Thinking Strategically: A Working Model Chapter 2 • By: Fiona Caramba-Coker • For: Dr. Fred De. Micco
OBJECTIVES Upon completion of this chapter, you will be able to: 1. understand that strategic management is a way of thinking about the future. 2. describe the differences among corporate, business, and functional strategies. 3. comprehend the key concepts of strategy and their role in organizational success. 4. utilize the strategic management model to develop effective strategies for the future success of the hospitality enterprise. 5. Apply the concepts of this chapter to the case study.
Strategic Management is a Way of Thinking About the Future • • Before looking at each of the concepts it is important first to recognize that strategy is not a process, it is a way of thinking. It includes many activities that must come together synergistically to produce the results expected by the stakeholders in the firm. ◦ Read pages 38 -40 in your book
A Way of Thinking http: //www. youtube. com/watch? v=ogg 7 s. Qch. SYc
The Relationship among Corporate, Business, and Functional Strategies What business(es) should we be in? Corporate Strategy What competitive methods do we invest in to achieve competitive advantage? Business Strategy Functional Strategy What financial, marketing, operations, and other strategies will be important to implement business strategy?
Corporate Strategies • Corporate Strategy is the grand design of • managing the entire organization. It determines that business in which the firm will be engaged in: industries, segments, products, and services. ◦ Read pages 40 -41 in your book
Corporate Strategies • A Real Life Example: ◦ A small hotel firm strives to change itself from a “corner shop” operating in a mainly domestic market, to participation in an “electronic shopping mall” with global reach. ◦ The firm re-evaluated its corporate strategy by assessing what business the hotel would be in and expanding the target market of the hotel. • Read more about this story in Article ONE.
Business Strategies • It is important to decipher how a firm will compete • within a particular industry. Business Strategy is directed at determining the competitive methods that companies develop to compete in a specific domain or industry sector. ◦ Read pages 41 -42 in your book
Business Strategies • Applying it to a Concept: ◦ Porter’s “The Five Competitive Forces That Shape Strategy” highlights the forces that strategists must understand in order to cope with competition. • Read Article TWO for a thorough discussion of the topic.
Business Strategies Potential New Entrants Bargaining Power of Suppliers Intra-Industry Rivalry Strategic Business Unit Substitute Products and Services Porter’s Competitive Model Bargaining Power of Buyers
Functional Strategies • Functional Strategy focuses on resource allocation. • Compared to the other levels of strategy, functional strategies change quite frequently, often influenced by competitors’ daily movements. ◦ Read pages 42 -43 in your book.
Functional Strategies • A Real Life Example: ◦ An example of this can be found in Article Three, when Starbucks Corp. eliminates 600 of its jobs to revive the struggling coffee giant • Please read Article THREE for more details on how Starbucks reallocated its resources.
Functional Strategies Functional Area Elements in which strategy is developed Finance Asset management, capital budgeting, capital structure, financing, risk management, financial planning, dividend decisions, forecasting, mergers and acquisitions, control systems Human Resources Personnel management, organizational behavior, labor-management relations, leadership Marketing Distribution, advertising and promotion, pricing, product and services offered, customer segments, research Administration Insurance coverage, accounting systems, management information systems, strategic planning, legal issues Operations Production management, quality control, resource acquisition and storage, safety and security, process management Research and Development Product development, customer development, new business development
Key Concepts of Strategy and Their Role in Organizational Success • Strategy is incorporated in the day-to-day activities of all levels of personnel within the firm. ◦ Including frontline customer employees through to toplevel management. ◦ It focuses on how the firm should compete by anticipating what competitive methods will lead the firm to financial success. ◦ The four constructs of the coalignment theory give a more detailed discussion on the importance of strategy to an organization’s success. • Read pages 44 -51 in your book
Exhibit 2. 4 Strategic Management Model Domain Definition(2) Geographic market area Segment Primary competition Target Market Long term objectives (6) Performance measure Competitive Methods (3) Environmental Events (1) Remote Task P 1 Action plan Resources needed Evaluation timetable P 2 P 3 Functional S 2 Strengths and (5) weakness analysis S 2 S 3 Firm Mission Statement (4) Nature of business Target customer Products/services Core values Means to accomplish above Core competencies Responsibility Resource allocation processes Contextual variables Process variables Functional analysis Financial position Structural analysis Physical assets Labor force Risk Competitiveness Accountability Rational Short term objectives (7) Evaluation (8)
Strategic Management Model and Effective Strategies For the Future Success of the Hospitality Industry • Although strategic management is a way of thinking, • strategy formulation is a process. Strategy formulation is the activity that management engages in to establish the direction of the firm’s future. ◦ The coalignment model is a reflection of the normal flow of activities that take place in the strategy formulation process.
Strategic Management Model and Effective Strategies For the Future Success of the Hospitality Industry • Segment, a sub-section of Domain Definition is defining the mission statements of hospitality firms today. ◦ Customers are becoming defined more individualistically, also referred to as the segment of one. ◦ They are demanding more customized products and services to meet their needs and will make purchase decisions based on the products and services that most directly meet these needs. • Read pages 51 -53 in your book.
Strategic Management Model and Effective Strategies For the Future Success of the Hospitality Industry • A Real Life Example: ◦ SYSCO uses Business Intelligence Software, Business Objects, to make better use of the information generated by its operations to serve its customers better. • Read Article FOUR for more details on how SYSCO moved forward with this strategy.
What Now? ? ? • Now that you have gone through the chapter, lets test your knowledge….
Multiple Choice The competitive methods of a company should reflect its management philosophy, which calls for A. consistent allocation of the resources. B. its core competencies. C. anticipatory action in the face of rapid change. D. none of the above. Indicate the item that does not reflect the essence of strategy. A. Strategy includes many activities that come together synergistically to produce the results expected by the shareholders in the firm. B. Strategy should be defined as a consistent pattern of resource allocation directed to those competitive methods. C. Strategy demands high levels of energy and an orientation to the future. D. In order to achieve the results expected by the stakeholders in the firm, strategy should be done every three years.
True or False? ? Once the corporate strategy determines what businesses the firm will be engaged in, the decision must then be made on acquiring another or building a new business. True False Corporate decisions can be influenced by institutional investors, environmental groups, employee groups, and regulatory bodies. True False Strategies can occur at all levels of an organization: corporate, business, and functional. The corporate strategies usually reflect a time frame of one to five years, while the functional strategies cover a time frame of no longer than one year. True False
Short Answer Response • What is the Essence of the Co-alignment principle? • What are the requirements for thinking Strategically? • What are the four major concepts of strategy making? • In order to identify threats and opportunities in the future, what categories of the environment of the business should be scanned and assessed by a firm?
Case Study Strategy for Mature Life Cycle: Yum! Brands 1. How has the role of the life cycle changed for the restaurant industry from the 1970’s to the present time? 2. Why is multibranding a strategy to pursue in the mature quick service industry? What are the claimed benefits? What are the challenges? What are the pros and cons for cobranding or multibranding in the foodservice industry? Discuss the issues from the perspective of operations, marketing, and customers. 3. What environment events led to Yum! Brands’ decision to adopt the multibranding strategy? 4. Besides cobranding, what are the other viable strategies that would allow for survival and prosperity in a maturing industry?
Supplemental Readings • Article ONE: From Corner Shop to Electronic Shopping Mall? ◦ Alison Morrison and Antony Harrison • Article TWO: The Five Competitive Forces That Shape Strategy ◦ Michael E. Porter • Article THREE: Starbucks Cuts 600 Positions ◦ The Wall Street Journal - Janet Adamy • Article FOUR: Business Intelligence Software at SYSCO ◦ Andrew Mcafee and Alison Berkley Wagonfeld • Answer Key: For the Chapter Case Study
Answer Key: Case Study 1. To survive and prosper in a maturing industry, operators are forced to rethink their strategies to satisfy the changing demands of the customers. They have developed new, differentiated, and effective strategies. One of the strategies was multi branding. The multi-brand concept has taken place as the quick service restaurant industry develops and it is becoming more and more common for companies in order to compete with the others.
Answer Key: Case Study 2. Multiple branding is a strategy in which a firm puts more than one of its brands into the same restaurant in hopes of raising sales and improving operating efficiency. Multi branding of this kind is not a new idea. Restaurants have been using that for years. While the intent of this strategy is to raise menu variety and daypart sales, some operators have tried and abandoned the strategy, and others are not rushing to bundle their brands, except in special markets. Nevertheless, cobranding has been embraced by Yum! Brands and is central to its longterm strategy. According to Aylwin Lewis, president and chief multibranding and operating officer, co-branding gives them a competitive advantage in the marketplace by allowing them to penetrate markets that are cost prohibitive or do not have the population density to support a single concept. Many industry leaders believe that multi-branding is likely to be a part of the future for all of the major players as they rethink their strategies. Sidney Feltenstein, chairman of the International Franchise Association, for example, has claimed that this strategy will be a major driver of growth in the QSR segment.
Answer Key: Case Study 2. Continued Beginning in 1992 with its first multi-branded restaurant, YUM! Brands now operate more than twenty-two hundred multi-branded units in the United States, accounting for almost 14 percent of profits. This Fortune 300 Company is able to execute a multi-branding strategy easily because it operates the following well-known brands: A&W All-American Food, Kentucky Fried Chicken (KFC), Long John Silver's, Pizza Hut, and Taco Bell. Overall system sales totaled $24. 2 billion in 2002, up from $22. 3 billion in 2001. In contrast, the Mc. Donald's strategy has heretofore been to develop its brands separately, although it could capitalize on co-branding in the future. Higher unit volumes are at the heart of the corporate multi-branding strategy. For years Mc. Donald's has been the envy of the industry, with restaurants that enjoy twice the volume of the typical KFC or Taco Bell outlet. According to Dave Deno, chief financial officer at Yum!, “the biggest thing that multibranding offers is the chance to leverage our existing assets that have lower volumes than, say, a Mc. Donald's. Early efforts at co-branding were combinations of KFC with Taco Bell and Taco Bell with Pizza Hut. The net result of these efforts was the addition of between $100, 000 and $400, 000 per unit in average sales. One franchisee, Larry Durrett, president of Southern Multifoods, which opened the first cobranded Taco Bell and Long John Silver's, explained why multi-branding is such a powerful idea for him as a franchisee.
Answer Key: Case Study 2. Continued Multi-branding has a dramatic impact on the customer. It's a barrier breaker for families, meaning that sometimes kids like to eat different things than adults. Globally, though, if you have a KFC--Taco Bell, you might get someone who wants a taco one day and who will come back the next day lot chicken. When we add volume to these restaurants through multi-branding, they add incremental profits that they could not have gotten any other way. Multi-branding is a strategy to pursue in the quick service industry. The philosophy underneath is that “two brands are better than one” which leads to higher unit volumes. The goal of adopting this strategy is to reduce advertisement costs and avoiding the cost of opening new locations. Central administration is an advantage for multi-branding because most of the changes made to one brand are easily applicable to others.
Answer Key: Case Study 2. Continued Advantages : - Borrowing expertise from sibling brands - Sharing employees - Purchasing power - Shared training, parking lot, etc. - Leveraging combined brand equity - Reducing production costs - Expanding brand meaning - Increasing consumer access points - Increasing unit revenues Disadvantages : - Not every franchisee has the infrastructure to deal with different brands - Franchisees must adhere to two separate contracts in one store - Two different sets of menu items and operating procedures can cause confusion among managers and employees - Slow down in production and service time
Answer Key: Case Study 3. It is a result of years of research and the development of its customer base. Demographics, real estate costs, traffic, and competition are the events that led Yum! to adopt multi-branding. It is very important to observe the environment with details. Yum! had done that.
Answer Key: Case Study 4. New Products New Markets International Markets Minimizing movement and churn of employees out of the organization is another strategic imperative. The feedback process helps with retention, creating more stable management teams and ultimately, more successful restaurants. Development programs such as double staffing and cross training of management enable detailed bench planning at the restaurant level and are used to build individual capability, ensuring the organization is able to have the people capability to meet both their current needs as well as their growth needs.
Answer Key: Case Study Figure 1
• This concludes Chapter 2