Implementing Strategies

The strategic-management process does not end when the firm decides what strategy or strategies to pursue. There must be a translation of strategic thought into strategic action. This translation is much easier if managers and employees of the firm understand the business, feel a part of the company, and through involvement in strategy-formulation activities have become committed to helping the organization succeed. Without understanding and commitment, strategy-implementation efforts face major problems. Implementing strategy affects an organization from top to bottom; it affects all the
functional and divisional areas of a business.

Doing Great in a Weak Economy. How?

When most firms were struggling in 2008, Google increased its revenues and profits such that Fortune magazine in 2009 rated Google as their fourth “Most Admired Company in the World” in terms of their management and performance. Based in Mountain View, California, Google’s first quarter of 2009 revenues grew 6.2 percent to $5.51 billion, followed by $5.52 billion the second quarter. These results widened Google’s lead in overall searches and online advertising market share. Google owns both YouTube and DoubleClic.

Google in 2009 began selling books online. This related diversification strategy led Google to digitize
close to 10 million books by year’s end. Google cofounder Sergey Brin recently said, “Call me weird, but I think there are a lot of advantages to reading books online. Today’s monitors have great resolution and you don’t have to wait on the book to arrive once ordered.” Google does not charge people to use its search engine. Instead of charging what the market will bear as most firms do, Google charges as little as they can bear. Thus Google obtains networks of people, millions of people, which strengthens its competitive position.

Google’s founders, Larry Page and Sergey Brin, each have nearly 30 percent voting control of the firm and have established a golden rule that permeates Google’s internal culture. The rule is to “Don’t be evil,” and this operating policy encourages all employees to challenge all managers on decisions—to make sure the decisions are true to the firm’s mission. Another internal rule at Google is to “Give up control,” which means giving up control to outsiders to reap the benefits of their input.
This latter rule is done through beta launches of any new software, product, or service they do. Google’s philosophy is that “Low prices are good, but free is better” because they want every customer they can get. 

Google stock in July 2009 rose above $400 per share as the company prepares to launch its own operating system for computers, a direct assault on the business of software giant Microsoft. Google’s strategic plan is to attack Microsoft in nearly all of its businesses, including browsers, where Google has 1.8 percent market share versus Microsoft’s 66 percent, smartphone operating systems (Google 1.6% versus Microsoft 10%), office suites (Google 0.04% versus Microsoft 94%), and Web searches (Google 65% versus Microsoft 8%).

Google’s Chrome OS operating system will require users to be connected to the Internet, unlike Microsoft’s operating systems. CEO Eric Schmidt at Google has been on a mission for the last several years, according to analysts, to capture Microsoft’s market share. The Google strategy is accelerating a shift in the personal computer (PC) industry to become more like the cell phone industry whereby customers pay monthly service fees for use of hardware and software.

Google’s Chrome will be free to all computer makers such as Hewlett-Packard who historically have preinstalled Microsoft’s operating system for a fee to consumers. Microsoft released its new Microsoft Windows 2010 in the fall 2009 and believes that the learning curve for any consumer to switch away to Google’s operating system will not be worth the effort. Google.com is the most visited Web site in the world and even in 2009 offered its own online word processing, spreadsheet, and presentation programs free – called Google Docs. The Google strategy is a huge bet that online programs can eventually overtake and crush desktop software.

Due to its dominance in the Internet search and advertising business, Google is coming under increasing scrutiny from the U.S. Justice Department regarding possible antitrust infringement. The pending Microsoft/ Yahoo merger may negate that Google vulnerability. Google obtains about 95 percent of its revenues from online advertising.

[Source: Based on Jeff Jarvis, “How the Google Model Could Help Detroit,” Business Week (February 9, 2009): 33–36; Geoff Colvin, “The World’s Most Admired Companies,” Fortune (March 16, 2009): 76–86.]

The Nature of Strategy Implementation

The strategy-implementation stage of strategic management is revealed in below Figure. 

Successful strategy formulation does not guarantee successful strategy implementation. It is always more difficult to do something (strategy implementation) than to say you are going to do it (strategy formulation)! Although inextricably linked, strategy implementation is fundamentally different from strategy formulation. Strategy formulation and implementation can be contrasted in the following ways:

• Strategy formulation is positioning forces before the action.
• Strategy implementation is managing forces during the action.
• Strategy formulation focuses on effectiveness.
• Strategy implementation focuses on efficiency.
• Strategy formulation is primarily an intellectual process.
• Strategy implementation is primarily an operational process.
• Strategy formulation requires good intuitive and analytical skills.
• Strategy implementation requires special motivation and leadership skills.
• Strategy formulation requires coordination among a few individuals.
• Strategy implementation requires coordination among many individuals.

Strategy-formulation concepts and tools do not differ greatly for small, large, for-profit, or nonprofit organizations. However, strategy implementation varies substantially among different types and sizes of organizations. Implementing strategies requires such actions as altering sales territories, adding new departments, closing facilities, hiring new employees, changing an organization’s pricing strategy, developing financial budgets, developing new employee benefits, establishing cost-control procedures, changing advertising strategies, building new facilities, training new employees, transferring managers among divisions, and building a better management information system. These types of activities obviously differ greatly between manufacturing, service, and governmental organizations.

In all but the smallest organizations, the transition from strategy formulation to strategy implementation requires a shift in responsibility from strategists to divisional and functional managers. Implementation problems can arise because of this shift in responsibility, especially if strategy-formulation decisions come as a surprise to middle- and lower-level managers. Managers and employees are motivated more by perceived self-interests than by organizational interests, unless the two coincide. Therefore, it is essential that divisional and functional managers be involved as much as possible in strategy-formulation activities. Of equal importance, strategists should be involved as much as possible in strategy-implementation activities. 

As indicated in following Table, management issues central to strategy implementation include establishing annual objectives, devising policies, allocating resources, altering an existing organizational structure, restructuring and re-engineering, revising reward and incentive plans, minimizing resistance to change, matching managers with strategy, developing a strategy supportive culture, adapting production/operations processes, developing an effective human resources function, and, if necessary, downsizing. Management changes are necessarily more extensive when strategies to be implemented move a firm in a major new direction.

TABLE: Some Management Issues Central to Strategy Implementation
Establish annual objectives
Devise policies
Allocate resources
Alter an existing organizational structure
Restructure and reengineer
Revise reward and incentive plans
Minimize resistance to change
Match managers with strategy
Develop a strategy-supportive culture
Adapt production/operations processes
Develop an effective human resources function
Downsize and furlough as needed
Link performance and pay to strategies

Managers and employees throughout an organization should participate early and directly in strategy-implementation decisions. Their role in strategy implementation should build upon prior involvement in strategy-formulation activities. Strategists’ genuine personal commitment to implementation is a necessary and powerful motivational force for managers and employees. Too often, strategists are too busy to actively support strategy-implementation efforts, and their lack of interest can be detrimental to organizational success. The rationale for objectives and strategies should be understood and clearly communicated throughout an organization. Major competitors’ accomplishments, products, plans, actions, and performance should be apparent to all organizational members. Major external opportunities and threats should be clear, and managers’ and employees’ questions should be answered. Top-down flow of communication is essential for developing bottom-up support.

Firms need to develop a competitor focus at all hierarchical levels by gathering and widely distributing competitive intelligence; every employee should be able to benchmark her or his efforts against best-in-class competitors so that the challenge becomes personal. For example, Starbucks Corp. in 2009–2010 is instituting “lean production/operations” at its 11,000 U.S. stores. This system eliminates idle employee time and unnecessary employee motions, such as walking, reaching, and bending. Starbucks says 30 percent of employees’ time is motion and the company wants to reduce that. They say “motion and work are two different things.”

Porter's Five Forces

Definition

1. “Porter’s five forces model is an analysis tool that uses five forces to determine the profitability of an industry and shape a firm’s competitive strategy”^[1]
2. “It is a framework that classifies and analyzes the most important forces affecting the intensity of competition in an industry and its profitability level.”

   Understanding the tool

   Five forces model was created by M. Porter in 1979 to understand how five key competitive forces are affecting an industry. The five forces identified are:
   
   
   These forces determine an industry structure and the level of competition in that industry. The stronger competitive forces in the industry are the less profitable it is. An industry with low barriers to enter, having few buyers and suppliers but many substitute products and competitors will be seen as very competitive and thus, not so attractive due to its low profitability.
   
   
    
   It is every strategist’s job to evaluate company’s competitive position in the industry and to identify what strengths or weakness can be exploited to strengthen that position. The tool is very useful in formulating firm’s strategy as it reveals how powerful each of the five key forces is in a particular industry. Threat of new entrants. This force determines how easy (or not) it is to enter a particular industry. If an industry is profitable and there are few barriers to enter, rivalry soon intensifies. When more organizations compete for the same market share, profits start to fall. It is essential for existing organizations to create high barriers to enter to deter new entrants. Threat of new entrants is high when:
   

   • Low amount of capital is required to enter a market;
   • Existing companies can do little to retaliate;
   • Existing firms do not possess patents, trademarks or do not have established brand reputation;
   • There is no government regulation;
   • Customer switching costs are low (it doesn’t cost a lot of money for a firm to switch to other industries);
   • There is low customer loyalty;
   • Products are nearly identical;
   • Economies of scale can be easily achieved.

   Bargaining power of suppliers. Strong bargaining power allows suppliers to sell higher priced or low quality raw materials to their buyers. This directly affects the buying firms’ profits because it has to pay more for materials. Suppliers have strong bargaining power when:
   

   • There are few suppliers but many buyers;
   • Suppliers are large and threaten to forward integrate;
   • Few substitute raw materials exist;
   • Suppliers hold scarce resources;
   • Cost of switching raw materials is especially high.

   Bargaining power of buyers. Buyers have the power to demand lower price or higher product quality from industry producers when their bargaining power is strong. Lower price means lower revenues for the producer, while higher quality products usually raise production costs. Both scenarios result in lower profits for producers. Buyers exert strong bargaining power when:
   

   • Buying in large quantities or control many access points to the final customer;
   • Only few buyers exist;
   • Switching costs to other supplier are low;
   • They threaten to backward integrate;
   • There are many substitutes;
   • Buyers are price sensitive.

   Threat of substitutes. This force is especially threatening when buyers can easily find substitute products with attractive prices or better quality and when buyers can switch from one product or service to another with little cost. For example, to switch from coffee to tea doesn’t cost anything, unlike switching from car to bicycle.
   Rivalry among existing competitors. This force is the major determinant on how competitive and profitable an industry is. In competitive industry, firms have to compete aggressively for a market share, which results in low profits. Rivalry among competitors is intense when:
   

   • There are many competitors;
   • Exit barriers are high;
   • Industry of growth is slow or negative;
   • Products are not differentiated and can be easily substituted;
   • Competitors are of equal size;
   • Low customer loyalty.

   Although, Porter originally introduced five forces affecting an industry, scholars have suggested including the sixth force: complements. Complements increase the demand of the primary product with which they are used, thus, increasing firm’s and industry’s profit potential. For example, iTunes was created to complement iPod and added value for both products. As a result, both iTunes and iPod sales increased, increasing Apple’s profits.
   

   Using the tool

   We now understand that Porter’s five forces framework is used to analyze industry’s competitive forces and to shape organization’s strategy according to the results of the analysis. But how to use this tool? We have identified the following steps:
   

   • Step 1. Gather the information on each of the five forces
   • Step 2. Analyze the results and display them on a diagram
   • Step 3. Formulate strategies based on the conclusions

   Step 1. Gather the information on each of the five forces. What managers should do during this step is to gather information about their industry and to check it against each of the factors (such as “number of competitors in the industry”) influencing the force. We have already identified the most important factors in the table below.
   

   Threat of new entry
   Amount of capital required Retaliation by existing companies Legal barriers (patents, copyrights, etc.) Brand reputation Product differentiation Access to suppliers and distributors Economies of scale Sunk costs Government regulation
   Supplier power
   Number of suppliers Suppliers’ size Ability to find substitute materials Materials scarcity Cost of switching to alternative materials Threat of integrating forward
   Buyer power
   Number of buyers Size of buyers Size of each order Buyers’ cost of switching suppliers There are many substitutes Price sensitivity Threat of integrating backward
   Threat of substitutes
   Number of substitutes Performance of substitutes Cost of changing
   Rivalry among existing competitors
   Number of competitors Cost of leaving an industry Industry growth rate and size Product differentiation Competitors’ size Customer loyalty Threat of horizontal integration Level of advertising expense

   Step 2. Analyze the results and display them on a diagram. After gathering all the information, you should analyze it and determine how each force is affecting an industry. For example, if there are many companies of equal size operating in the slow growth industry, it means that rivalry between existing companies is strong. Remember that five forces affect different industries differently so don’t use the same results of analysis for even similar industries!
   Step 3. Formulate strategies based on the conclusions. At this stage, managers should formulate firm’s strategies using the results of the analysis For example, if it is hard to achieve economies of scale in the market, the company should pursue cost leadership strategy. Product development strategy should be used if the current market growth is slow and the market is saturated.
   Although, Porter’s five forces is a great tool to analyze industry’s structure and use the results to formulate firm’s strategy, it has its limitations and requires further analysis to be done, such as SWOT, PEST or Value Chain analysis.
   

   Example

   This is Porter’s five forces analysis example for an automotive industry.
   
   

   Threat of new entry (very weak)

   Large amount of capital required High retaliation possible from existing companies, if new entrants would bring innovative products and ideas to the industry Few legal barriers protect existing companies from new entrants All automotive companies have established brand image and reputation Products are mainly differentiated by design and engineering quality New entrant could easily access suppliers and distributors A firm has to produce at least 5 million (by some estimations) vehicles to be cost competitive, therefore it is very hard to achieve economies of scale Governments often protect their home markets by introducing high import taxes

   Supplier power (weak)

   Large number of suppliers Some suppliers are large but the most of them are pretty small Companies use another type of material (use one metal instead of another) but only to some extent (plastic instead of metal) Materials widely accessible Suppliers do not pose any threat of forward integration

   Buyer power (strong)

   There are many buyers Most of the buyers are individuals that buy one car, but corporates or governments usually buy large fleets and can bargain for lower prices It doesn’t cost much for buyers to switch to another brand of vehicle or to start using other type of transportation Buyers can easily choose alternative car brand Buyers are price sensitive and their decision is often based on how much does a vehicle cost Buyers do not threaten backward integration

   Threat of substitutes (weak)

   There are many alternative types of transportation, such as bicycles, motorcycles, trains, buses or planes Substitutes can rarely offer the same convenience Alternative types of transportation almost always cost less and sometimes are more environment friendly

   Competitive rivalry (very strong)

   Moderate number of competitors If a firm would decide to leave an industry it would incur huge losses, so most of the time it either bankrupts or stays in automotive industry for the lifetime Industry is very large but matured Size of competing firm’s vary but they usually compete for different consumer segments Customers are loyal to their brands There is moderate threat of being acquired by a competitor

Introduction to Strategic Management - Definition and Stages of Strategic Management

What Is Strategic Management?

Once there were two company presidents who competed in the same industry. These two presidents decided to go on a camping trip to discuss a possible merger. They hiked deep into the woods. Suddenly, they came upon a grizzly bear that rose up on its hind legs and snarled. Instantly, the first president took off his knapsack and got out a pair of jogging shoes. The second president said, “Hey, you can’t outrun that bear.” The first president responded, “Maybe I can’t outrun that bear, but I surely can outrun you!” This story captures the notion of strategic management, which is to achieve and maintain competitive advantage.

Defining Strategic Management

Strategic management can be defined as the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives. As this definition implies, strategic management focuses on integrating management, marketing, finance/accounting, production/operations, research and development, and information systems to achieve organizational success. The term strategic management in this text is used synonymously with the term strategic planning. The latter term is more often used in the business world, whereas the former is often used in academia. Sometimes the term strategic management is used to refer to strategy formulation, implementation, and evaluation, with strategic planning referring only to strategy formulation. The purpose of strategic management is to exploit and create new and different opportunities for tomorrow; long-range planning, in contrast, tries to optimize for tomorrow the trends of today.

The term strategic planning originated in the 1950s and was very popular between the mid-1960s and the mid-1970s. During these years, strategic planning was widely believed to be the answer for all problems. At the time, much of corporate America was “obsessed” with strategic planning. Following that “boom,” however, strategic planning was cast aside during the 1980s as various planning models did not yield higher returns. The 1990s, however, brought the revival of strategic planning, and the process is widely practiced today in the business world. A strategic plan is, in essence, a company’s game plan. Just as a football team needs a good game plan to have a chance for success, a company must have a good strategic plan to compete successfully. Profit margins among firms in most industries have been so reduced by the global economic recession that there is little room for error in the overall strategic plan. A strategic plan results from tough managerial choices among numerous
good alternatives, and it signals commitment to specific markets, policies, procedures, and
operations in lieu of other, “less desirable” courses of action. The term strategic management is used at many colleges and universities as the subtitle for the capstone course in business administration.  

Stages of Strategic Management

The strategic-management process consists of three stages: strategy formulation, strategy implementation, and strategy evaluation. Strategy formulation includes developing a vision and mission, identifying an organization’s external opportunities and threats, determining internal strengths and weaknesses, establishing long-term objectives, generating alternative strategies, and choosing particular strategies to pursue. Strategy-formulation issues include deciding what new businesses to enter, what businesses to abandon, how to allocate resources, whether to expand operations or diversify, whether to enter international markets, whether to merge or form a joint venture, and how to avoid a hostile takeover. 

Because no organization has unlimited resources, strategists must decide which alternative strategies will benefit the firm most. Strategy-formulation decisions commit an organization to specific products, markets, resources, and technologies over an extended period of time. Strategies determine long-term competitive advantages. For better or worse, strategic decisions have major multifunctional consequences and enduring effects on an organization. Top managers have the best perspective to understand fully the ramifications of strategy-formulation decisions; they have the authority to commit the resources necessary for implementation. 

Strategy implementation requires a firm to establish annual objectives, devise policies, motivate employees, and allocate resources so that formulated strategies can be executed. Strategy implementation includes developing a strategy-supportive culture, creating an effective organizational structure, redirecting marketing efforts, preparing budgets, developing and utilizing information systems, and linking employee compensation to organizational performance.

Strategy implementation often is called the “action stage” of strategic management. Implementing strategy means mobilizing employees and managers to put formulated strategies into action. Often considered to be the most difficult stage in strategic management, strategy implementation requires personal discipline, commitment, and sacrifice. Successful strategy implementation hinges upon managers’ ability to motivate employees, which is more an art than a science. Strategies formulated but not implemented serve no useful purpose.

Interpersonal skills are especially critical for successful strategy implementation. Strategy-implementation activities affect all employees and managers in an organization. Every division and department must decide on answers to questions, such as “What must we do to implement our part of the organization’s strategy?” and “How best can we get the job done?” The challenge of implementation is to stimulate managers and employees throughout an organization to work with pride and enthusiasm toward achieving stated objectives.

Strategy evaluation is the final stage in strategic management. Managers desperately need to know when particular strategies are not working well; strategy evaluation is the primary means for obtaining this information. All strategies are subject to future modification because external and internal factors are constantly changing. Three fundamental strategy-evaluation activities are (1) reviewing external and internal factors that are the bases for current strategies, (2) measuring performance, and (3) taking corrective actions. Strategy evaluation is needed because success today is no guarantee of success tomorrow! Success always creates new and different problems; complacent organizations experience demise.

Strategy formulation, implementation, and evaluation activities occur at three hierarchical levels in a large organization: corporate, divisional or strategic business unit, and functional. By fostering communication and interaction among managers and employees across hierarchical levels, strategic management helps a firm function as a competitive team. Most small businesses and some large businesses do not have divisions or strategic business units; they have only the corporate and functional levels. Nevertheless, managers and employees at these two levels should be actively involved in strategic-management activities. 

Peter Drucker says the prime task of strategic management is thinking through the overall mission of a business:..

. . . that is, of asking the question, “What is our business?” This leads to the setting of objectives, the development of strategies, and the making of today’s decisions for tomorrow’s results. This clearly must be done by a part of the organization that can see the entire business; that can balance objectives and the needs of today against the needs of tomorrow; and that can allocate resources of men and money to key results.