Strategic Management: Creating Competitive Advantages

McDonald’s
Q3. Strategic Implementation

What does strategy consist of:

• Analysis
• Strategic goals (vision, mission, strategic objectives)
• Internal and external environment of the firm
• Decisions – Formulation
• What industries should we compete in (business-level)?
• How should we compete in those industries (corporate-level & international strategies)?
• Action – Implementation
• Allocate necessary resources
• Design the organization to bring intended strategies to reality

Q3 cont: What steps did Skinner take to fix the problems McDonald’s faced?

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Remember our previous discussion…

 

 

Strategy is all about the ideas, decisions, and actions that enable a firm to succeed.

Leaders face a large number of complex challenges. Leaders must be proactive, anticipate change and continually refine changes to their strategies. This requires a certain level of “ambidextrous behavior”, where leaders are alert to opportunities beyond the confines of their own jobs, and are also cooperative and seek out opportunities to combine their efforts with others. Leaders must make strategic management both a process and a way of thinking throughout the organization.

The primary role of the organizational leader is to articulate vision, mission and strategic objectives.

Leaders must communicate their initial vision of the organization’s purpose: what was the original goal that evokes a powerful and compelling mental image of a shared future, one that would be massively inspiring, overarching, and long-term, that represented a destination that is driven by and evokes passion? Is the original vision still applicable given the present circumstances?

The organizational mission also needs to be considered: a mission encompasses both the purpose of the company as well as the basis for competition and competitive advantages. In writing a mission statement, it is important to understand the definition of the business: 1) who are its customers, 2) what customer need is the organization trying to fulfill, and 3) how does the business create and deliver value to customers and satisfy their needs. Organizations must respond to multiple constituencies if they are to survive and prosper, and the mission provides a means of communicating to diverse organizational stakeholders. Although vision statements tend to be quite enduring and seldom change, a firm’s mission can and should change when competitive conditions dramatically change or the firm is faced with new threats or opportunities.

Anticipating that things might change, an organization’s leadership must then establish strategic objectives to operationalize the mission statement with specific yardsticks. That is, objectives help to provide guidance on how the organization can fulfill or move toward the “higher goals” in the goal hierarchy—the mission and vision.

External forces had begun pushing for healthier forms of food. Company-owned and franchisee restaurants had inconsistency in service and décor. New menu items had to be accepted by loyal customers. Skinner appeared to have continued with the original vision & mission. Should Thompson do the same? McDonald’s provides an interesting example of a firm that did very well for decades with a clear strategy and then stumbled as it tried to reevaluate what it wanted to do. It is clear from the case that McDonald’s had been tremendously successful primarily as a fast food chain, with particular emphasis on hamburgers. Should Thompson rethink strategy as a result of factors in the environment?

During strategic analysis, the leader does “advance work” to anticipate unforeseen environmental developments, identify unanticipated resource constraints, assess changes in his or her preferences for how to manage. During strategy formulation, the organization addresses the issue of how to compete in a given business to attain competitive advantage. Strategies are formulated at the business, corporate, and international levels. Entrepreneurial initiatives may also play a role. In strategy implementation, depending on the type of organization structure, the leader might include key individuals in a discussion around selecting which strategies might be best to implement at which level within the organization. The leader must ensure proper strategic controls and organizational design, and establish effective means to coordinate and integrate activities within the firm as well as with suppliers, customers and possible alliance partners. Leaders should also be committed to excellence and ethical behavior while promoting learning and continuous improvement. Here’s where innovation is important.

The basic question strategic management tries to answer is: How can we create competitive advantages in the marketplace that are not only unique and valuable but also difficult for competitors to copy or substitute?

Organizational leaders must become aware of factors in the overall environment that might affect their ability to create a competitive advantage. So how do managers become environmentally aware? By doing scanning, monitoring, and gathering competitive intelligence, and using these inputs to develop forecasts. This prepares the firm to do more extensive analysis of the forces in the general environment and the industry or competitive environment. Environmental scanning involves surveillance of a firm’s external environment to predict environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint of the industry/competition, looking for key indicators of emerging trends – what catches your eye? Alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them. Environmental monitoring is a firm’s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities. Leaders need to monitor the trends that have the potential to change the competitive landscape – what do you want to track? Firms need to CHOOSE the trends identified via the scanning activity, and regularly monitor or track these specific trends to evaluate the impact of these trends on their strategy process.

What factors or trends might be most important to McDonald’s? To assess how the external environment might affect McDonald’s strategy, it’s necessary to take a look at the factors in the general external environment. McDonald’s must consider the political/legal, economic and global, sociocultural and demographic, and technological forces that might affect the ability of the firm to deliver its services and sustain its business. See which factors in the general environment we might pick that have a significant impact on the fast food industry.

To answer the question about the current forces in the general and fast food industry environments that affect McDonald’s ongoing strategy, it’s necessary to assess the segments of the external competitive environment that include competitors, customers, and suppliers, substitutes and new entrants. Porter’s five forces model allows strategists to anticipate where the industry might be most vulnerable.

Let’s apply Porter’s Five Forces of competition. Based on the external environmental industry analysis, the fast food business is not an attractive industry, with many competitors trying to carve out a piece of the “profit” pie.

To answer the question of whether McDonald’s differentiation strategy is adequately supported by its value chain and other internal resources, McDonald’s must assess the relationships between the elements in its value chain. Every activity should add value.

Take a look at Chapter 3, Exhibit 3.1 to see the value chain activities.

CEO Skinner realized that basic changes in McDonalds’ value chain needed to made to get the company back on track. Menu changes and franchisee relationships were key factors that he addressed. His moves seem to have paid off in that McDonalds’ financial performance improved, but fundamental issues still remained – would the McCafe innovation and “healthier” menu dilute the traditional brand image and harm McDonald’s reputation?

To further answer the question of how to support a competitive strategy, it’s important to consider the concept of the resource-based view of the firm, and the three key types of resources: tangible resources, intangible resources, and organizational capabilities.

McDonald’s profile might look like this:

Determining whether the internal resources are valuable, rare, difficult to imitate, or difficult to substitute (VRIN) can help a firm sustain a competitive advantage. See Chapter 3, Exhibit 3.6.

Applying the VRIN analysis, McDonald’s doesn’t appear to have any resources that are clearly valuable, rare, in-imitable, or non-substitutable. This indicates that McDonald’s may have a major challenge sustaining a competitive advantage, especially since any strategy it implements can be quickly imitated by competitors. However, McDonald’s core capability appears to be its operations focus on the original vision and mission. This has allowed its brand reputation to remain solid over the years.

Consider the concepts of intellectual capital and human capital, both of which are intangible assets that a company such as McDonald’s needs to have in order to compete successfully. Intellectual capital is a measure of the value of a firm’s intangible assets, its reputation, employee loyalty and commitment, customer relationships, company values, brand names, and the experience and skills of employees. Human capital involves the individual capabilities, knowledge, skills, and experience of the company’s employees and managers. McDonald’s has some valuable intangible assets to help it carry out its mission – but these need to be further developed, especially now that the company has transitioned to a more franchise-based model. Thompson’s leadership is key! Given McDonald’s challenges both internally and externally, he must make some good choices about how to compete going forward.

Corporate strategy focuses discussion on the questions of what businesses a corporation should compete in, and how the businesses should be managed so they can create “synergy” – creating value through entering new markets or developing new technologies, either through related or unrelated diversification.

Diversification is the process of firms expanding their operations by entering new businesses. In related diversification, a firm enters a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power. Whatever the choice, it should create value for all stakeholders – employees, suppliers, distributors, and the organization’s owners themselves. The choice of diversification strategy should create synergy so that all parties gain something they would not have had on their own.

When achieving synergy through diversification, a firm has two choices: related diversification through horizontal relationships with related businesses, sharing tangible and intangible resources, and leveraging core competencies; and unrelated diversification though hierarchical relationships with unrelated business. In this case, value creation derives from the corporate office by leveraging support activities.

 

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International expansion is a viable diversification strategy, however before pursuing this, a firm needs to determine why an industry in a given country is more (or less) successful than the same industry in another country.

When choosing a country to expand into, firms must assess the degree of consumer demand, the degree to which resources such as skilled labor and other supplier or supporting infrastructure are developed and available, the speed with which such resources can be deployed, the extent of political and economic risk and corruption, the access to qualified management.