realize
that IT has the leading role in growing firm value.
 Technology
 Ex : Lickable samples of products are being attached to magazines as a new type of advertisement. Please
read article 3 for more information.
 New Management
 Ex : Please read the McDonalds case at the end of this chapter and try to understand the importance of
leadership and managerial skills for a company.
 Sustainable Development
 Ex : Includes green projects such as Clean Up the World, True Green, Global Tree Planting and Green
Products Fair. Please read article 2 for more information.
 Social Issues
 Ex : All of the hotels in the US and Canada will become %100 smoke free. Please read article 1 for more
information.
 Objectives
7) Understand the importance of leadership to the strategic management process.

 Please read pages 24 through 26 in the text book.

 Please read article 4(case study of chapter 1) or article 5 for examples of turnaround strategies.

 Subject of article 4 is “Turnaround at McDonald’s”.

 Subject of article 5 is “Turnaround in East Asian firms: Evidence from ethnic overseas Chinese
communities”.
 Tomorrow’s Hospitality Manager
• Monitor changes in an increasingly diverse/co
• A strategist - less craft skills, more business mplex demand curve
skills • Provide information to guest to satisfy their n
• A multifunctional manager eeds for safety and security
• A change agent - boundary spanner • New leadership skills to motivate a more dive
• Visionary rse workforce consisting of more knowledge
• Technologist workers
• A Knowledge worker - information manager
• Marketing on the information highway
• How to buy and sell your way into the inform
ation highway
• Evaluating and maintaining the best strategi
c alliances
• Recognize, interact with, and utilize the reso
urces of those who will own the information
systems (information highway)
• Capable of receiving, analyzing, synthesizin
g incredible amounts of information regardin
g: guest, internal operations, external data f
rom capacity controllers
• Utilize information to adjust to the speed of c
hange
 Porter’s Competitive Forces Model

• Porter's 5 forces analysis is a framework for the industry analysis and business strategy
development developed by Michael E. Porter of Harvard Business School in 1979.

• It uses concepts developed in Industrial Organization (IO) economics to derive 5 forces

that determine the competitive intensity and therefore attractiveness of a market.

• Strategy consultants use Porter's five forces framework when making a qualitative
evaluation of a firm's strategic position.

• Porter's Five Forces include three forces from 'horizontal' competition: threat of substitute products,
the threat of established rivals, and the threat of new entrants; and two forces from 'vertical'
competition: the bargaining power of suppliers, bargaining power of customers.

Each of them will be discussed in the following slides.

 Porter Competitive Forces Model

Potential
New Entrants

Bargaining Intra-Industry Bargaining

Power Rivalry Power
of Suppliers Strategic Business Unit of Buyers

Substitute
Products
and Services
 A Buyer Has Power If :

 It has large, concentrated buying power that enables it to gain volume

discounts and/or special terms or services.

 What it is buying is standard or undifferentiated and there are multiple

alternative sources.

 It earns low profit margins so it has great incentive to lower its

purchasing costs.

 It has a strong potential to backward integrate.

 A Supplier Has Power If :

 Its product is unique or at least differentiated.

 It has built up switching costs.

 It provides benefits through geographic proximity to its customers.

 It poses a definite threat to forward integrate into its customers’

business.

 A long time working relationship provides unique capabilities.

 Possible Barriers to Entry

 Economies of scale.
 Strong, established cost advantages.
 Strong, established brands.
 Proprietary product differences.
 Major switching costs.
 Limited or restrained access to distribution.
 Large capital expenditure requirements.
 Government policy.
 Definite strong competitor retaliation.
 Substitute Threats

 Buyer propensity to substitute.

 Relative price/performance of substitutes.

 Switching costs.
 Readings
 Article 1 – A Breath for Fresh Air --- Marriott Goes 100% Smoke-Free in North America

 Article 2 – Reducing Marriott’s Environmental Footprint

 Article 3 – Marketers Salivate Over Lickable Ads

 Article 4 – Turnaround at McDonald’s(textbook)

 Article 5 – Turnaround in East Asian firms: Evidence from ethnic overseas Chinese communities

 Article 6 – Impact of Supermarkets and Fast-Food Chains on Horticulture Supply Chains in Argentina

 Article 7 – Information Technology Strategy in the Hospitality Industry

 Article 8 – Investing in Information Technology to Grow Firm Value

 Article 9 – The Impact of 9/11 on the Hospitality Industry

 Article 10 – The Internet as a Distribution Channel

 Case Study Answers (Please check this after you write your own responses for the case study)
 Chapter Questions

1. The Co-alignment Model describes and explains how successful hospitality

managers respond to the environment and make strategic choices to attain
sustainable competitive advantage. The environment here refers to:
o external.
o internal.
o both external and internal.
o none of the above.

2. Which statement is false? Competitive methods are:

o made up of portfolios of products and services to achieve advantage in the mark
et
o place.
o used in order to add value to the organization.
o having an expected long life in the context of a changing environment.
o chosen based on a consistent environment analysis.
o all of the above.
3. Effective leaders are defined by:
o popularity.
o results.
o followers.
o responsibility.

4. Which is not a force driving change?

o Marketing, distribution, and capacity management
o Safety and security
o Standardization
o Assets and capital
o Technology
o New management
o Sustainable development
o Social issues
5. The logical sequence of components of the co-alignment principle is
environment, strategic choice, firm structure, and firm performance.
o True
o False

6. Popularity is not leadership; results are what define effective leaders.

o True
o False

7. Service products are produced and consumed simultaneously, so they are

perishable.
o True
o False
8. According to Peter Drucker, what are the four important truths that
effective leaders should understand?

9. What are the secrets of the effective leader?

10. What are the seven major forces driving change?

11. What are the important points for strategic leaders to be successful?

12. What are the seven major forces driving change?

 Student Learning Objectives

On completion of this chapter, you will be able to;

 Identify the 4 steps of co-alignment model and apply each to the hospitality industry.
 Develop an appreciation of the difference that strategic management is a way of thinking,
rather than a process to be performed and then forgotten for a long period of time.
 Describe the supply-and-demand and technology relationships that exist in the service
industry and understand what role they play during strategy management and how they
affect strategy.
 Identify the unique elements of the service industry such as quality and value and explain
their effects on strategy making.
 Identify and define the 7 steps of forces driving change and give at least 1 hospitality
related example for each of them.
 Identify the characteristics of a successful hospitality manager.
 Achieve a more practical understanding of strategy and decision making in hospitality.
(Case Study)
 Comprehend the challenges of Porter’s Competitive Forces Model.
 Case Study Answers

1) According to Olsen, in order for McDonald’s to properly align itself with the forces driving
change in the environment it competes in, in the detailed case study of McDonald’s, Olsen started
as by identifying the opportunities that exist for McDonalds by scanning its remote environment.
Olsen identified three major value drivers within the remote environment that will impact
McDonalds’ future strategy.
They are described as: Aging Population, Biotechnology and Public Opinion.
McDonald’s scanned the environment, and aligned new strategies for recovery. They have used the
coalignment model efficiently to assist the firm in responding to changes in the external
environment and adapting its internal operations.
McCafé is a good example for that. The trend of high quality cafe shops was rising, and
McDonald’s saw the opportunity in the market. To accommodate the current trend for high quality
coffee and the popularity of coffee shops in general, McDonald's introduced McCafés. The McCafé
concept is a café-style accompaniment to McDonald's restaurants. McCafé is a concept of
McDonald's Australia, starting with Melbourne in 1993. Today, most McDonald's in Australia have
McCafés located within the existing McDonald's restaurant. In Tasmania there are McCafés in
every store, with the rest of the states quickly following suite. After upgrading to the new McCafe
look and feel, some Australian stores have noticed up to a 60% increase in sales. As of the end of
2003 there were over 600 McCafés worldwide.
 Case Study Answers

2) In the recovery phase of a company, leaders are very important. The McDonald’s case
supported this thesis. McDonald's hit bottom in 2003, posted its first-ever quarterly loss. In a
management shake-up, the fast-food chain brought veteran executive Jim Cantalupo out of
retirement to turn around the world's largest restaurant company (Leung, 2004). As CEO,
Mr. Cantalupo faced some big problems: a tired brand, a saturated fast-food market and widening
worries about waistlines. Then, earlier 2004, he came face to face with the first case of mad-cow
disease found in the U.S., a food-safety issue that had previously hurt McDonald's profits abroad.
Still, Mr. Cantalupo pressed on with his turnaround plan, spending the year tinkering with recipes
of old favorites and launching a new global tagline, "I'm lovin' it," with MTV-style commercials.
Noting changing tastes, Mr. Cantalupo decided to make McDonald's appetizing to health-conscious
consumers by introducing fancy salads, apple slices and a low-carb menu in some markets.
He got results, most impressively in the saturated U.S. market, where sales had slumped for years.
By the help of faster service and menu changes, McDonald's posted a fourth-quarter profit in 2004.
 Case Study Answers

3) The key decisions that have resulted in that turnaround are as follows :
Using technology by means of remodeling stores with automated machines in the kitchen to
decrease labor cost and service time.
Searching the environment and according to the developments in the environment, they have
upgraded the service.
New training methods. The complete training program includes seminars, conferences, and
one-on-one sessions with corporate personnel. McDonald’s pays the cost of the training materials;
however, McDonald’s does not pay for the time or reimburse expenses associated with training.
During the course of the training, both franchisee and McDonald’s have the right to change your
minds about franchisee’s participation for any reason. You will be considered for a franchise only
when McDonald’s determines your training is successfully completed. Also they have improved an
employee training program. McDonald’s spent 96 millions on training in 2004 vs. 115 millions in
2003. Both years, it accounted for 5% of McDonald’s expenditures.
◦ Remodeling and streamlining the menu.
◦ Overhauling cooking procedures.
◦ Enhancing the taste and consistency of the food.
 Case Study Answers

4) McDonald’s changed their menu. They have added dollar menu. And after the documentary
–Super Size Me--, they have taken healthier foods more seriously because people were demanding.
Menu items such as salads were added to the menu. The enormous success of the Dollar Menu,
where all items cost $1, has helped stimulate 36 consecutive months of sales growth at stores open
in 2005. In three years, revenue has increased by 33 percent and its shares have rocketed 170
percent, a remarkable turnaround for a company that only four years ago seemed to be going
nowhere.
McDonald's has attracted considerable attention in the last few years for introducing to its menu
healthy food items like salads and fruit. Yet its turnaround has come not from greater sales of
healthy foods but from selling more fast-food basics, like double cheeseburgers and fried chicken
sandwiches, from the Dollar Menu.
They have taken the advantage of technology. Using handheld devices for communication and mon
itoring in order to reduce response time.