Planning Strategy Starts with SWOT
Firms approach the planning process in a variety of ways. For instance, a bottom-up approach drives the development of business unit strategy beginning with the front-line managers of the unit: The strategy is reviewed by senior management who critique and approve the unit strategy. A top-down approach uses a central staff to cast the corporate mission and objectives into strategies, which are then imposed on the business units; this is sometimes called a “command-and-control” approach to setting strategy. The process chosen usually reflects the complexity of the firm, its culture and history, and the relative talents of operating managers. Current conventional wisdom probably favors a bottom-up approach in the belief that people closest to the front line see the strategic field most clearly. Jack Welch, the former CEO of General Electric, was a leading proponent of the bottom-up approach to strategic planning.
The strategic planning process begins with an assessment of the business unit. This focuses both inward on the condition and resources of the unit, and outward on the shape of its environment and the unit’s position in the competitive field.
RESOURCES These may entail physical and financial assets, as well as talent and intellectual capital. Resources are like raw material; what matters is how the firm integrates resources to reach its objectives. Capabilities integrate resources to reach an objective. For instance, to produce custom-designed furniture, a firm must integrate across marketing, design, purchasing, manufacturing, and finance. Core competencies are strategic capabilities: those skills and activities that translate resources into special advantage for the firm. Home Depot, for instance, has a strategic capability in site location and store openings—design, construction, staffing, training, and marketing had to be coordinated to support the firm’s strategic goal of 25 percent annual increase in store space profitably. Core competencies that are difficult for competitors to imitate create sustainable competitive advantage and are key drivers of superior investment returns. Examples of core competencies are Wal-Mart’s logistics and inventory management, Honda’s ability in new product innovation, Sony’s skills at miniaturization, and Pixar’s skills at computer-based animation. The competitive advantage that these core competencies create is generated from resources within the firm and does not rely on external resources; this competitive advantage is sustainable when current and potential competitors cannot or will not attempt to duplicate it.
COMPETITIVE POSITION Strength of position is also correlated with investment returns: the stronger the position, the higher the returns. For instance, a monopolist can extract higher returns than can a marginal player in a highly competitive industry. It is not only one’s own share of market that matters, but also the distribution of shares among other players. In the abstract, a stronger competitive position should result in higher returns to investors. This is what Shoeffler, Buzzell, and Heaney (1974) found in their analysis of returns on investment by market position. Exhibit 6.2 gives their results: Return on investment rises with market share.
The relationship between a stronger market position and returns to investors has been the focus of considerable research. Shapiro (1999) summarized the sources of economic value as barriers to entry, economies of scale, product differentiation, access to special distribution channels, and advantageous government policy. He argues that “the essence of corporate strategy [is] creating and then taking advantage of imperfections in product and factor markets…. More important, a good understanding of corporate strategy should help uncover new and potentially profitable projects.” (Pages 105, 106)
The aim of strategic assessment is to draw a profile of the strengths, weaknesses, opportunities, and threats of the business. Exhibit 6.3 presents a SWOT table such as confronted Chrysler Corporation and Daimler-Benz A.G. as they began merger negotiations in early 1998—this shows important areas of strategic fit of the two firms. Notice especially the complementary positions in products (luxury sedans versus SUVs, minivans, pickup trucks), cost leadership versus quality leadership, financial strength, and market presence. SWOT analysis is invaluable for preparing negotiators, deal designers, due diligence researchers, and integration planners.
EXHIBIT 6.2 Relationship between Market Share and Return on Investment
| Market Share | Return on Investment |
|---|---|
| Over 36% | 30.2% |
| 22–36% | 17.9% |
| 14–22% | 13.5% |
| 7–14% | 12.0% |
| 0–7% | 9.6% |
Source of data: Schoeffler, Buzzell, and Heany (1974), page 141.
EXHIBIT 6.3 SWOT Analysis of Chrysler and Daimler-Benz Just before the Announcement of Their Merger in 1998
| Daimler-Benz A.G. | Chrysler Corporation | |
|---|---|---|
| Strengths | Dominates “quality” niche; protected from trough of auto cycle. Strong international brand. New plant in Brazil, hot market. Strong new products: SLK, M-class, A-class, Smart Car. High share price; good acquisition currency. Good access to capital: Deutsche Bank is key stakeholder. | Strength in specific product segments such as minivans, trucks, SUVs. Manufacturing advantages: short product cycle; low supplier cost. Good position for Jeep worldwide and for Chrysler in Latin America. Cash and unused debt capacity. Engineering culture. |
| Weaknesses | High labor costs. High labor content: 60–80 hours/car (vs. 20 for Lexus). Declining unit volume in big luxury cars. Labor union on supervisory board may limit flexibility to change work practices. Losing large tax shields from operating loss carryforwards. | As third-largest North American player, very sensitive to economic cycle. Chronic financial weakness; near-demise in 1980. Products: not as much attention to detail and image. The least vertically integrated big manufacturer. Possibly undervalued in stock market. |
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