CHAPTER 8
Managing Strategy and Strategic Planning
CHAPTER SUMMARY
This chapter discusses how organizations manage strategy and strategic planning. It begins by examining
the nature of strategic management including its components and alternatives. It then describes the kinds
of analyses needed for firms to formulate their strategies. Next it examines how organizations first
formulate and then implement business strategies, followed by a parallel discussion at the corporate
strategy level. The chapter concludes with a discussion of international and global strategies.
LEARNING OBJECTIVES
After covering this chapter, students should be able to:
1. Discuss the components of strategy, types of strategic alternatives, and the distinction between
strategy formulation and strategy implementation.
2. Describe how to use SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis in
formulating strategy.
Toyota’s hybrid car, the Prius, is a huge success ever since it was launched in 2000 in the U.S. Its fuel
economy and its reduced emissions have attracted a loyal cadre of buyers. However, as the opening case
Discussion Starter: Ask students to describe if they would buy a hybrid car? Would they buy a Prius
knowing that Toyota seeks lower CAFÉ standards as do the other car makers?
Chapter 8: Managing Strategy and Strategic Planning
LECTURE OUTLINE
I. THE NATURE OF STRATEGIC MANAGEMENT
A strategy is a comprehensive plan for accomplishing a firm’s goals.
A. The Components of Strategy
1. A distinctive competence is something a firm does exceptionally well.
Management Update: For decades, Volvo has been associated with cars that are exceptionally safe.
Other car makers seem unable or unwilling to compete with Volvo in those areas.
Teaching Tip: Emphasize for students that a distinctive competence always exists in a limited area and
2. Scope specifies the range of markets in which a firm will compete.
Global Connection: For an international business, the scope component of strategy specifies in which
foreign markets the firm intends to compete.
B. Types of Strategic Alternatives
1. Business-level strategy consists of the set of strategic alternatives that a firm chooses
from as it conducts business in a particular industry or market.
Extra Example: A good example that helps distinguish between business- and corporate-level
Teaching Tip: An additional level of strategy is functional level. This refers to strategies developed for
specific functional areas such as marketing, finance, and so forth.
Chapter 8: Managing Strategy and Strategic Planning
C. Strategy Formulation and Implementation
1. Strategy formulation—the set of processes involved in creating or determining the
strategies of the firm.
2. Strategy implementation—the methods by which strategies are operationalized or
Discussion Starter: Ask students whether Volkswagen’s reintroduction of the Beetle reflects a
deliberate or an emergent strategy. (In reality, it has elements of both—VW knew it needed to do
II. USING SWOT ANALYSIS TO FORMULATE STRATEGY
SWOT—acronym that stands for Strengths, Weaknesses, Opportunities, and Threats.
The best strategies (1) exploit opportunities and strengths, (2) neutralize threats, and (3) avoid (or
correct) weaknesses.
A. Evaluating an Organization’s Strengths
Organizational strengths—skills and capabilities that enable a firm to conceive of and
implement its strategies.
1. Common organizational strengths—a capability possessed by a large number of
competing firms. Competitive parity exists when large numbers of competing firms are
able to implement the same strategy.
2. Distinctive competencies—a strength possessed by only a small number of competing
Reasons a distinctive competence might not be imitable:
a) Its acquisition or development may depend on unique historical circumstances that
other firms cannot replicate.
Extra Example: Price competition is among the easiest strategies to imitate. For example, any time an
airline lowers its prices to attract new customers, competing airlines are able to imitate its strategy
within hours.
Discussion Starter: If a low-price strategy is easily imitated, is it likely to lead to a sustainable
Chapter 8: Managing Strategy and Strategic Planning
Extra Example: During World War II, Coca-Cola’s CEO decreed that every U.S. soldier abroad
should have access to a 5-cent bottle of Coke. With government assistance, the firm built 64 overseas
bottling plants. This early entry into global markets gave Coke an advantage over Pepsi that it has never
relinquished.
B. Evaluating an Organization’s Weaknesses
Organizational weaknesses—skills and capabilities that do not enable a firm to choose and
Discussion Starter: Ask students if they think it is easier to assess environment opportunities and
threats or organizational strengths and weaknesses. While the latter are more “immediate,” such
analysis may also pose threats to individuals within the organization.
Cross-Reference: Porter’s five forces model of the competitive environment discussed in Chapter 3
Group Exercise: Have small groups of students outline a hypothetical SWOT analysis of a local firm
and/or your college or university.
III. FORMULATING BUSINESS-LEVEL STRATEGIES
Teaching Tip: Reinforce again the distinction between business– and corporate-level strategies. Use
the PepsiCo example to illustrate formulation and implementation across different levels to remind
students of the distinctions.
There are three approaches to formulating business-level strategy.
A. Porter’s Generic Strategies
1. Differentiation strategy—firm seeks to distinguish itself from competitors through the
quality of its products or services
Global Connection: A good example of the focus strategy is cosmetics and personal care products
maker Aveda, which only manufactures products that are made from natural, botanical ingredients. The
Chapter 8: Managing Strategy and Strategic Planning
B. The Miles and Snow Typology
1. Prospector strategy—seeks out new markets and new opportunities and is oriented
2. Defender strategy—concentrates on protecting current markets, maintaining stable
growth, and serving current customers.
Extra Example: Another good example of a defender is Domino’s Pizza. After losing ground to Pizza
3. Analyzer strategy—combines elements of prospectors and defenders.
Extra Example: Dell Computer also uses an analyzer strategy. Its expansion outside of the personal
C. Strategies Based on the Product Life Cycle
Product life cycle—a four-stage model that shows how sales volume changes over the life of
products. Different stages of the life cycle call for different strategies
1. Introduction stage—demand may be very high and sometimes outpaces the firm’s ability
to supply the product. Strategies focus on increasing production, keeping quality high,
and managing cash flow.
Discussion Starter: Ask students to identify examples of current products or services that appear to be
at each stage of the product life cycle.
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IV. IMPLEMENTING BUSINESS-LEVEL STRATEGIES
A. Implementing Porter’s Generic Strategies
Teaching Tip: Note the role and importance of basic business functions in implementing business
strategies.
1. Differentiation strategy
a. Marketing and sales—emphasize the high-quality, high-value image of the
organization’s products or services.
Extra Example: The human resource function can also help implement a differentiation strategy by
hiring people who can do high-quality work and training them to perform to the quality standards set by
the firm.
2. Overall cost leadership strategy
a. Marketing and sales—focus on simple product attributes and how these product
attributes meet customer needs in a low-cost and effective manner.
business functions.
Discussion Starter: Ask students to suggest circumstances under which a firm that has successfully
been using one generic strategy might choose to implement a different generic strategy.
B. Implementing Miles and Snow’s Strategies
1. Prospectors need to encourage creativity and flexibility. Decentralization often
facilitates this.
Discussion Starter: Again, solicit ideas about why a firm that is successfully pursuing one of Miles
and Snow’s strategies might appropriately decide to implement a different one.
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V. FORMULATING CORPORATE-LEVEL STRATEGIES
Teaching Tip: Again, reinforce the distinction between business-level and corporate-level strategies.
Use again the PepsiCo example to remind students of the differences.
Extra Example: PepsiCo is organized around two SBUs—packaged drinks (Pepsi, Lipton, etc.) and
snack foods (Frito-Lay).
Diversification—the number of different businesses that a firm is engaged in and the extent to which
these businesses are related to one another
A. Single-Product Strategy
B. Related Diversification
Related diversification—operating multiple businesses that are related to one another
1. Bases of relatedness include common technology, common distribution network,
Extra Example: Ford’s purchase of Jaguar a few years ago (it is now owned by Tata Motors) was an
example of related diversification.
2. Advantages of related diversification
a) Reduces a firm’s dependence on any one of its business activities and thus reduces
Extra Example: A recent trend in organizations today is a reduction in the number of businesses, to
Extra Example: However, when Georgia Pacific considered separating its paper products division
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C. Unrelated Diversification
Unrelated diversification—operating multiple businesses that are not related to one another
1. Presumed benefits: businesses that use this strategy should have stable performance over
time and resource allocation advantages.
Extra Example: General Electric is perhaps the most successful firm today that still uses unrelated
diversification. GE owns businesses in such disparate industries as aircraft engines, appliances, finance
and insurance, and plastics.
VI. IMPLEMENTING CORPORATE-LEVEL STRATEGIES
A. Becoming a Diversified Firm
1. A firm can diversify by internal development of its own new products and services
within the boundaries of its traditional business operations.
Extra Example: The Limited, which began as a women’s clothing chain, added units such as
2. A firm can also become diversified by replacing its former suppliers and customers.
a) Backward vertical integration—occurs when a firm stops buying supplies from
other companies and begins to provide its own supplies.
Extra Example: Many petroleum firms have implemented both backward and forward vertical
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a) Merger—occurs when the two organizations being combined are approximately the
same size and a new firm is created.
Extra Example: Daimler-Benz and Chrysler merged in 1998, creating the world’s third-largest
b) Acquisition—occurs when one of the firms buys the other outright.
Extra Example: The Limited has also grown by acquisition. It purchased Lane Bryant (clothes for
B. Managing Diversification
Portfolio management techniques—methods that diversified firms use to make decisions about
what businesses to engage in and how to manage these multiple businesses.
1. BCG matrix—provides a framework for evaluating the relative performance of
businesses in which a diversified organization operates.
The matrix uses two factors to evaluate a firm’s set of businesses: market growth rate and
market share. The matrix classifies the types of businesses that a diversified firm can
engage in.
a) Dogs are businesses that have a very small share of a market that is not expected to
grow.
Group Exercise: Have groups of students research and collect information about a large diversified
firm. (Disney, General Motors, Sears, or Procter and Gamble would all make good examples.) Then
have the groups classify the firm’s various businesses into the four cells of the BCG matrix.
Teaching Tip: Use Figure 8.3 as a framework for discussing the BCG matrix.
2. GE Business Screen
A more sophisticated approach than the BCG matrix, using a nine-cell matrix. Note that
using the GE Business Screen parallels the application of SWOT analysis.
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VII. INTERNATIONAL AND GLOBAL STRATEGIES
A. Developing International and Global Strategies
1. International firms can better exploit global efficiencies.
a) Location efficiencies allow firms to locate facilities wherever they can best obtain a
cost or differentiation advantage.
Global Connection: Microsoft employs many software engineers in India to produce programs for the
broader product lines.
2. Multimarket flexibility gives firms the ability to respond to changes in one region by
making changes to their operations in other regions.
B. Strategic Alternatives for International Business
1. Firms that use the home replication strategy apply the distinctive competences they
developed in their home market to the foreign markets that they enter. This strategy
works best when the firm’s competences are valuable in many different types of markets.
2. The multidomestic strategy is used by firms that manage a portfolio of international
Chapter 8: Managing Strategy and Strategic Planning
END OF CHAPTER QUESTIONS
Questions for Review
1. Define the four parts of a SWOT analysis.
2. Describe the relationship between a distinctive competency, a competitive advantage, and a
sustained competitive advantage.
A distinctive competency is an internal strength or capability that is possessed by only a few firms.
3. List and describe Porter’s generic strategies and the Miles and Snow typology of strategies.
Porter’s generic strategies include: (1) differentiation—the firm seeks to distinguish itself from
4. What are the characteristics of businesses in each of the four cells of the BCG matrix?
A Star is a business with a large market share that competes in a rapidly growing industry. A Cash
Questions for Analysis
5. Describe the process that an organization follows when using a deliberate strategy. How does this
process differ when an organization implements an emergent strategy?
A firm using a deliberate strategy will identify problems, gather and analyze information, formulate
6. Which strategy should a firm develop first—its business- level or its corporate-level strategy?
Describe the relationship between a firm’s business– and corporatelevel strategies.
Both must be developed together, at the same time. Decisions made at the corporate level, such as to
Chapter 8: Managing Strategy and Strategic Planning
7. Volkswagen sold its original Beetle automobile in the United States until the 1970s. The original
Beetle was made of inexpensive materials, was built using an efficient mass production technology,
and offered few options. Then, in the 1990s, Volkswagen introduced its new Beetle, which has a
distinctive style, provides more optional features, and is priced for upscale buyers. What was
Volkswagen’s strategy with the original Beetle—product differentiation, low cost, or focus? Which
strategy did Volkswagen implement with its new Beetle? Explain your answers.
The original Beetle was clearly part of a low cost strategy with its emphasis on efficiency, inexpensive
Questions for Application
8. Assume that you are the owner and manager of a small business. Write a strategy for your business.
Be sure to include each of the three primary strategic components.
Students’ answers will vary depending on the type of business they choose. Students should write a
9. Interview a manager and categorize the business- and corporate-level strategies of his or her
organization according to Porter’s generic strategies, the Miles and Snow typology, and extent of
diversification.
Answers will, of course, vary. Students who interview a manager of a smaller firm will not likely
10. Give an example of a corporation following a single-product strategy, a related diversification
strategy, and an unrelated diversification strategy. What level of performance would you expect
from each firm, based on its strategy? Examine the firm’s profitability to see whether your
expectations were accurate.
Students’ answers will vary, but here is an example: “Toys ‘R’ Us is following a single-product
Chapter 8: Managing Strategy and Strategic Planning
END OF CHAPTER EXERCISES
Building Effective Decision-Making Skills
I. Purpose
This exercise will encourage students to consider how a SWOT analysis would be performed in a
real organization, including which sources should be used, and the validity of the information at
those sources.
II. Format
This decision-making exercise can be performed by individuals or groups. It should take about 30
minutes to complete.
III. Follow-Up
A. List the sources you will use to obtain information about the firm’s strengths, weaknesses,
opportunities, and threats.
C. Next, rate each source in terms of its probable reliability.
There will be considerable variation in students’ answers to these three questions. Students
should notice that there are a variety of likely sources, and that the sources differ a great deal
D. Finally, ask yourself how confident you’d be in basing decisions on the information that
you’ve obtained?
Again, answers will vary, but students will recognize that it is difficult to get reliable
Building Effective Conceptual Skills
I. Purpose
This in-class game demonstrates concepts about competition and cooperation through the use of a
prisoner’s dilemma situation.
II. Format
This game will take about 20 minutes to play through once. It can also effectively be played twice.
Follow-up and discussion time will vary.
III. Follow-Up
Before playing this game in class, discuss the concepts of game theory and especially the prisoner’s
Chapter 8: Managing Strategy and Strategic Planning
The main message of this game is: “It’s nice to be nice, to the nice.” Students will find that
competition is the preferred mode when rivals are behaving competitively, and cooperation is
preferred in situations where rivals are willing to be cooperative. In a mixed case, faced with some
rivals that are cooperative and some that are competitive, the cooperative firms can band together
and effectively compete against the competitive firms by using their combined power.
game with just one set if volunteers come forward to play the game in front of the entire class.
There are four different rule sets, which can be played simultaneously, and then the results reported
to the class. Alternatively, the rule sets can be played sequentially.
For all rules sets: Four players per game. Each player uses only 2 pieces, not 4 (in order to make the
game play faster). Players start moving pieces on their first roll of the dice, rather than waiting for a
specific number (again, for speed).
Rule Set 1: This is the cooperative game. Players should try not to land on an occupied space, and
they may never send any of their opponent’s pieces back to the start. If they must land on an
occupied space, the player should put their piece in the next free spot, not displacing his or her
opponent.
Rule Set 4: This is the mixed case, “retaliation” game. One player is chosen at the start to be the
competitive one, and the group is informed. During play, the competitive player plays by Rule Set 2,
sending his or her opponent’s pieces back to the start whenever possible. The three cooperative
players play by Rule Set 1, when they are facing another cooperative player. That is, they should not
send a cooperative player’s pieces back to the start. However, the three cooperative players play by
Rule Set 2, when they are facing the competitive player. That is, they should try to send the
competitive player’s pieces back to the start whenever possible.
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Students will find that retaliation game (#4) seems to be fair, because the competitive student often
does not win. This is the situation in which some rivals cooperate for mutual benefit with other
trusted rivals, while competitive rivals find that the others “gang up” and use their combined power
to squash any competitive tactics. This is analogous to the situation where the honest students study
together to help each other, excluding the cheating student from the study group.
A. Break into small groups and play the board game according to the instructions you receive
from your professor.
MANAGEMENT AT WORK
ACTING ON A STRATEGIC VISION
The case contrasts the strategies of two video game competitors – Electronic Arts (EA) and Activision.
EA was on a high growth path till the last few years. It acquired video game companies, centralized
production, and churned out sequels. In contrast, Activision, under new leader, Robert Kotick, kept its
acquired studios independent and encouraged its own developers to become independent developers. By
2007, Activision had surpassed EA in revenues and in market capitalization.
Company Update: Activision is now called “Activision Blizzard.” In fiscal 2010, it reported revenues
of $4.4 billion and profits of $418 million. Its “Call of Duty” became the number one video game
franchise of all times.
1. Case Question 1: How might a SWOT analysis have helped Electronic Arts assess its slippage in
the videogame market?
SWOT is the acronym for Strengths, Weaknesses, Opportunities, and Threats. A SWOT analysis
2. Case Question 2: How might Porter’s generic strategies theory help to explain why Electronic Arts
lost its leadership in the videogame market to Activision Blizzard?
Electronic Arts used the strategy of differentiation to succeed in the video game industry. It
Chapter 8: Managing Strategy and Strategic Planning
3. Case Question 3: How would you use Miles and Snow typology theory to advise Activision
Blizzard on the best way to maintain its leadership in the videogame market?
Activision Blizzard is likely to be the “new” prospector in the industry, having usurped this position
4. Case Question 4: If you ran a small video game startup, what would be your strategy for competing
with EA and Activision Blizzard?
Using Porter’s generic strategy theory, the best bet for a start up would be as a niche player, since
5. Case Question 5: If you’re a videogame player, what aspects of Activision’s strategy have led to
your playing more (or fewer) of its games? If you’re not a videogame player, what aspects of
Activision Blizzard’s strategy might induce you to try a few of its games?
While responses will vary, this question is very likely to foster a high amount of discussion as