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Purpose: You will generate a pool of alternative strategies, evaluate these alternative strategies, and select the best strategy using the tools and concepts learned throughout the course

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Purpose: You will generate a pool of alternative strategies, evaluate these alternative strategies, and select the best strategy using the tools and concepts learned throughout the course. You will develop implementation plans, evaluative plans to control the implementation process, and plan for post-evaluation measures. You will also draw from previous business courses to develop an understanding of how organizations develop and manage strategies to establish, safeguard, and sustain its position in a competitive market. Instructions: Step 1 Course Material and Research You are required to research information about the focal company and the internal environment for this project, You are accountable for using the course materials to support the ideas, reasoning, and conclusions made. Course materials use goes beyond defining terms but is used to explain the 'why and how' of a situation. Using one or two in-text citations from the course materials and then relying on Internet source material will not earn many points on the assignment. A variety of source material is expected and what is presented must be relevant and applicable to the topic being discussed. Avoid merely making statements but close the loop of the discussion by explaining how something happens or why something happens, which focuses on importance and impact. In closing the loop, you will demonstrate the ability to think clearly and rationally showing an understanding of the logical connections between the ideas presented from the research, the course material, and the question(s) being asked. Note: Your report is based on the results of the research performed and not on any prepared documentation. What this means is that you will research and draw your own conclusions that are supported by the research and the course material rather than the use of any source material that puts together any of the tools or techniques whether from the Internet, for-pay websites, or any preprepared document, video or source material. A zero will be earned for not doing your own analysis. Success: The analysis is based on research and not opinion. You are not making recommendations and you will not attempt to position the focal company in a better or worse light than other companies within the industry merely because you are completing an analysis on this particular company. The analysis must be based on factual information. Any conclusions drawn have to be based on factual information rather than leaps of faith. To ensure success, as stated above, you are expected to use the course materials and research on the focal company's global industry and the focal company. The opinion does not earn credit nor does use external sources when course materials can be used. It is necessary to provide explanations (the why and how) rather than making statements. Avoid stringing one citation after another as doing so does not show detailed explanations. Step 2 Research In completing the report, you will use the chapters in the eBook as a guide and perform research on the same company as in Projects 1 and 2, answer the required elements below in narrative form following the steps. Note: Your report is based on the results of the research performed and not on any prepared documentation. What this means is that you will research and draw your own conclusions that are supported by the research and the course material rather than the use of any source material that puts together any of the tools or techniques whether from the Internet, for-pay websites, or any document, video or source material. A zero will be earned for not doing your own analysis. Library Resources On the main navigation bar in the classroom select Resources and then select Library. Select Databases by Title (A - Z). Select M from the alphabet list, and then select Mergent Online. You may also use Market Line and should be looking at the focal company's Annual Report or 10K report. You are not depending on anyone resource to complete the analysis. It is impossible to complete Porter’s Five Forces, competitive analysis, or OT by using the only course material. You should not be using obscure articles, GlassDoor, or Chron, or similar articles. Research for Financial Analysis: Financial Research Research for Industry Analysis CSI Market Library Support Extensive library resources and services are available online, 24 hours a day, seven days a week at https://www.umgc.edu/library/index.cfm to support you in your studies. The UMGC Library provides research assistance in creating search strategies, selecting relevant databases, and evaluating and citing resources in a variety of formats via its Ask a Librarian service at https://www.umgc.edu/library/libask/index.cfm. Scholarly Research in OneSearch To search for only scholarly resources, you are expected to place a checkmark in the space for “Scholarly journals only” before clicking search. Step 4 Preparation for the Project Before you begin writing the report, you will read the following requirements that will help you meet the writing and APA requirements. You will be doing an analysis of the selected company. When doing analysis you are not merely making statements that may be cited. Instead, you will be supporting the statements made. “Support” is the process of explaining, discussing, and analyzing “why” and “how,” which is a higher-level critical analytical skill that is required for this class. Support is needed to do well on this project. Read the grading rubric for the project. Use the grading rubric while writing the report to ensure all requirements are met that will lead to the highest possible grade. Step 5 How to Set Up the Project The document has to be written in Word or rtf. No other format is acceptable. No pdf files will be graded. Use 12-point font for a double-spaced report. The final product cannot be longer than 12-16 pages in length, excluding the title page and reference page. Those items identified in the implementation and action plans should appear under the appropriate heading in the paper. Do no use an Appendix. Create a title page with the title, your name, date, the course number, the instructor's name. Create Topic Headings that correspond to exact sections of the project requirements. Use the following template using the headings to separate elements. Do not use bullets in your paper as the required format is in narrative format with indented paragraphs and no extra space between paragraphs. Introduction (The Introduction paragraph is the first paragraph of the paper and will be used to describe to the reader the intent of the paper explaining the main points covered in the paper. This intent should be understood prior to reading the remainder of the paper so the reader knows exactly what is being covered in the paper. Write the introduction last to ensure all of the main points are covered.) Alternative Strategy Generation To generate a pool of strategies, you will look at the organization’s business-level strategy, corporate-level strategy, and global strategy. Using the information and data collected from your research, and the analytical outcomes from (a) external factor analysis in your Project 1 and (b) internal factor analysis in Project 2, you will generate a pool of strategies. Generate a minimum of three possible alternative strategies for the company. Identify and discuss cultural and organizational factors that should be considered in analyzing and choosing among the alternative strategies. Strategy Prioritization Prioritize strategies and explain using the course material to support the reasoning – Use the tools learned in the course. Strategy Selection Explain how to select the best strategy or strategies Recommend the best one or two strategies and long-term objectives among the alternative strategies and explain why these strategies and objectives are best Identify strategy recommendations using the following format for the formulation of strategies. Make sure you are thorough in your presentation. View Strategy Content Guidelines. Goal (The desired outcomes to be achieved) Objective (Measurable milestone toward accomplishing the Goal) Strategy (The approach used to achieve the Goal) Tactic (A specific activity that was undertaken to implement the Strategy) Review this resource to differentiate between Strategy Versus Operations and Strategy Versus Tactics Strategy Implementation Recommend procedures for strategy implementation. Discuss who, what and how to implement the selected strategy or strategies at the corporate level, business-unit level, and functional level. Strategy Evaluation Use frameworks and tools discussed throughout the course. Support the reasoning and conclusions made. Discuss procedures for strategy review and evaluation Discuss the appropriate evaluative measures (including who, what, when, and how at the corporate level, business-unit level, and functional level) Discuss a corrective action plan (including who, what, when, and how) at the corporate level, business-unit level, and functional level.) Conclusion Create a conclusion. The Conclusion is intended to emphasize the purpose/significance of the analysis, emphasize the significance/consequence of findings, and indicate the wider applications that are derived from the main points of the project’s requirements. You will draw conclusions about the findings of the external environment analysis. Chapter 5 from Mastering Strategic Management was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested by the work’s original creator or licensee. © 2014, The Saylor Foundation. Chapter 5 Selecting Business-Level Strategies LEARNING OBJECTIVES After reading this chapter, you should be able to understand and articulate answers to the following questions: 1. Why is an examination of generic strategies valuable? 2. What are the four main generic strategies? 3. What is a best-cost strategy? 4. What does it mean to be “stuck in the middle”? The Competition Takes Aim at Target On January 13, 2011, Target Corporation announced its intentions to operate stores outside the United States for the first time. The plan called for Target to enter Canada by purchasing existing leases from a Canadian retailer and then opening 100 to 150 stores in 2013 and 2014. [1] The chain already included more than 1,700 stores in forty-nine states. Given the close physical and cultural ties between the United States and Canada, entering the Canadian market seemed to be a logical move for Target. In addition to making its initial move beyond the United States, Target had several other sources of pride in early 2011. The company claimed that 96 percent of American consumers recognized its signature logo, surpassing the percentages enjoyed by famous brands such as Apple and Nike. In March, Fortune magazine ranked Target twenty-second on its list of the “World’s Most Admired Companies.” In May, Target reported that its sales and earnings for the first quarter of 2011 (sales: $15.6 billion; earnings: $689 million) were stronger than they had been in the first quarter of 2010 (sales: $15.2 billion; earnings: $671 million). Yet there were serious causes for concern, too. News stories in the second half of 2010 about Target’s donations to political candidates had created controversy and unwanted publicity. And despite increasing sales and profits, Target’s stock price fell about 20 percent during the first quarter of 2011. Saylor URL: http://www.saylor.org/books Saylor.org 135 Concern also surrounded Target’s possible vulnerability to competition within the retail industry. Since its creation in the early 1960s, Target executives had carved out a lucrative position for the firm. Target offers relatively low prices on brand-name consumer staples such as cleaning supplies and paper products, but it also offers chic clothing and household goods. This unique combination helps Target to appeal to fairly affluent customers. Although Target counts many college students and senior citizens among its devotees, the typical Target shopper is forty-one years old and has a household income of about $63,000 per year. Approximately 45 percent of Target customers have children at home, and about 48 percent have a college degree. [2] Perhaps the most tangible reflection of Target’s upscale position among large retailers is the tendency of some customers to jokingly pronounce its name as if it were a French boutique: “Tar-zhay.” Target’s lucrative position was far from guaranteed, however. Indeed, a variety of competitors seemed to be taking aim at Target. Retail chains such as Kohl’s and Old Navy offered fashionable clothing at prices similar to Target’s. Discounters like T.J. Maxx, Marshalls, and Ross offered designer clothing and chic household goods for prices that often were lower than Target’s. Closeout stores such as Big Lots offered a limited selection of electronics, apparel, and household goods but at deeply discounted prices. All these stores threatened to steal business from Target. Walmart was perhaps Target’s most worrisome competitor. After some struggles in the 2000s, the mammoth retailer’s performance was strong enough that it ranked well above Target on Fortune’s list of the “World’s Most Admired Companies” (eleventh vs. twenty-second). Walmart also was much bigger than Target. The resulting economies of scale meant that Walmart could undercut Target’s prices anytime it desired. Just such a scenario had unfolded before. A few years ago, Walmart’s victory in a price war over Kmart led the latter into bankruptcy. One important difference between Kmart and Target is that Target is viewed by consumers as offering relatively high-quality goods. But this difference might not protect Target. Although Walmart’s products tended to lack the chic appeal of Target’s, Walmart had begun offering better products during the recession of the late 2000s in an effort to expand its customer base. If Walmart executives chose to match Target’s quality while charging lower prices, Target could find itself without a unique appeal for customers. As 2011 continued, a big question loomed: could Target maintain its unique appeal to Saylor URL: http://www.saylor.org/books Saylor.org 136 customers or would the competitive arrows launched by Walmart and others force Target’s executives to quiver? [1] Target Corporation to acquire interest in Canadian real estate from Zellers Inc., a subsidiary of Hudson’s Bay Company, for C$1.825 billion [Press release]. 2011, January 13. Target Stores. Retrieved from http://pressroom.target.com/pr/news/target-corporation-to-acquire-real-estate.aspx [2] Target fact card. 2007, January 2007. Retrieved from http://sites.target.com/images/corporate/about/pdfs/corp_factcard_101107.pdf Saylor URL: http://www.saylor.org/books Saylor.org 137 5.1 Understanding Business-Level Strategy through “Generic Strategies” LEARNING OBJECTIVES 1. Understand the four primary generic strategies. 2. Know the two dimensions that are critical to defining business-level strategy. 3. Know the limitations of generic strategies. Why Examine Generic Strategies? Business-level strategy addresses the question of how a firm will compete in a particular industry (Figure 5.1 "Business-Level Strategies"). This seems to be a simple question on the surface, but it is actually quite complex. The reason is that there are a great many possible answers to the question. Consider, for example, the restaurants in your town or city. Chances are that you live fairly close to some combination of McDonald’s, Subway, Chili’s, Applebee’s, Panera Bread Company, dozens of other national brands, and a variety of locally based eateries that have just one location. Each of these restaurants competes using a business model that is at least somewhat unique. When an executive in the restaurant industry analyzes her company and her rivals, she needs to avoid getting distracted by all the nuances of different firm’s business-level strategies and losing sight of the big picture. The solution is to think about business-level strategy in terms of generic strategies. A generic strategy is a general way of positioning a firm within an industry. Focusing on generic strategies allows executives to concentrate on the core elements of firms’ business-level strategies. The most popular set of generic strategies is based on the work of Professor Michael Porter of the Harvard Business School and subsequent researchers that have built on Porter’s initial ideas. Saylor URL: http://www.saylor.org/books [1] Saylor.org 138 Figure 5.1 Business-Level Strategies 6 Images courtesy of GeneralCheese, http://en.wikipedia.org/wiki/File:Remodeld_walmart.jpg (top left); unknown author, http://en.wikipedia.org/wiki/File:Nordstrom.JPG (top right); NNECAPA, http://www.flickr.com/photos/nnecapa/2794736274/(bottom left); Debs, http://www.flickr.com/photos/littledebbie11/4537337628/ (bottom right). Saylor URL: http://www.saylor.org/books Saylor.org 139 According to Porter, two competitive dimensions are the keys to business-level strategy. The first dimension is a firm’s source of competitive advantage. This dimension involves whether a firm tries to gain an edge on rivals by keeping costs down or by offering something unique in the market. The second dimension is firms’ scope of operations. This dimension involves whether a firm tries to target customers in general or whether it seeks to attract just a segment of customers. Four generic business-level strategies emerge from these decisions: (1) cost leadership, (2) differentiation, (3) focused cost leadership, and (4) focused differentiation. In rare cases, firms are able to offer both low prices and unique features that customers find desirable. These firms are following a best-cost strategy. Firms that are not able to offer low prices or appealing unique features are referred to as “stuck in the middle.” Understanding the differences that underlie generic strategies is important because different generic strategies offer different value propositions to customers. A firm focusing on cost leadership will have a different value chain configuration than a firm whose strategy focuses on differentiation. For example, marketing and sales for a differentiation strategy often requires extensive effort while some firms that follow cost leadership such as Waffle House are successful with limited marketing efforts. This chapter presents each generic strategy and the “recipe” generally associated with success when using that strategy. When firms follow these recipes, the result can be a strategy that leads to superior performance. But when firms fail to follow logical actions associated with each strategy, the result may be a value proposition configuration that is expensive to implement and that does not satisfy enough customers to be viable. Saylor URL: http://www.saylor.org/books Saylor.org 140 Limitations of Generic Strategies Examining business-level strategy in terms of generic strategies has limitations. Firms that follow a particular generic strategy tend to share certain features. For example, one way that cost leaders generally keep costs low is by not spending much on advertising. Not every cost leader, however, follows this path. While cost leaders such as Waffle House spend very little on advertising, Walmart spends considerable money on print and television advertising despite following a cost leadership strategy. Thus a firm may not match every characteristic that its generic strategy entails. Indeed, depending on the nature of a firm’s industry, tweaking the recipe of a generic strategy may be essential to cooking up success. KEY TAKEAWAY Saylor URL: http://www.saylor.org/books Saylor.org 141 x Business-level strategies examine how firms compete in a given industry. Firms derive such strategies by executives making decisions about whether their source of competitive advantage is based on price or differentiation and whether their scope of operations targets a broad or narrow market. EXERCISES 1. What are examples of each generic business-level strategy in the apparel industry? 2. What are the limitations of examining firms in terms of generic strategies? 3. Create a new framework to examine generic strategies using different dimensions than the two offered by Porter’s framework. What does your approach offer that Porter’s does not? [1] Porter, M. E. 1980. Competitive strategy: Techniques for analyzing industries and competitors. New York, NY: Free Press; Williamson, P. J., & Zeng, M. 2009. Value-for-money strategies for recessionary times. Harvard Business Review, 87(3), 66–74. Saylor URL: http://www.saylor.org/books Saylor.org 142 5.2 Cost Leadership LEARNING OBJECTIVES 1. Describe the nature of cost leadership. 2. Understand how economies of scale help contribute to a cost leadership strategy. 3. Know the advantages and disadvantages of a cost leadership strategy. The Nature of the Cost Leadership Strategy It is tempting to think of cost leaders as companies that sell inferior, poor-quality goods and services for rock-bottom prices. The Yugo, for example, was an extremely unreliable car that was made in Eastern Europe and sold in the United States for about $4,000. Despite its attractive price tag, the Yugo was a dismal failure because drivers simply could not depend on the car for transportation. Yugo exited the United States in the early 1990s and closed down entirely in 2008. In contrast to firms such as Yugo whose failure is inevitable, cost leaders can be very successful. A firm following a cost leadership strategy offers products or services with acceptable quality and features to a broad set of customers at a low price. Payless ShoeSource, for example, sells name-brand shoes at inexpensive prices. Its low-price strategy is communicated to customers through advertising slogans such as “Why pay more when you can Payless?” and “You could pay more, but why?” Little Debbie snack cakes offer another example. The brand was started in the 1930s when O. D. McKee began selling sugary treats for five cents. Most consumers today would view the quality of Little Debbie cakes as a step below similar offerings from Entenmann’s, but enough people believe that they offer acceptable quality that the brand is still around eight decades after its creation. Saylor URL: http://www.saylor.org/books Saylor.org 143 Listeners of the popular radio show Car Talk voted the Yugo as the “worst car of the millennium.” Image courtesy of Antp, http://upload.wikimedia.org/wikipedia/commons/e/e7/Yugo.jpg. Perhaps the most famous cost leader is Walmart, which has used a cost leadership strategy to become the largest company in the world. The firm’s advertising slogans such as “Always Low Prices” and “Save Money. Live Better” communicate Walmart’s emphasis on price slashing to potential customers. Meanwhile, Walmart has the broadest customer base of any firm in the United States. Approximately one hundred million Americans visit a Walmart in a typical week. [1] Incredibly, this means that roughly one- third of Americans are frequent Walmart customers. This huge customer base includes people from all demographic and social groups within society. Although most are simply typical Americans, the popular website http://www.peopleofwalmart.com features photos of some of the more outrageous characters that have been spotted in Walmart stores. Cost leaders tend to share some important characteristics. The ability to charge low prices and still make a profit is challenging. Cost leaders manage to do so by emphasizing efficiency. At Waffle House restaurants, for example, customers are served cheap eats quickly to keep booths available for later customers. As part of the effort to be efficient, most cost leaders spend little on advertising, market research, or research and development. Waffle House, for example, limits its advertising to billboards along highways. Meanwhile, the simplicity of Waffle House’s menu requires little research and development. Many cost leaders rely on economies of scale to achieve efficiency. Economies of scale are created when the costs of offering goods and services decreases as a firm is able to sell more items. This occurs because Saylor URL: http://www.saylor.org/books Saylor.org 144 expenses are distributed across a greater number of items. Walmart spent approximately $2 billion on advertising in 2008. This is a huge number, but Walmart is so large that its advertising expenses equal just a tiny fraction of its sales. Also, cost leaders are often large companies, which allows them to demand price concessions from their suppliers. Walmart is notorious for squeezing suppliers such as Procter & Gamble to sell goods to Walmart for lower and lower prices over time. The firm passes some of these savings to customers in the form of reduced prices in its stores. Advantages and Disadvantages of Cost Leadership Each generic strategy offers advantages that firms can potentially leverage to enhance their success as well as disadvantages that may undermine their success. In the case of cost leadership, one advantage is that cost leaders’ emphasis on efficiency makes them well positioned to withstand price competition from rivals. Kmart’s ill-fated attempt to engage Walmart in a price war ended in disaster, in part because Walmart was so efficient in its operations that it could live with smaller profit margins far more easily than Kmart could. Beyond existing competitors, a cost leadership strategy also creates benefits relative to potential new entrants. Specifically, the presence of a cost leader in an industry tends to discourage new firms from entering the business because a new firm would struggle to attract customers by undercutting the cost leaders’ prices. Thus a cost leadership strategy helps create barriers to entry that protect the firm—and its existing rivals—from new competition. In many settings, cost leaders attract a large market share because a large portion of potential customers find paying low prices for goods and services of acceptable quality to be very appealing. This is certainly true for Walmart, for example. The need for efficiency means that cost leaders’ profit margins are often slimmer than the margins enjoyed by other firms. However, cost leaders’ ability to make a little bit of profit from each of a large number of customers means that the total profits of cost leaders can be substantial. In some settings, the need for high sales volume is a critical disadvantage of a cost leadership strategy. Highly fragmented markets and markets that involve a lot of brand loyalty may not offer much of an Saylor URL: http://www.saylor.org/books Saylor.org 145 opportunity to attract a large segment of customers. In both the soft drink and cigarette industries, for example, customers appear to be willing to pay a little extra to enjoy the brand of their choice. Lower-end brands of soda and cigarettes appeal to a minority of consumers, but famous brands such as Coca-Cola, Pepsi, Marlboro, and Camel still dominate these markets. A related concern is that achieving a high sales volume usually requires significant upfront investments in production and/or distribution capacity. Not every firm is willing and able to make such investments. Cost leaders tend to keep their costs low by minimizing advertising, market research, and research and development, but this approach can prove to be expensive in the long run. A relative lack of market research can lead cost leaders to be less skilled than other firms at detecting important environmental changes. Meanwhile, downplaying research and development can slow cost leaders’ ability to respond to changes once they are detected. Lagging rivals in terms of detecting and reacting to external shifts can prove to be a deadly combination that leaves cost leaders out of touch with the market and out of answers. KEY TAKEAWAY x Cost leadership is an effective business-level strategy to the extent that a firm offers low prices, provides satisfactory quality, and attracts enough customers to be profitable. EXERCISES 1. What are three industries in which a cost leadership strategy would be difficult to implement? 2. What is your favorite cost leadership restaurant? 3. Name three examples of firms conducting a cost leadership strategy that use no advertising. Should they start advertising? Why or why not? [1] Ann Zimmerman and Kris Hudson, “Managing Wal-Mart: How US-store chief hopes to fix Wal-Mart,” Wall Street Journal, April 17, 2006. Saylor URL: http://www.saylor.org/books Saylor.org 146 5.3 Differentiation Figure 5.4Differentiation Images courtesy of _nickd, http://www.flickr.com/photos/_nickd/2313836162/ (top left); Guillermo Vasquez, http://www.flickr.com/photos/megavas/3302486505/ (middle); Derek Saylor URL: http://www.saylor.org/books Saylor.org 148 Hatfield, http://www.flickr.com/photos/loimere/5068068920/(bottom right); Adrian Pingstone,http://en.wikipedia.org/wiki/File:Fedex.a310-200.n420fe.arp.jpg (top right); ChunkySoup, http://en.wikipedia.org/wiki/File:Zoom_elite_2.png(bottom left). LEARNING OBJECTIVES 1. Describe the nature of differentiation. 2. Know the advantages and disadvantages of a differentiation strategy. The Nature of the Differentiation Strategy A famous cliché contends that “you get what you pay for.” This saying captures the essence of a differentiation strategy. A firm following a differentiation strategy attempts to convince customers to pay a premium price for its good or services by providing unique and desirable features (Figure 5.4 "Differentiation"). The message that such a firm conveys to customers is that you will pay a little bit more for our offerings, but you will receive a good value overall because our offerings provide something special. In terms of the two competitive dimensions described by Michael Porter, using a differentiation strategy means that a firm is competing based on uniqueness rather than price and is seeking to attract a broad market. [1] Coleman camping equipment offers a good example. If camping equipment such as sleeping bags, lanterns, and stoves fail during a camping trip, the result will be, well, unhappy campers. Coleman’s sleeping bags, lanterns, and stoves are renowned for their reliability and durability. Cheaper brands are much more likely to have problems. Lovers of the outdoors must pay more to purchase Coleman’s goods than they would to obtain lesser brands, but having equipment that you can count on to keep you warm and dry is worth a price premium in the minds of most campers. Saylor URL: http://www.saylor.org/books Saylor.org 149 Coleman’s patented stove was originally developed for use by soldiers during World War II. Seven decades later, the Coleman Stove remains a must-have item for campers. Image courtesy of B. W. Tullis, http://en.wikipedia.org/wiki/File: Patent_Drawing_for_Coleman_M odel_520_Stove.jpg. Successful use of a differentiation strategy depends on not only offering unique features but also communicating the value of these features to potential customers. As a result, advertising in general and brand building in particular are important to this strategy. Few goods are more basic and generic than table salt. This would seemingly make creating a differentiated brand in the salt business next to impossible. Through clever marketing, however, Morton Salt has done so. Morton has differentiated its salt by building a brand around its iconic umbrella girl and its trademark slogan of “When it rains, it pours.” Would the typical consumer be able to tell the difference between Morton Salt and cheaper generic salt in a blind taste test? Not a chance. Yet Morton succeeds in convincing customers to pay a little extra for its salt through its brand-building efforts. FedEx and Nike are two other companies that have done well at communicating to customers that they provide differentiated offerings. FedEx’s former slogan “When it absolutely, positively has to be there overnight” highlights the commitment to speedy delivery that sets the firm apart from competitors such as Saylor URL: http://www.saylor.org/books Saylor.org 150 UPS and the US Postal Service. Nike differentiates its athletic shoes and apparel through its iconic “swoosh” logo as well as an intense emphasis on product innovation through research and development. Developing a Differentiation Strategy at Express Oil Change Express Oil Change and Service Centers is a chain of auto repair shops that stretches from Florida to Texas. Based in Birmingham, Alabama, the firm has more than 170 company-owned and franchised locations under its brand. Express Oil Change tries to provide a unique level of service, and the firm is content to let rivals offer cheaper prices. We asked an Express Oil Change executive about his firm. [2] Question: The auto repair and maintenance business is a pretty competitive space. How is Express Oil Change being positioned relative to other firms, such as Super Lube, American LubeFast, and Jiffy Lube? Don Larose, Senior Vice President of Franchise Development: Every good business sector is competitive. The key to our success is to be more convenient and provide a better overall experience for the customer. Express Oil Change and Service Centers outperform the industry significantly in terms of customer transactions per day and store sales, for a host of reasons. In terms of customer convenience, Express Oil Change is faster than most of our competitors—we do a ten-minute oil change while the customer stays in the car. Mothers with kids in car seats especially enjoy this feature. We also do mechanical work that other quick lube businesses don’t do. We change and rotate tires, do brake repairs, air conditioning, tune ups, and others. There is no appointment necessary Saylor URL: http://www.saylor.org/books Saylor.org 151 for many mechanical services like tire rotation and balancing, and checking brakes. So, overall, we are more convenient than most of our competitors. In terms of staffing our stores, full-time workers are all that we employ. Full-time workers are better trained and typically have less turnover. They therefore have more experience and do better quality work. We think incentives are very important. We use a payroll system that provides incentives to the store staff on how many cars are serviced each day and on the total sales of the store, rather than on increasing the average transactions by selling the customer items they did not come in for, which is what most of the industry does. We don’t sell customers things they don’t yet need, like air filters and radiator flushes. We focus on building trust, by acting with integrity, to get the customer to come back and build the daily car count. This philosophy is not a slogan for us. It is how we operate with every customer, in every store, every day. The placement of our outlets is another key factor. We place our stores in A-caliber retail locations. These are lots that may cost more than our competitors are willing or able to pay. We get what we pay for though; we have approximately 41% higher sales per store than the industry average. Question: What is the strangest interaction you’ve ever had with a potential franchisee? Larose: I once had a franchisee candidate in New Jersey respond to a request by us for proof of his liquid assets by bringing to the interview about $100,000 in cash to the meeting. He had it in a bag, with bundles of it wrapped in blue tape. Usually, folks just bring in a copy of a bank or stock statement. Not sure why he had so much cash on hand, literally, and I didn’t want to know. He didn’t become a franchisee. Express Oil Change sets itself apart through superior service and great locations. Images courtesy of Express Oil Change Advantages and Disadvantages of Differentiation Saylor URL: http://www.saylor.org/books Saylor.org 152 Each generic strategy offers advantages that firms can potentially leverage to enjoy strong performance, as well as disadvantages that may damage their performance. In the case of differentiation, a key advantage is that effective differentiation creates an ability to obtain premium prices from customers. This enables a firm to enjoy strong profit margins. Coca-Cola, for example, currently enjoys a profit margin of approximately 33 percent, meaning that about thirty-three cents of every dollar it collects from customers is profit. In comparison, Walmart’s cost leadership strategy delivered a margin of under 4 percent in 2010. In turn, strong margins mean that the firm does not need to attract huge numbers of customers to have a good overall level of profit. Luckily for Coca-Cola, the firm does attract a great many buyers. Overall, the firm made a profit of just under $12 billion on sales of just over $35 billion in 2010. Interestingly, Walmart’s profits were only 25 percent higher ($15 billion) than Coca-Cola’s while its sales volume ($421 [3] billion) was twelve times as large as Coca-Cola’s. This comparison of profit margins and overall profit levels illustrates why a differentiation strategy is so attractive to many firms. To the extent that differentiation remains in place over time, buyer loyalty may be created. Loyal customers are very desirable because they are notprice sensitive. In other words, buyer loyalty makes a customer unlikely to switch to another firm’s products if that firm tries to steal the customer away through lower prices. Many soda drinkers are fiercely loyal to Coca-Cola’s products. Coca-Cola’s headquarters are in Atlanta, and loyalty to the firm is especially strong in Georgia and surrounding states. Pepsi and other brands have a hard time convincing loyal Coca-Cola fans to buy their beverages, even when offering deep discounts. This helps keep Coca-Cola’s profits high because the firm does not have to match any promotions that its rivals launch to keep its customers. Meanwhile, Pepsi also has attracted a large set of brand-loyal customers that Coca-Cola struggles to steal. This enhances Pepsi’s profits. In contrast, store-brand sodas such as Sam’s Choice (which is sold at Walmart) seldom attract loyalty. As a result, they must be offered at very low prices to move from store shelves into shopping carts. Beyond existing competitors, a differentiation strategy also creates benefits relative to potential new entrants. Specifically, the brand loyalty that customers feel to a differentiated product makes it difficult Saylor URL: http://www.saylor.org/books Saylor.org 153 for a new entrant to lure these customers to adopt its product. A new soda brand, for example, would struggle to take customers away from Coca-Cola or Pepsi. Thus a differentiation strategy helps create barriers to entry that protect the firm and its industry from new competition. The big risk when using a differentiation strategy is that customers will not be willing to pay extra to obtain the unique features that a firm is trying to build its strategy around. In 2007, department store Dillard’s stopped carrying men’s sportswear made by Nautica because the seafaring theme of Nautica’s brand had lost much of its cache among many men. [4] Because Nautica’s uniqueness had eroded, Dillard’s believed that space in its stores that Nautica had been occupying could be better allocated to other brands. In some cases, customers may simply prefer a cheaper alternative. For example, products that imitate the look and feel of offerings from Ray-Ban, Tommy Bahama, and Coach are attractive to many valueconscious consumers. Firms such as these must work hard at product development and marketing to ensure that enough customers are willing to pay a premium for their goods rather than settling for knockoffs. In other cases, customers desire the unique features that a firm offers, but competitors are able to imitate the features well enough that they are no longer unique. If this happens, customers have no reason to pay a premium for the firm’s offerings. IBM experienced the pain of this scenario when executives tried to follow a differentiation strategy in the personal computer market. The strategy had worked for IBM in other areas. Specifically, IBM had enjoyed a great deal of success in the mainframe computer market by providing superior service and charging customers a premium for their mainframes. A business owner who relied on a mainframe to run her company could not afford to have her mainframe out of operation for long. Meanwhile, few businesses had the skills to fix their own mainframes. IBM’s message to customers was that they would pay more for IBM’s products but that this was a good investment because when a mainframe needed repairs, IBM would provide faster and better service than its competitors could. The customer would thus be open for business again very quickly after a mainframe failure. This positioning failed when IBM used it in the personal computer market. Rivals such as Dell were able to offer service that was just as good as IBM’s while also charging lower prices for personal computers than IBM charged. From a customer’s perspective, a person would be foolish to pay more for an IBM Saylor URL: http://www.saylor.org/books Saylor.org 154 personal computer since IBM did not offer anything unique. IBM steadily lost market share as a result. By 2005, IBM’s struggles led it to sell its personal computer business to Lenovo. The firm is still successful, however, within the mainframe market where its offerings remain differentiated. Firms following a differentiation strategy must “watch” out for counterfeit goods such as the faux Rolexes shown here. Image courtesy of US Customs and Border Patrol, http://en.wikipedia.org/wiki/File:Counterfeit_Rolex_Watch, _dsc4577_5f270.jpg. KEY TAKEAWAY x Differentiation can be an effective business-level strategy to the extent that a firm offers unique features that convince customers to pay a premium for their goods and services. EXERCISES 1. What are two industries in which a differentiation strategy would be difficult to implement? 2. What is an example of a differentiated business near your college or university? 3. Name three ways businesses that provide entertainment that might better differentiate their services. How might they do this? Saylor URL: http://www.saylor.org/books Saylor.org 155 [1] Porter, M. E. 1980. Competitive strategy: Techniques for analyzing industries and competitors. New York, NY: Free Press. [2] Excerpted from Ketchen, D. J., & Short, J. C. 2010. The franchise player: An interview with Don Larose. Journal of Applied Management and Entrepreneurship, 15(4), 94–101. [3] Profit statistics drawn from Standard & Poor’s stock reports on Coca-Cola and Walmart. [4] Kapner, S. 2007, November 1. Nautica brand losing ground. CNNMoney. Retrieved from http://money.cnn.com/2007/10/31/news/companies/Kapner_Nautica.fortune/index.htm Saylor URL: http://www.saylor.org/books Saylor.org 156 5.4 Focused Cost Leadership and Focused Differentiation LEARNING OBJECTIVES 1. Describe the nature of focused cost leadership and focused differentiation. 2. Know the advantages and disadvantages of focus strategies. Companies that use a cost leadership strategy and those that use a differentiation strategy share one important characteristic: both groups try to be attractive to customers in general. These efforts to appeal to broad markets can be contrasted with strategies that involve targeting a relatively narrow niche of potential customers. These latter strategies are known as focus strategies. [1] The Nature of the Focus Cost Leadership Strategy Focused cost leadership is the first of two focus strategies. A focused cost leadership strategy requires competing based on price to target a narrow market. A firm that follows this strategy does not necessarily charge the lowest prices in the industry. Instead, it charges low prices relative to other firms that compete within the target market. Redbox, for example, uses vending machines placed outside grocery stores and other retail outlets to rent DVDs of movies for $1. There are ways to view movies even cheaper, such as through the flat-fee streaming video subscriptions offered by Netflix. But among firms that rent actual DVDs, Redbox offers unparalleled levels of low price and high convenience. Another important point is that the nature of the narrow target market varies across firms that use a focused cost leadership strategy. In some cases, the target market is defined by demographics. Claire’s, for example, seeks to appeal to young women by selling inexpensive jewelry, accessories, and ear piercings. Claire’s use of a focused cost leadership strategy has been very successful; the firm has more than three thousand locations and has stores in 95 percent of US shopping malls. Saylor URL: http://www.saylor.org/books Saylor.org 157 Redbox machines are available on university campuses nationwide. Image courtesy of Valerie Everett, http://www.flickr.com/photos/valeriebb/2224649723. In other cases, the target market is defined by the sales channel used to reach customers. Most pizza shops offer sit-down service, delivery, or both. In contrast, Papa Murphy’s sells pizzas that customers cook at home. Because these inexpensive pizzas are baked at home rather than in the store, the law allows Papa Murphy’s to accept food stamps as payment. This allows Papa Murphy’s to attract customers that might not otherwise be able to afford a prepared pizza. In contrast to most fast-food restaurants, Checkers Drive In is a drive-through-only operation. To serve customers quickly, each store has two drive-through lanes: one on either side of the building. Checkers saves money in a variety of ways by not offering indoor seating to its customers—Checkers’ buildings are cheaper to construct, its utility costs are lower, and fewer employees are needed. These savings allow the firm to offer large burgers at very low prices and still remain profitable. The Nature of the Focused Differentiation Strategy Saylor URL: http://www.saylor.org/books Saylor.org 158 Focused differentiation is the second of two focus strategies. A focused differentiation strategy requires offering unique features that fulfill the demands of a narrow market. As with a focused low-cost strategy, narrow markets are defined in different ways in different settings. Some firms using a focused differentiation strategy concentrate their efforts on a particular sales channel, such as selling over the Internet only. Others target particular demographic groups. One example is Breezes Resorts, a company that caters to couples without children. The firm operates seven tropical resorts where vacationers are guaranteed that they will not be annoyed by loud and disruptive children. While a differentiation strategy involves offering unique features that appeal to a variety of customers, the need to satisfy the desires of a narrow market means that the pursuit of uniqueness is often taken to the proverbial “next level” by firms using a focused differentiation strategy. Thus the unique features provided by firms following a focused differentiation strategy are often specialized. When it comes to uniqueness, few offerings can top Kopi Luwak coffee beans. High-quality coffee beans often sell for $10 to $15 a pound. In contrast, Kopi Luwak coffee beans sell for hundreds of dollars per pound. [2] This price is driven by the rarity of the beans and their rather bizarre nature. As noted in a 2010 article in the New York Times, these beans are found in the droppings of the civet, a nocturnal, furry, long-tailed catlike animal that prowls Southeast Asia’s coffee-growing lands for the tastiest, ripest coffee cherries. The civet eventually excretes the hard, indigestible innards of the fruit—essentially, incipient coffee beans—though only after they have been fermented in the animal’s stomach acids and enzymes to produce a brew described as smooth, chocolaty and devoid of any bitter aftertaste. [3] Although many consumers consider Kopi Luwak to be disgusting, a relatively small group of coffee enthusiasts has embraced the coffee and made it a profitable product. This illustrates the essence of a focused differentiation strategy—effectively serving the specialized needs of a niche market can create great riches. Saylor URL: http://www.saylor.org/books Saylor.org 159 Larger niches are served by Whole Foods Market and Mercedes-Benz. Although most grocery stores devote a section of their shelves to natural and organic products, Whole Foods Market works to sell such products exclusively. For customers, the large selection of organic goods comes at a steep price. Indeed, the supermarket’s reputation for high prices has led to a wry nickname—“Whole Paycheck”—but a sizable number of consumers are willing to pay a premium to feel better about the food they buy. The dedication of Mercedes-Benz to cutting-edge technology, styling, and safety innovations has made the firm’s vehicles prized by those who are rich enough to afford them. This appeal has existing for many decades. In 1970, acid-rocker Janis Joplin recorded a song called “Mercedes Benz” that highlighted the automaker’s allure. Since then Mercedes-Benz has used the song in several television commercials, including during the 2011 Super Bowl. Janis Joplin’s musical tribute to Mercedes-Benz underscores the allure of the brand. Image courtesy of de.wp, http://en.wikipedia.org/wiki/File:S-Klasse_W221.jpg. Developing a Focused Differentiation Strategy at Augustino LoPrinzi Guitars and Ukuleles Augustino LoPrinzi Guitars and Ukuleles in Clearwater, Florida, builds high-end custom instruments. The founder of the company, Augustino LoPrinzi, has been a builder of custom guitars for five decades. While a reasonably good mass-produced guitar can be purchased elsewhere for a few hundred dollars, LoPrinzi’s handmade models start at $1,100, and some sell for more than $10,000. The firm’s customers have included professional musicians such as Dan Fogelberg, Leo Kottke, Herb Ohta (Ohta-San), Lyle Ritz, Saylor URL: http://www.saylor.org/books Saylor.org 160 Andrés Segovia, and B. J. Thomas. Their instruments can be found athttp://www.augustinoloprinzi.com. We asked Augustino about his firm. [4] Question: Were there other entrepreneurial opportunities you considered before you began making guitars? Augustino Loprinzi: I originally thought of pursuing a career in commercial art, but I found my true love was in classical guitar building. I was trained by my father to be a barber from a very young age, and after my term in the service, I opened a barbershop. Question: What is the most expensive guitar you’ve ever sold? Loprinzi: $17,500. Question: How old were you when you started your first business in the guitar industry? Loprinzi: I was in my early twenties. Question: How did you get your break with more famous customers? Loprinzi: I think word of mouth had a lot do with it. Question: You have been active in Japan. Do the preferences of Japanese customers differ from those of Americans? Loprinzi: Yes. The Japanese want only high-end instruments. Aesthetics are very important to the Japanese along with high-quality materials and workmanship. The US market seems to care in general less about ornamentation and more about quality workmanship, tone, and playability. Question: How do you stay ahead in your industry? Loprinzi: Always try to stay abreast on what the music industry is doing. We do this by reading several music industry publications, talking with suppliers, and keeping an eye on the trends going on in other countries because usually they come full circle. Also, for the past several years by following the Internet forums and such has been extremely beneficial. Advantages and Disadvantages of the Focused Strategies Each generic strategy offers advantages that firms can potentially leverage to enhance their success as well as disadvantages that may undermine their success. In the case of focus differentiation, one advantage is that very high prices can be charged. Indeed, these firms often price their wares far above what is charged by firms following a differentiation strategy. REI (Recreational Equipment Inc.), for example, commands a hefty premium for its outdoor sporting goods and clothes that feature name brands, such as The North Face and Marmot. Nat Nast’s focus differentiation strategy Saylor URL: http://www.saylor.org/books Saylor.org 161 centers on selling men’s silk camp shirts with a 1950s retro flair. These shirts retail for more than $100. Focused cost leaders such as Checkers Drive In do not charge high prices like REI and Nat Nast do, but their low cost structures enable them to enjoy healthy profit margins. A second advantage of using a focus strategy is that firms often develop tremendous expertise about the goods and services that they offer. In markets such as camping equipment where product knowledge is important, rivals and new entrants may find it difficult to compete with firms following a focus strategy. In terms of disadvantages, the limited demand available within a niche can cause problems. First, a firm could find its growth ambitions stymied. Once its target market is being well served, expansion to other markets might be the only way to expand, and this often requires developing a new set of skills. Also, the niche could disappear or be taken over by larger competitors. Many gun stores have struggled and even gone out of business since Walmart and sporting goods stores such as Academy Sports and Bass Pro Shops have started carrying an impressive array of firearms. In contrast to tacky Hawaiian souvenirs, the quality of Kamaka ukuleles makes them a favorite of ukulele phenom Jake Shimabukuro and others who are willing to pay $1,000 or more for a high-end instrument. Image courtesy of Wikimedia,http://en.wikipedia.org/ wiki/File:Jake_Shimabukuro.jpg. Saylor URL: http://www.saylor.org/books Saylor.org 162 Finally, damaging attacks may come not only from larger firms but also from smaller ones that adopt an even narrower focus. A sporting goods store that sells camping, hiking, kayaking, and skiing goods, for example, might lose business to a store that focuses solely on ski apparel because the latter can provide more guidance about how skiers can stay warm and avoid broken bones. Strategy at the Movies Zoolander One man’s trash is another man’s fashion? That’s what fashion mogul Jacobim Mugatu was counting on in the 2001 comedy Zoolander. In his continued effort to be the most cutting-edge designer in the fashion industry, Mugatu developed a new line of clothing inspired “by the streetwalkers and hobos that surround us.” His new product line, Derelicte, characterized by dresses made of burlap and parking cones and pants made of garbage bags and tin cans, was developed for customers who valued the uniqueness of his…eclectic design. Emphasizing unique products is typical of a company following a differentiation strategy; however, Mugatu targeted a very specific set of customers. Few people would probably be enticed to wear garbage for the sake of fashion. By catering to a niche target market, Mugatu went from a simple differentiation strategy to a focused differentiation. Mugatu’s Derelicte campaign in Zoolander is one illustration of how a particular firm might develop a focused differentiation strategy. KEY TAKEAWAY x Focus strategies can be effective business-level strategies to the extent that a firm can match their goods and services to specific niche markets. EXERCISES 1. What are three different demographics that firms might target to establish a focus strategy? 2. What is an example of a business that you think is focused in too narrow a fashion to be successful? How might it change to be more successful? [1] Porter, M. E. 1980. Competitive strategy: Techniques for analyzing industries and competitors. New York, NY: Free Press. Saylor URL: http://www.saylor.org/books Saylor.org 163 [2] http://www.catsasscoffee.com/order3.html [3] Onishi, N. 2010, April 17. From dung to coffee brew with no aftertaste. New York Times. Retrieved from http://www.nytimes.com/2010/04/18/world/asia/18civetcoffee.html?pagewanted=all [4] Excerpted from Short, J. C. 2007. A touch of the masters’ hands: An interview with Augustino and Donna Loprinzi. Journal of Applied Management and Entrepreneurship, 12, 103–109. Saylor URL: http://www.saylor.org/books Saylor.org 164 5.5 Best-Cost Strategy LEARNING OBJECTIVES 1. Describe the nature of a best-cost strategy. 2. Understand why executing a best-cost strategy is difficult. The Challenge of Following a Best-Cost Strategy Some executives are not content to have their firms compete based on offering low prices or unique features. They want it all! Firms that charge relatively low prices and offer substantial differentiation are following a best-cost strategy. This strategy is difficult to execute in part because creating unique features and communicating to customers why these features are useful generally raises a firm’s costs of doing business. Product development and advertising can both be quite expensive. However, firms that manage to implement an effective best-cost strategy are often very successful. Target appears to be following a best-cost strategy. The firm charges prices that are relatively low among retailers while at the same time attracting trend-conscious consumers by carrying products from famous designers, such as Michael Graves, Isaac Mizrahi, Fiorucci, Liz Lange, and others. This is a lucrative position for Target, but the position is under attack from all sides. Cost leader Walmart charges lower prices than Target. This makes Walmart a constant threat to steal the thriftiest of Target’s customers. Focus differentiators such as Anthropologie that specialize in trendy clothing and home furnishings can take business from Target in those areas. Deep discounters such as T.J. Maxx and Marshalls offer another viable alternative to shoppers because they offer designer clothes and furnishings at closeout prices. A firm such as Target that uses a best-cost strategy also opens itself up to a wider variety of potentially lethal rivals. Developing a Best-Cost Strategy at Plain Ivey Jane According to government statistics, women are 60 percent less likely than men to become entrepreneurs. Meanwhile, succeeding within the specialty fashion retailing market is notoriously difficult. These trends do not worry Sarah Reeves, a young entrepreneur and 2007 graduate of Auburn University who is rapidly becoming a key player within the Austin, Texas, retail scene by offering high-end fashion at low prices. Saylor URL: http://www.saylor.org/books Saylor.org 165 On her website (http://www.plainiveyjane.com), Sarah describes Plain Ivey Jane as “the go-to place for women who want to elevate their wardrobes. We offer high end designer names at a discount, and the new overstocked apparel is handpicked from over 70 different brands to offer exactly what Austin needs at a price every girl can afford. To pair with your fabulous new wardrobe, Plain Ivey Jane carries accessories from undiscovered local artisans.” We asked Reeves to discuss her firm. [1] Photo courtesy of Shanti Matulewski. Question: Can you tell us a little about your Plain Ivey Jane concept? Sarah Reeves, Owner: Plain Ivey Jane sells overstock from Anthropologie, Urban Outfitters, Bloomingdales, and other high-end and small designers. Although I buy from the same designers as the big and famous retailers, our dresses and accessories are sold at a fraction of their prices. Question: What differentiates your boutique from competitors? Reeves: I’m one of the lowest-priced retailers in the shopping district that people in Austin call the Second Street area. My niche in the fashion retailing business is that my merchandise is overstock from great brands. There’s maybe one other business in Austin that sells overstock. What makes my concept different is that it has the feel of a high-end retail store Saylor URL: http://www.saylor.org/books Saylor.org 166 versus a basement feel of the typical discount retailer. Question: Do have a lot of regular customers? Reeves: Yes. Once people find out what I offer, they’re in here all the time. I see the same group of people every few months, but getting in new faces is the challenge. I think a lot of people walk by and assume that our clothes are expensive, but nothing could be further from the truth. Question: Were you fearful of starting your own business so young? Reeves: No, I figured this was a great time since I had nothing to lose. I thought getting it out of my system now was a good idea, and it was a good time since I was able to get a great deal on my lease. With the downturn in the economy, the time was right for my lower-priced strategy. Question: What would you say is the biggest key to success for small business? Reeves: Flexibility. Rolling with the punches and definitely the ability to follow up with people. I thought that people who owned their own business must know what they are doing, but many people don’t. At this point, I prefer to do everything myself. At least I can blame myself when things go wrong. Another key is networking with other small-business owners. A lot of the other boutique owners nearby have become close friends. I learn what works for them and what might possibly apply to my concept. Saylor URL: http://www.saylor.org/books Saylor.org 167 The success that 2007 college graduate Sarah Reeves has enjoyed with Plain Ivey Jane may inspire other young women to become entrepreneurs. Photo courtesy of Shanti Matulewski. Figure 5.10 Driving toward a Best-Cost Strategy by Reducing Overhead Saylor URL: http://www.saylor.org/books Saylor.org 168 Images courtesy of Kari Sullivan,http://www.flickr.com/photos/ilovemypit/3726649397/ (top left); Sarah B. Brooks, http://www.flickr.com/photos/foodclothingshelter/4753507671/(bottom left); Samantha Marx,http://www.flickr.com/photos/spam/5166429482/ Pursuing the Best-Cost Strategy through a Low-Overhead Business Model One route toward a best-cost strategy is for a firm to adopt a business model whose fixed costs and overhead are very low relative to the costs that competitors are absorbing (Figure 5.10 "Driving toward a Best-Cost Strategy by Reducing Overhead"). The Internet has helped make this possible for some firms. Amazon, for example, can charge low prices in part because it does not have to endure the expenses that firms such as Walmart and Target do in operating many hundreds of stores. Meanwhile, Amazon offers an unmatched variety of goods. This combination has made Amazon the unquestioned leader in e-commerce. Another example is Netflix. This firm is able to offer customers a far greater variety of movies and charge lower prices than video rental stores by conducting all its business over the Internet and via mail. Netflix’s best-cost strategy has been so successful that $10,000 invested in the firm’s stock in May 2006 was worth more than $90,000 five years later. [2] Hey Cupcake! in Austin, Texas, is a low-overhead bakery that has become a delicious success. Saylor URL: http://www.saylor.org/books Saylor.org 169 Image courtesy of Evan Bench, http://www.flickr.com/photos/austinevan/3237785474. Moving toward a best-cost strategy by dramatically reducing expenses is also possible for firms that cannot rely on the Internet as a sales channel. Owning a restaurant requires significant overhead costs, such as rent and utilities. Some talented chefs are escaping these costs by taking their food to the streets. Food trucks that serve high-end specialty dishes at very economical prices are becoming a popular trend in cities around the country. In Portland, Oregon, a food truck called the Ninja Plate Lunch offers large portions of delectable Hawaiian foods such as pulled pork for around $5. Another Portland food truck is PBJ’s, whose unique and inexpensive sandwiches often center on organic peanut butter. Beyond keeping costs low, the mobility of food trucks offers important advantages over a traditional restaurant. Some food trucks set up outside big-city nightclubs, for example, to sell partygoers a late-night snack before they head home. KEY TAKEAWAY x A best-cost strategy can be an effective business-level strategy to the extent that a firm offers differentiated goods and services at relatively low prices. EXERCISES 1. What is an example of an industry that you think a best-cost strategy could be successful? How would you differentiate a company to achieve success in this industry? 2. What is an example of a firm following a best-cost strategy near your college or university? [1] Excerpted from Ketchen, D. J., & Short, J. C. Forthcoming. The discount diva: An interview with Sarah Reeves. Journal of Applied Management and Entrepreneurship. [2] Statistics drawn from Standard & Poor’s stock report on Netflix. Saylor URL: http://www.saylor.org/books Saylor.org 170 5.6 Stuck in the Middle LEARNING OBJECTIVES 1. Describe the problem of being stuck in the middle of different generic strategies. 2. Understand why trying to please everyone often creates problems when crafting a business-level strategy. Saylor URL: http://www.saylor.org/books Saylor.org 171 Saylor URL: http://www.saylor.org/books Saylor.org 172 Images courtesy of F33, http://www.flickr.com/photos/f33/3204789700/(top right); Ethan Prater,http://www.flickr.com/photos/eprater/4592959910/ (top left); Caldorwards4,http://en.wikipedia.org/wiki/File:Big_Kmart,_Ontario,_Oregon_2006.jpeg(botto m right); Rachel P. Maines, http://en.wikipedia.org/wiki/File:Sears__Aids_That_Every_Woman_Appreciates.jpg (bottom left). Stuck in the Middle: Neither Inexpensive nor Differentiated Some firms fail to effectively pursue one of the generic strategies. A firm is said to be stuck in the middle if it does not offer features that are unique enough to convince customers to buy its offerings, and its prices are too high to compete effectively based on price. Arby’s appears to be a good example. Arby’s signature roast beef sandwiches are neither cheaper than other fast-food sandwiches nor standouts in taste. Firms that are stuck in the middle generally perform poorly because they lack a clear market or competitive pricing. Perhaps not surprisingly, parent company Wendy’s has been trying to sell Arby’s despite having recently acquired the company in 2008. Stockholders apparently agreed with the plan to cut Arby’s loose—the price of Wendy’s stock rose 7 percent the day the plan was announced. [1] Doing Everything Means Doing Nothing Well Michael Porter has noted that strategy is as much about executives deciding what a firm is not going to do [2] as it is about deciding what the firm is going to do. In other words, a firm’s business-level strategy should not involve trying to serve the varied needs of different segment of customers in an industry. No firm could possibly pull this off. Saylor URL: http://www.saylor.org/books Saylor.org 173 Saylor URL: http://www.saylor.org/books Saylor.org 174 This illustration from 1887 captures the lesson of Aesop’s fable “The Miller, His Son, and Their Ass”—a lesson that executives need to follow. Image courtesy of Walter Crane,http://en.wikipedia.org/wiki/File:Can%27t_please_everyone2.jpg. The fable “The Miller, His Son, and Their Ass” told by the ancient Greek storyteller Aesop helps illustrate this idea. In this tale, a miller and his son were driving their ass (donkey) to market for sale. They soon encountered a group of girls who mocked them for walking instead of riding. The father then told his son to ride the animal. Not long after, father and son overheard a man claim that young people had no respect for the elderly. On hearing this opinion, the father told the boy to dismount the animal and he began to ride. They progressed a short distance farther and met a company of women and children. Several of the women suggested that it was both ridiculous and lazy for the father to ride while the young son was forced to walk alone; once again the two changed positions. Another bystander suggested that they could not believe that the man was the owner of the beast, judging from the way it was weighted down. In fact, it would make more sense for the man and his son to carry the ass. On hearing this, the father and his son tied the animal’s legs together and carried it on a pole. As they crossed a bridge near town, the townspeople began to gather and laugh at the unorthodox sight. The noise and the chaos frightened the beast, leading it to thrash around until it tumbled into the river. With tongue in cheek, we note that the moral of the story is that if you try to please everyone, you may lose your ass. [3] Getting Outmaneuvered by Competitors In many cases, firms become stuck in the middle not because executives fail to arrive at a well-defined strategy but because firms are simply outmaneuvered by their rivals. After six decades as an electronics retailer, Circuit City went out of business in 2009. The firm had simply lost its appeal to customers. Rival electronics retailer Best Buy offered comparable prices to Circuit City’s prices, but the former offered much better customer service. Meanwhile, the service offered by discount retailers such as Walmart and Target on electronics were no better that Circuit City’s, but their prices were better. The results were predictable—customers who made electronics purchases based on the service they received went to Best Buy, and value-driven buyers patronized Walmart and Target. Circuit City’s demise was probably inevitable because it lacked a competitive advantage within the electronics business. Although Target was on the winning end of this battle, Target executives need to worry that their firm Saylor URL: http://www.saylor.org/books Saylor.org 175 could become stuck in the middle between Walmart’s better prices on one side and the trendiness of specialty shops on the other. IBM’s personal computer business offers another example. IBM tried to position its personal computers via a differentiation strategy. In particular, IBM’s personal computers were offered at high prices, and the firm promised to offer excellent service to customers in return. Unfortunately for IBM, rivals such as Dell were able to provide equal levels of service while selling computers at lower prices. Nothing made IBM’s computers stand out from the crowd, and the firm eventually exited the business. At its peak in the mid-2000s, Movie Gallery operated approximately 4,700 video rental stores. By 2010, the firm was dead. This rapid demise can be traced to the firm becoming outmaneuvered by Netflix. When Netflix began offering inexpensive DVD rentals through the mail, customers defected in droves from Movie Gallery and other video rental stores such as Blockbuster. Netflix customers were delighted by the firm’s low prices, vast selection, and the convenience of not having to visit a store to select and return videos. Movie Gallery was stuck in the middle—its prices were higher than those of Netflix, and Netflix’s service was superior. Once individuals lacked a compelling reason to be Movie Gallery customers, the firm’s fate was sealed. Saylor URL: http://www.saylor.org/books Saylor.org 176 Saylor URL: http://www.saylor.org/books Saylor.org 177 Netflix and Redbox have left video rental stores such as Movie Gallery and Blockbuster stuck in the middle. Blockbuster filed for bankruptcy in late 2010. Image courtesy of Stu pendousmat,http://en.wikipedia.org/wiki/File:BlockbusterMoncton.JPG. KEY TAKEAWAY x When executing a business-level strategy, a firm must not become stuck in the middle between viable generic business-level strategies by neither offering unique features nor competitive pricing. EXERCISES 1. What is an example of a firm that you would consider to be “stuck in the middle”? What would your advice be to the executives in charge of this firm? 2. Research a company that has gone bankrupt or otherwise stopped operations in the past decade because their strategy was “stuck in the middle” of otherwise viable generic business-level strategies. Could its demise have been prevented? [1] McWilliams, J. 2011, January 21. Wendy’s/Arby’s to try to sell Arby’s. Atlantic Journal-Constitution. Retrieved from http://www.ajc.com/business/wendys-arbys-to- try-810320.html [2] Porter, M. E. 1996. What is strategy? Harvard Business Review, reprint 96608. [3] Excerpted from Short, J. C., & Ketchen, D. J. 2005. Using classic literature to teach timeless truths: An illustration using Aesop’s fables to teach strategic management.Journal of Management Education, 29(6), 816– 832. Saylor URL: http://www.saylor.org/books Saylor.org 178 5.7 Conclusion This chapter explains generic business-level strategies that executives select to keep their firms competitive. Executives must select their firm’s source of competitive advantage by choosing to compete based on low-cost versus more expensive features that differentiate their firm from competitors. In addition, targeting either a narrow or broad market helps firms further understand their customer base. Based on these choices, firms will follow cost leadership, differentiation, focused cost leadership, or focused differentiation strategies. Another potentially viable business strategy, best cost, exists when firms offer relatively low prices while still managing to differentiate their goods or services on some important value-added aspects. All firms can fall victim to being “stuck in the middle” by not offering unique features or competitive prices. EXERCISES 1. Divide your class into four or eight groups, depending on the size of the class. Each group should select a different industry. Find examples of each generic business-level strategy for your industry. Discuss which strategy seems to be the most successful in your selected industry. 2. This chapter discussed Target and other retailers. If you were assigned to turn around a struggling retailer such as Kmart, what actions would you take to revive the company? Saylor URL: http://www.saylor.org/books Saylor.org 179 Chapter 3 from Mastering Strategic Management was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested by the work’s original creator or licensee. © 2014, The Saylor Foundation. Chapter 3 Evaluating the External Environment LEARNING OBJECTIVES After reading this chapter, you should be able to understand and articulate answers to the following questions: 1. What is the general environment and why is it important to organizations? 2. What are the features of Porter’s five forces industry analysis? 3. What are strategic groups and how are they useful to evaluating the environment? Subway Is on a Roll As shown in the highlighted countries, Subway is well on its way to building a worldwide sandwich empire. Image courtesy of Nomi887,http://en.wikipedia.org/wiki/File:Subway_world_map1edit.png. Many observers were stunned in March 2011 when news broke that Subway had surpassed McDonald’s as the biggest restaurant chain in the world. At the time of the announcement, Subway had 33,749 units under its banner while McDonald’s had 32,737. [1] Despite its meteoric growth, many opportunities remained. In China, for example, Subway had fewer than two hundred stores. In contrast, China hosts Saylor URL: http://www.saylor.org/books Saylor.org 71 more than 3,200 Kentucky Fried Chicken stores. Overall, Subway was on a roll, and this success seemed likely to continue. How had Subway surpassed a global icon like McDonald’s? One key factor was Subway’s efforts to provide and promote healthy eating options. This emphasis took hold in the late 1990s when the American public became captivated by college student Jared Fogle. As a freshman at Indiana University in 1998, the 425 pound Fogle decided to try to lose weight by walking regularly and eating a diet consisting of Subway subs. Amazingly, Fogle dropped 245 pounds by February of 1999. Subway executives knew that a great story had fallen into their laps. They decided to feature Fogle in Subway’s advertising and soon he was a well-known celebrity. In 2007, Fogle met with President Bush about nutrition and testified before the US Congress about the need for healthier snack options in schools. Today, Fogle is the face of Subway and one of the few celebrities that are instantly recognizable based on his first name alone. Much like Beyoncé and Oprah, you can mention “Jared” to almost anyone in America and that person will know exactly of whom you are speaking. Subway’s line of Fresh Fit sandwiches is targeted at prospective Jareds who want to improve their diets. Because American diets contain too much salt, which can cause high blood pressure, salt levels in restaurant food are attracting increased scrutiny. Subway responded to this issue in April 2011 when its outlets in the United States reduced the amount of salt in all its sandwiches by at least 15 percent without any alteration in taste. The Fresh Fit line of sandwiches received a more dramatic 28 percent reduction in salt. These changes were enacted after customers of Subway’s outlets in New Zealand and Australia embraced similar adjustments. Although the new sandwich recipes cost slightly more than the old ones, Subway plans to absorb these costs rather than raising their prices. [2] This may be a wise strategy for retaining customers, who have become very price sensitive because of the ongoing uncertainty surrounding the American economy and the high unemployment. [1] Kingsley, P. 2011, March 9. How a sandwich franchise ousted McDonald’s. The Guardian. Retrieved from http://www.guardian.co.uk/lifeandstyle/2011/mar/09/subway-biggest -fast-food-chain Saylor URL: http://www.saylor.org/books Saylor.org 72 [2] Riley, C. 2011, April. Subway lowers salt in its sandwiches. CNNMoney. Retrieved from http://money.cnn.com/2011/04/18/news/companies/subway_salt/index.htm Saylor URL: http://www.saylor.org/books Saylor.org 73 3.1 The Relationship between an Organization and Its Environment LEARNING OBJECTIVES 1. Define the environment in the context of business. 2. Understand how an organization and its environment affect each other. 3. Learn the difference between the general environment and the industry. What Is the Environment? For any organization, the environment consists of the set of external conditions and forces that have the potential to influence the organization. In the case of Subway, for example, the environment contains its customers, its rivals such as McDonald’s and Kentucky Fried Chicken, social trends such as the shift in society toward healthier eating, political entities such as the US Congress, and many additional conditions and forces. It is useful to break the concept of the environment down into two components. The general environment (or macroenvironment) includes overall trends and events in society such as social trends, technological trends, demographics, and economic conditions. The industry (or competitive environment) consists of multiple organizations that collectively compete with one another by providing similar goods, services, or both. Every action that an organization takes, such as raising its prices or launching an advertising campaign, creates some degree of changes in the world around it. Most organizations are limited to influencing their industry. Subway’s move to cut salt in its sandwiches, for example, may lead other fast-food firms to revisit the amount of salt contained in their products. A few organizations wield such power and influence that they can shape some elements of the general environment. While most organizations simply react to major technological trends, for example, the actions of firms such as Intel, Microsoft, and Apple help create these trends. Some aspects of the general environment, such as demographics, simply must be taken as a given by all organizations. Overall, the environment has a far greater influence on most organizations than most organizations have on the environment. Saylor URL: http://www.saylor.org/books Saylor.org 74 Why Does the Environment Matter? Understanding the environment that surrounds an organization is important to the executives in charge of the organizations. There are several reasons for this. First, the environment provides resources that an organization needs in order to create goods and services. In the seventeenth century, British poet John Donne famously noted that “no man is an island.” Similarly, it is accurate to say that no organization is self-sufficient. As the human body must consume oxygen, food, and water, an organization needs to take in resources such as labor, money, and raw materials from outside its boundaries. Subway, for example, simply would cease to exist without the contributions of the franchisees that operate its stores, the suppliers that provide food and other necessary inputs, and the customers who provide Subway with money through purchasing its products. An organization cannot survive without the support of its environment. Second, the environment is a source of opportunities and threats for an organization. Opportunities are events and trends that create chances to improve an organization’s performance level. In the late 1990s, for example, Jared Fogle’s growing fame created an opportunity for Subway to position itself as a healthy alternative to traditional fast-food restaurants. Threats are events and trends that may undermine an organization’s performance. Subway faces a threat from some upstart restaurant chains. Saladworks, for example, offers a variety of salads that contain fewer than five hundred calories. Noodles and Company offers a variety of sandwiches, pasta dishes, and salads that contain fewer than four hundred calories. These two firms are much smaller than Subway, but they could grow to become substantial threats to Subway’s positioning as a healthy eatery. Executives must also realize that virtually any environmental trend or event is likely to create opportunities for some organizations and threats for others. This is true even in extreme cases. In addition to horrible human death and suffering, the March 2011 earthquake and tsunami in Japan devastated many organizations, ranging from small businesses that were simply wiped out to corporate giants such as Toyota whose manufacturing capabilities were undermined. As odd as it may seem, however, these tragic events also opened up significant opportunities for other organizations. The Saylor URL: http://www.saylor.org/books Saylor.org 75 rebuilding of infrastructure and dwellings requires concrete, steel, and other materials. Japanese concrete manufacturers, steelmakers, and construction companies are likely to be very busy in the years ahead. Third, the environment shapes the various strategic decisions that executives make as they attempt to lead their organizations to success. The environment often places important constraints on an organization’s goals, for example. A firm that sets a goal of increasing annual sales by 50 percent might struggle to achieve this goal during an economic recession or if several new competitors enter its business. Environmental conditions also need to be taken into account when examining whether to start doing business in a new country, whether to acquire another company, and whether to launch an innovative product, to name just a few. KEY TAKEAWAY x An organization’s environment is a major consideration. The environment is the source of resources that the organizations needs. It provides opportunities and threats, and it influences the various strategic decisions that executives must make. EXERCISES 1. What are the three reasons that the environment matters? 2. Which of these three reasons is most important? Why? 3. Can you identify an environmental trend that no organizations can influence? Saylor URL: http://www.saylor.org/books Saylor.org 76 3.2 Evaluating the General Environment LEARNING OBJECTIVES 1. Explain how PESTEL analysis is useful to organizations. 2. Be able to offer an example of each of the elements of the general environment. The Elements of the General Environment: PESTEL Analysis An organization’s environment includes factors that it can readily affect as well as factors that largely lay beyond its influence. The latter set of factors are said to exist within the general environment. Because the general environment often has a substantial influence on an organization’s level of success, executives must track trends and events as they evolve and try to anticipate the implications of these trends and events. PESTEL analysis is one important tool that executives can rely on to organize factors within the general environment and to identify how these factors influence industries and the firms within them. PESTEL is an anagram, meaning it is a word that created by using parts of other words. In particular, PESTEL reflects the names of the six segments of the general environment: (1) political, (2) economic, (3) social, (4) technological, (5) environmental, and (6) legal. Wise executives carefully examine each of these six segments to identify major opportunities and threats and then adjust their firms’ strategies accordingly. P Is for “Political” The political segment centers on the role of governments in shaping business. This segment includes elements such as tax policies, changes in trade restrictions and tariffs, and the stability of governments. Immigration policy is an aspect of the political segment of the general environment that offers important implications for many different organizations. What approach to take to illegal immigration into the United States from Mexico has been a hotly debated dilemma. Some hospital executives have noted that illegal immigrants put a strain on the health care system because immigrants seldom can pay for medical services and hospitals cannot by law turn them away from emergency rooms. Saylor URL: http://www.saylor.org/books Saylor.org 77 Meanwhile, farmers argue that a tightening of immigration policy would be harmful because farmers rely heavily on cheap labor provided by illegal immigrants. In particular, if farmers were forced to employ only legal workers, this would substantially increase the cost of vegetables. Restaurant chains such as Subway would then pay higher prices for lettuce, tomatoes, and other perishables. Subway would then have to decide whether to absorb these costs or pass them along to customers by charging more for subs. Overall, any changes in immigration policy will have implications for hospitals, farmers, restaurants, and many other organizations. E Is for “Economic” The economic segment centers on the economic conditions within which organizations operate. It includes elements such as interest rates, inflation rates, gross domestic product, unemployment rates, levels of disposable income, and the general growth or decline of the economy. The economic crisis of the late 2000s has had a tremendous negative effect on a vast array of organizations. Rising unemployment discouraged consumers from purchasing expensive, nonessential goods such as automobiles and television sets. Bank failures during the economic crisis led to a dramatic tightening of credit markets. This dealt a huge blow to home builders, for example, who saw demand for new houses plummet because mortgages were extremely difficult to obtain. Saylor URL: http://www.saylor.org/books Saylor.org 78 Some businesses, however, actually prospered during the crisis. Retailers that offer deep discounts, such as Dollar General and Walmart, enjoyed an increase in their customer base as consumers sought to find ways to economize. Similarly, restaurants such as Subway that charge relatively low prices gained customers, while high-end restaurants such as Ruth’s Chris Steak House worked hard to retain their clientele. S Is for “Social” A generation ago, ketchup was an essential element of every American pantry and salsa was a relatively unknown product. Today, however, food manufacturers sell more salsa than ketchup in the United States. This change reflects the social segment of the general environment. Social factors include trends in demographics such as population size, age, and ethnic mix, as well as cultural trends such as attitudes toward obesity and consumer activism. The exploding popularity of salsa reflects the increasing number of Latinos in the United States over time, as well as the growing acceptance of Latino food by other ethnic groups. Sometimes changes in the social segment arise from unexpected sources. Before World War II, the American workforce was overwhelmingly male. When millions of men were sent to Europe and Asia to Saylor URL: http://www.saylor.org/books Saylor.org 79 fight in the war, however, organizations had no choice but to rely heavily on female employees. At the time, the attitudes of many executives toward women were appalling. Consider, for example, some of the advice provided to male supervisors of female workers in the July 1943 issue of Transportation Magazine: x [1] Older women who have never contacted the public have a hard time adapting themselves and are inclined to be cantankerous and fussy. It’s always well to impress upon older women the importance of friendliness and courtesy. x General experience indicates that “husky” girls—those who are just a little on the heavy side—are more even tempered and efficient than their underweight sisters. x Give every girl an adequate number of rest periods during the day. You have to make some allowances for feminine psychology. A girl has more confidence and is more efficient if she can keep her hair tidied, apply fresh lipstick and wash her hands several times a day. The tremendous contributions of female workers during the war contradicted these awful stereotypes. The main role of women who assembled airplanes, ships, and other war materials was to support the military, of course, but their efforts also changed a lot of male executives’ minds about what females could accomplish within organizations if provided with opportunities. Inequities in the workplace still exist today, but modern attitudes among men toward women in the workplace are much more enlightened than they were in 1943. Saylor URL: http://www.saylor.org/books Saylor.org 80 Women’s immense contributions to the war effort during World War II helped create positive social changes in the ensuing decades. Image courtesy of J. Howard Miller, http://en.wikipedia.org/wiki/File:We_Can_Do_It!.jpg. Beyond being a positive social change, the widespread acceptance of women into the workforce has created important opportunities for certain organizations. Retailers such as Talbot’s and Dillard’s sell business attire to women. Subway and other restaurants benefit when the scarceness of time lead dual income families to purchase take-out meals rather than cook at home. Saylor URL: http://www.saylor.org/books Saylor.org 81 T Is for “Technological” The technological segment centers on improvements in products and services that are provided by science. Relevant factors include, for example, changes in the rate of new product development, increases in automation, and advancements in service industry delivery. One key feature of the modern era is the ever-increasing pace of technological innovation. In 1965, Intel cofounder Gordon E. Moore offered an idea that has come to be known as Moore’s law. Moore’s law suggests that the performance of microcircuit technology roughly doubles every two years. This law has been very accurate in the decades since it was offered. One implication of Moore’s law is that over time electronic devices can become smaller but also more powerful. This creates important opportunities and threats in a variety of settings. Consider, for example, photography. Just a decade ago, digital cameras were relatively large and they produced mediocre images. With each passing year, however, digital cameras have become smaller, lighter, and better. Today, digital cameras are, in essence, minicomputers, and electronics firms such as Panasonic have been able to establish strong positions in the market. Meanwhile, film photography icon Kodak has been forced to Saylor URL: http://www.saylor.org/books Saylor.org 82 abandon products that had been successful for decades. In 2005, the firm announced that it would stop producing black-and-white photographic paper. Four years later, Kodachrome color film was phased out. Successful technologies are also being embraced at a much faster rate than in earlier generations. The Internet reached fifty million users in only four years. In contrast, television reached the same number of users in thirteen years while it took radio thirty-eight years. This trend creates great opportunities for organizations that depend on emerging technologies. Writers of applications for Apple’s iPad and other tablet devices, for example, are able to target a fast-growing population of users. At the same time, organizations that depend on technologies that are being displaced must be aware that consumers could abandon them at a very rapid pace. As more and more Internet users rely on Wi-Fi service, for example, demand for cable modems may plummet. Although the influence of the technological segment on technology-based companies such as Panasonic and Apple is readily apparent, technological trends and events help to shape low-tech businesses too. In 2009, Subway started a service called Subway Now. This service allows customers to place their orders in Saylor URL: http://www.saylor.org/books Saylor.org 83 advance using text messages and avoid standing in line at the store. By offering customers this service, Subway is also responding to a trend in the general environment’s social segment: the need to save time in today’s fast-paced society. E Is for “Environmental” The environmental segment involves the physical conditions within which organizations operate. It includes factors such as natural disasters, pollution levels, and weather patterns. The threat of pollution, for example, has forced municipalities to treat water supplies with chemicals. These chemicals increase the safety of the water but detract from its taste. This has created opportunities for businesses that provide better-tasting water. Rather than consume cheap but bad-tasting tap water, many consumers purchase bottled water. Indeed, according to the Beverage Marketing Corporation, the amount of bottled water consumed by the average American increased from 1.6 gallons in 1976 to 28.3 gallons in 2006.[2] At present, roughly one-third of Americans drink bottled water regularly. As is the case for many companies, bottled water producers not only have benefited from the general environment but also have been threatened by it. Some estimates are that 80 percent of plastic bottles end up in landfills. This has led some socially conscious consumers to become hostile to bottled water. Meanwhile, water filtration systems offered by Brita and other companies are a cheaper way to obtain clean and tasty water. Such systems also hold considerable appeal for individuals who feel the need to cut personal expenses due to economic conditions. In sum, bottled water producers have been provided opportunities by the environmental segment of the general environment (specifically, the spread of poortasting water to combat pollution) but are faced with threats from the social segment (the social conscience of some consumers) and the economic segment (the financial concerns of other consumers). Saylor URL: http://www.saylor.org/books Saylor.org 84 L Is for “Legal” The legal segment centers on how the courts influence business activity. Examples of important legal factors include employment laws, health and safety regulations, discrimination laws, and antitrust laws. Intellectual property rights are a particularly daunting aspect of the legal segment for many organizations. When a studio such as Pixar produces a movie, a software firm such as Adobe revises a program, or a video game company such as Activision devises a new game, these firms are creating intellectual property. Such firms attempt to make profits by selling copies of their movies, programs, and games to individuals. Piracy of intellectual property—a process wherein illegal copies are made and sold by others—poses a serious threat to such profits. Law enforcement agencies and courts in many countries, including the United States, provide organizations with the necessary legal mechanisms to protect their intellectual property from piracy. Saylor URL: http://www.saylor.org/books Saylor.org 85 In other countries, such as China, piracy of intellectual property is quite common. Three other general environment segments play a role in making piracy a major concern. First, in terms of the social segment, China is the most populous country in the world. Second, in terms of the economic segment, China’s affluence is growing rapidly. Third, in terms of the technological segment, rapid advances in computers and communication have made piracy easier over time. Taken together, these various general environment trends lead piracy to be a major source of angst for firms that rely on intellectual property to deliver profits. KEY TAKEAWAY x To transform an avocado into guacamole, a chef may choose to use a mortar and pestle. A mortar is a mashing device that is shaped liked a baseball bat, while a pestle is a sturdy bowl within which the mashing takes place. Similarly, PESTEL reflects the general environment factors—political, economic, social, technological, environmental, and legal—that can crush an organization. In many cases, executives can prevent such outcomes by performing a PESTEL analysis to diagnose where in the general environment important opportunities and threats arise. Saylor URL: http://www.saylor.org/books Saylor.org 86 EXERCISES 1. What does each letter of PESTEL mean? 2. Using a recent news article, identify a trend that has a positive and negative implication for a particular industry. 3. Can you identify a general environment trend that has positive implications for nursing homes but negative implications for diaper makers? 4. Are all six elements of PESTEL important to every organization? Why or why not? 5. What is a key trend for each letter of PESTEL and one industry or firm that would be affected by that trend? [1] 1943 guide to hiring women. 2007, September–October. Savvy & Sage, p. 16. [2] Plastic recy.