2.3.2 Functions of Management
2.3.3 Firm Vision or Mission
2.3.4 Management Decision-making Process
2.3.5 Porter's 5 Forces
2.3.6 Resources and Capabilities of a Firm
2.3.7 Competition and Strategy of a Firm
2.3.8 SWOT Analysis
Management and Strategic Decision Making
Overview
Qualities of a Successful Business Manager
Learning Objective
6a Discuss qualities of a successful agribusiness manager.
Being a Manager
Managers are in constant action. Virtually every study of managers in action has found that they “switch frequently from task to task, changing their focus of attention to respond to issues as they arise, and engaging in a large volume of tasks of short duration.”
Managers, in fact, spend very little time by themselves. Contrary to the image offered by management textbooks, they are rarely alone drawing up plans or worrying about important decisions. Instead, they spend most of their time interacting with others—both inside and outside the organization. If casual interactions in hallways, phone conversations, one-on-one meetings, and larger group meetings are included, managers spend about two-thirds of their time with other people.
Henry Mintzberg observed CEOs on the job to get some idea of what they do and how they spend their time. He found, for instance, that they averaged 36 written and 16 verbal contacts per day, almost every one of them dealing with a distinct or different issue. Most of these activities were brief, lasting less than nine minutes. In the same vein, Lee Sproull’s study revealed that, during the course of a day, managers engaged in 58 different activities with an average duration of just nine minutes.
John Kotter’s study found that the average manager spent just 25% of his time working alone, and that time was spent largely at home, on airplanes, or commuting. Kotter’s study reveals that successful general managers spend most of their time with others, including subordinates, their bosses, and numerous people from outside the organization. Few of them spent less than 70% of their time with others, and some spent up to 90% of their working time this way.
Kotter also found that the breadth of topics in manager’s discussions with others was extremely wide, with unimportant or irrelevant issues taking time alongside important business matters. His study revealed that managers rarely make “big decisions” during these conversations and rarely give orders in a traditional sense. They often react to others’ initiatives and spend substantial amounts of time on unplanned activities that aren’t pre-scheduled. He found that managers will spend most of their time with others in short, disjointed conversations: “It is not at all unusual for a general manager to cover ten unrelated topics in a five-minute conversation.”
Interruptions also appear to be a natural part of the job. Rosemary Stewart found that the managers she studied were working uninterrupted for half an hour only nine times during the four weeks she studied them. As Mintzberg has pointed out, “Unlike other workers, the manager does not leave the telephone or the meeting to get back to work. Rather, these contacts are his work.”
The interactive nature of management means that most management work is conversational. Managers spend about two-thirds to three-quarters of their time in verbal activity. These verbal conversations, according to Robert Eccles and Nitin Nohria, are the means by which managers gather information, stay on top of things, identify problems, negotiate shared meanings, develop plans, put things in motion, give orders, assert authority, develop relationships, and spread gossip. In short, they are what the manager’s daily practice is all about. When managers are in action, they are talking and listening.
The 3 Core Management Roles
In Mintzberg’s seminal study of managers and their jobs, he found there are three core management roles: interpersonal, informational, and decisional.
Interpersonal Roles
Managers are required to interact with a substantial number of people in the course of a workweek. They host receptions; take clients and customers to dinner; meet with business prospects and partners; conduct hiring and performance interviews; and form alliances, friendships, and personal relationships with many others. Numerous studies have shown that such relationships are the richest source of information for managers because of their immediate and personal nature. The interpersonal role of managers arises directly from formal authority and involves basic interpersonal relationships.
Managers fill the figurehead role. Managers are responsible for the work of the people in their unit, and their actions in this regard are directly related to their role as a leader. The influence of managers is most clearly seen, according to Mintzberg, in the leader role. Formal authority vests them with great potential power. Leadership determines, in large part, how much power they will realize. Additionally, as the head of an organizational unit, every manager must perform some ceremonial duties. In Mintzberg’s study, chief executives spent 12% of their contact time on ceremonial duties and 17% of their incoming mail dealt with acknowledgments and requests related to their status. For instance, a company president who deals with charity or philanthropic requests is engaging in the ceremonial duties that come with being a figurehead.
The impact of a leadership role of managers can be seen in some famous examples of managers who had huge impacts on business success. When Lee Iacocca took over Chrysler Corporation (now DaimlerChrysler) in the 1980s, the once-great auto manufacturer was in bankruptcy, teetering on the verge of extinction. Iacocca formed new relationships with the United Auto Workers, reorganized the senior management of the company, and—perhaps most importantly—convinced the U.S. federal government to guarantee a series of bank loans that would make the company solvent again. The loan guarantees, the union response, and the reaction of the marketplace were due in large measure to Iacocca’s leadership style and personal charisma. More recent examples include the return of Starbucks founder Howard Schultz to re-energize and steer his company, and Amazon CEO Jeff Bezos’s ability to innovate during a downturn in the economy.
Managers also fill the liaison role, which falls under the larger interpersonal umbrella. Popular management literature has had little to say about the liaison role until recently. This role, in which managers establish and maintain contacts outside the vertical chain of command, becomes especially important in view of the finding of virtually every study of managerial work that managers spend as much time with peers and other people outside of their units as they do with their own subordinates. Surprisingly, they spend little time with their own superiors. In Rosemary Stewart’s study, 160 British middle and top managers spent 47% of their time with peers, 41% of their time with people inside their unit, and only 12% of their time with superiors.
Informational Roles
Managers are required to gather, collate, analyze, store, and disseminate many kinds of information. As monitors, managers are constantly scanning the environment for information, talking with liaison contacts and subordinates, and receiving unsolicited information, much of it as a result of their network of personal contacts. A good portion of this information arrives in verbal form, often as gossip, hearsay, and speculation.
In doing so, they become information resource centers, often storing huge amounts of information in their own heads, moving quickly from the role of gatherer to the role of disseminator in minutes. Although many business organizations install large, expensive management information systems to perform many of those functions, nothing can match the speed and intuitive power of a well-trained manager’s brain for information processing. Not surprisingly, most managers prefer it that way.
In the disseminator role, managers pass privileged information directly to subordinates, who might otherwise have no access to it. Managers must not only decide who should receive such information, but how much of it, how often, and in what form. Increasingly, managers are being asked to decide whether subordinates, peers, customers, business partners, and others should have direct access to information 24 hours a day without having to contact the manager directly.
In the spokesperson role, managers send information to people outside of their organizations. An example of fulfilling a spokesperson role is when an executive makes a speech to lobby for an organizational cause, or a supervisor suggests a product modification to a supplier. Increasingly, managers are also being asked to deal with representatives of the news media, providing both factual and opinion-based responses that will be printed or broadcast to vast unseen audiences, often directly or with little editing. The risks in such circumstances are enormous, but so too are the potential rewards in terms of brand recognition, public image, and organizational visibility.
Decisional Roles
Ultimately, managers are charged with the responsibility of making decisions on behalf of both the organization and the stakeholders with an interest in it. Such decisions are often made under circumstances of high ambiguity and with inadequate information. Often, the other two managerial roles—interpersonal and informational—will assist a manager in making difficult decisions in which outcomes are not clear and interests are often conflicting.
In the role of entrepreneur, managers seek to improve their businesses: adapt to changing market conditions and react to opportunities as they present themselves. Managers who take a longer-term view of their responsibilities are among the first to realize that they will need to reinvent themselves, their product and service lines, their marketing strategies, and their ways of doing business as older methods become obsolete and competitors gain advantage.
While the entrepreneur role describes managers who initiate change, the disturbance or crisis handler role depicts managers who must involuntarily react to conditions. Crises can arise because bad managers let circumstances deteriorate or spin out of control, but just as often good managers find themselves in the midst of a crisis that they could not have anticipated but must react to just the same.
The decisional role of resource allocator involves managers making decisions about who gets what, how much, when, and why. Resources, including funding, equipment, human labor, office or production space, and even the boss’s time are all limited, and demand inevitably outstrips supply. Managers must make sensible decisions about such matters while still retaining, motivating, and developing the best of their employees.
Managers spend considerable amounts of time in the role of negotiator. Negotiations happen over budget allocations, labor and collective bargaining agreements, and other formal dispute resolutions. In the course of a week, managers will often make dozens of decisions that are the result of brief but important negotiations between and among employees, customers and clients, suppliers, and others with whom managers must deal.
Increased Emphasis on Leader and Entrepreneurial Roles
The entrepreneur role is gaining importance. Managers must increasingly be aware of threats and opportunities in their environment. Threats include technological breakthroughs on the part of competitors, obsolescence in a manager’s organization, and dramatically shortened product cycles. Opportunities might include product or service niches that are underserved, out-of-cycle hiring opportunities, mergers, purchases, or upgrades in equipment, space, or other assets. Managers who are carefully attuned to the marketplace and competitive environment will look for opportunities to gain an advantage.
The leader role is also more prominent these days. Managers must be more sophisticated as strategists and mentors. A manager’s job involves much more than simple caretaking in a division of a large organization. Unless organizations are able to attract, train, motivate, retain, and promote good people, they cannot possibly hope to gain advantage over the competition. Thus, as leaders, managers must constantly act as mentors to those in the organization with promise and potential. When organizations lose a highly capable worker, all else in their world will come to a halt until they can replace that worker. Even if they find someone ideally suited and superbly qualified for a vacant position, they must still train, motivate, and inspire that new recruit, and live with the knowledge that productivity levels will be lower for a while than they were with their previous employee.
Role Recap
A visual recap of all the roles discussed in this section is illustrated in Figure 2.3.1c.
Attributions
Title Image: " Farmland seen from the air" by Mrwrite at English Wikipedia, Wikimedia Commons is in the Public Domain
Description: Public Domain Farmland seen from an airliner. The circles you can see are irrigated crops being grown, they are called pivots. Center-pivot irrigation (sometimes called central pivot irrigation), also called circle irrigation, is a method of crop irrigation in which equipment rotates around a pivot. A circular area centered on the pivot is irrigated, often creating a circular pattern in crops when viewed from above.
"Principles of Management" by David S. Bright, Anastasia H. Cortes, OpenStax is licensed under CC BY 4.0
Access for free at https://openstax.org/books/principles-management/pages/1-1-what-do-managers-do
Functions of Management
Learning Objectives
6b Discuss the four functions of management.
Efficiency and Management
A manager’s time is fragmented. Managers have acknowledged from antiquity that they never seem to have enough time to get all those things done that need to be done. In the latter years of the twentieth century, however, a new phenomenon arose: demand for time from those in leadership roles increased, while the number of hours in a day remained constant. And their work is not always easily delegated to others. This results in small allotments of time for each task they must complete and each role they must fill.
Values compete and the various roles are in tension. Managers clearly cannot satisfy everyone. Employees want more time to do their jobs; customers want products and services delivered quickly and at high-quality levels. Supervisors want more money to spend on equipment, training, and product development; shareholders want returns on investment maximized. A manager caught in the middle cannot deliver to each of these people what each most wants; decisions are often based on the urgency of the need and the proximity of the problem.
Managers take on heavy loads. In recent years, many North American and global businesses were reorganized to make them more efficient, nimble, and competitive. For the most part, this reorganization meant decentralizing many processes along with the wholesale elimination of middle management layers. Many managers who survived such downsizing found that their number of direct reports had doubled. Classical management theory suggests that seven is the maximum number of direct reports a manager can reasonably handle. Today, high-speed information technology and remarkably efficient telecommunication systems mean that many managers have as many as 20 or 30 people reporting to them directly.
Efficiency is essential. With less time than they need, with time fragmented into increasingly smaller units during the workday, with the workplace following many managers out the door and even on vacation, and with many more responsibilities loaded onto managers in downsized, flatter organizations, efficiency has become the core management skill of the twenty-first century.
4 Functions of Managers:Plan, Organize, Direct, and Control
What responsibilities do managers have in organizations? According to our definition, managers are involved in planning, organizing, directing, and controlling. Managers have described their responsibilities that can be aggregated into nine major types of activity. These include:
- Long-range planning. Managers occupying executive positions are frequently involved in strategic planning and development.
- Controlling. Managers evaluate and take corrective action concerning the allocation and use of human, financial, and material resources.
- Environmental scanning. Managers must continually watch for changes in the business environment and monitor business indicators, such as returns on equity or investment, economic indicators, business cycles, and so forth.
- Supervision. Managers continually oversee the work of their subordinates.
- Coordinating. Managers often must coordinate the work of others both inside the work unit and outside.
- Customer relations and marketing. Certain managers are involved in direct contact with customers and potential customers.
- Community relations. Contact must be maintained and nurtured with representatives from various constituencies outside the company, including state and federal agencies, local civic groups, and suppliers.
- Internal consulting. Some managers make use of their technical expertise to solve internal problems, acting as inside consultants for organizational change and development.
- Monitoring products and services. Managers get involved in planning, scheduling, and monitoring the design, development, production, and delivery of the organization’s products and services.
Not every manager engages in all of these activities. Rather, different managers serve different roles and carry different responsibilities, depending upon where they are in the organizational hierarchy.
Variations in Mangerial Work
Although each manager may have a diverse set of responsibilities, including those mentioned above, the amount of time spent on each activity and the importance of that activity will vary considerably. The two most salient perceptions of a manager are (1) the manager’s level in the organizational hierarchy and (2) the type of department or function for which he/she/they is responsible. Let us briefly consider each of these.
Management by Level
We can distinguish three general levels of management: executive management, middle management, and first-line management:
- Executive managers are at the top of the hierarchy and are responsible for the entire organization, especially its strategic direction.
- Middle managers, who are at the middle of the hierarchy, are responsible for major departments and may supervise other lower-level managers.
- First-line managers supervise rank-and-file employees and carry out day-to-day activities within departments.
Figure 2.3.2a shows the differences in managerial activities by hierarchical level. Senior executives will devote more of their time to conceptual issues, while front-line managers will concentrate their efforts on technical issues. For example, top managers rate high on such activities as long-range planning, monitoring business indicators, coordinating, and internal consulting. Lower-level managers, by contrast, rate high on supervising because their responsibility is to accomplish tasks through rank-and-file employees. Middle managers rate near the middle for all activities.
Managerial Skills
We can distinguish three types of managerial skills: technical, human relations, conceptual.
- Technical skills. Managers must have the ability to use the tools, procedures, and techniques of their special areas. An accountant must have expertise in accounting principles; whereas, a production manager must know operations management. These skills are the mechanics of the job.
- Human relations skills. Human relations skills involve the ability to work with people and understand employee motivation and group processes. These skills allow the manager to become involved with and lead his group.
- Conceptual skills. These skills represent a manager’s ability to organize and analyze information in order to improve organizational performance. They include the ability to see the organization as a whole and to understand how various parts fit together to work as an integrated unit. These skills are required to coordinate the departments and divisions successfully so that the entire organization can pull together.
As shown in Figure 2.3.2b, different levels of these skills are required at different stages of the managerial hierarchy. That is, success in executive positions requires far more conceptual skill and less use of technical skills in most (but not all) situations; whereas, first-line managers generally require more technical skills and fewer conceptual skills. Note, however, that human relations skills, or people skills, remain important for success at all three levels in the hierarchy.
Management by Department or Function
In addition to level in the hierarchy, managerial responsibilities also differ with respect to the type of department or function. There are differences found for quality assurance, manufacturing, marketing, accounting and finance, and human resource management departments. For instance, manufacturing department managers will concentrate their efforts on products and services, controlling, and supervising. Marketing managers, in comparison, focus less on planning, coordinating, and consulting and more on customer relations and external contact. Managers in both accounting and human resource management departments rate high on long-range planning, but they will spend less time on the organization’s products and service offerings. Managers in accounting and finance are also concerned with controlling and monitoring performance indicators, while human resource managers provide consulting expertise, coordination, and external contacts. The emphasis on and intensity of managerial activities varies considerably by the department the manager is assigned to.
At a personal level, knowing that the mix of conceptual, human, and technical skills changes over time and that different functional areas require different levels of specific management activities can serve at least two important functions. First, if you choose to become a manager, knowing that the mix of skills changes over time can help you avoid a common complaint that often young employees want to think and act like a CEO before they have mastered being a first-line supervisor. Second, knowing the different mix of management activities by functional area can facilitate your selection of an area or areas that best match your skills and interests.
In many firms, managers are rotated through departments as they move up in the hierarchy. In this way they obtain a well-rounded perspective on the responsibilities of the various departments. In their day-to-day tasks they must emphasize the right activities for their departments and their managerial levels. Knowing what types of activity to emphasize is at the core of the manager’s job.
Attributions
"Principles of Management" by David S. Bright, Anastasia H. Cortes, OpenStax is licensed under CC BY 4.0
Access for free at: https://openstax.org/books/principles-management/pages/1-3-major-characteristics-of-the-managers-job
Firm Vision or Mission?
Learning Objectives
6e Define and distinguish firm vision and mission.
Conveying the Purpose of a Business
The first step in the process of developing a successful strategic position should be part of the founding of the firm itself. When entrepreneurs decide to start a business, they usually have a reason for starting it, a reason that answers the question “What is the point of this business?” Even if an entrepreneur initially thinks of starting a business in order to be their own boss, they must also have an idea about what their business will do. And that idea about what a business will do should be conveyed through a vision and a mission, but these two things do slightly differ.
Vision Statement
A vision statement is an expression of what a business’s founders want that business to accomplish. The vision statement is usually very broad, and it does not even have to mention a product or service. The vision statement does not describe the strategy a firm will use to follow its vision—it is simply a sentence or two that states why the business exists.
Mission Statement
While a firm’s vision statement is a general statement about its values, a firm’s mission statement is more specific. The mission statement takes the why of a vision statement and gives a broad description of how the firm will try to make its vision a reality. A mission statement is still not exactly a strategy, but it focuses on describing the products a firm plans to offer or the target markets it plans to serve.
Clearing Up Confusion
An interesting thing to note about vision and mission statements is that many companies confuse them, calling a very broad statement their mission. For example, Microsoft says that its mission is “to help people around the world realize their full potential.” By the description above, this would be a good vision statement. However, Microsoft’s official vision statement is to “empower people through great software anytime, anyplace, and on any device.” Although the second statement is also quite broad, it does say how Microsoft wants to achieve the first statement, which makes it a better mission statement than their vision statement.
Figure 2.3.3a gives examples of vision and mission statements for the Walt Disney Company and for Ikea. Notice that in both cases, the vision statement is very broad and is not something a business could use as a strategy because there’s simply not enough information to explain what kind of business each might be. The mission statements, on the other hand, describe the products and services each company plans to offer and the customers each company plans to serve in order to fulfill their vision.
Why are vision and mission statements important to a firm’s strategy for developing a competitive advantage? To put it simply, you can’t make a plan or strategy unless you know what you want to accomplish. Vision and mission statements together are the first building blocks in defining why a firm exists and in developing a plan to accomplish what the firm wants to accomplish.
Attributions
"Principles of Management" by David S. Bright, Anastasia H. Cortes, OpenStax is licensed under CC BY 4.0
https://openstax.org/books/principles-management/pages/9-2-firm-vision-and-mission
Management Decision-making Process
Learning Objectives
6c Discuss the decision-making process (management process).
Decision-making Techniques
Managers can use a variety of techniques to improve their decision-making by making better-quality decisions or making decisions more quickly. Table 2.3.4a summarizes some of these tactics.
Summary of Techniques That May Improve Individual Decision-Making | ||
Type of Decision | Technique | Benefit |
Programmed decisions | Heuristics (mental shortcuts) | Saves time |
Satisficing (choosing first acceptable solution) | Saves time | |
Nonprogrammed decisions | Systematically go through the six steps of the decision-making process. | Improves quality |
Talk to other people. | Improves quality: generates more options, reduces bias | |
Be creative. | Improves quality: generates more options | |
Conduct research; engage in evidence-based decision-making. | Improves quality | |
Engage in critical thinking. | Improves quality | |
Think about the long-term implications. | Improves quality | |
Consider the ethical implications. | Improves quality |
The Importance of Experience
An often overlooked factor in effective decision-making is experience. Managers with more experience have generally learned more and developed greater expertise that they can draw on when making decisions. Experience helps managers develop methods and heuristics to quickly deal with programmed decisions and helps them know what additional information to seek out before making a nonprogrammed decision.
Techniques for Making Better Programmed Decisions
In addition, experience enables managers to recognize when to minimize the time spent making decisions on issues that are not particularly important but must still be addressed. As discussed previously, heuristics are mental shortcuts that managers take when making programmed (routine, low-involvement) decisions. Another technique that managers use with these types of decisions is satisficing. When satisficing, a decision maker selects the first acceptable solution without engaging in additional effort to identify the best solution. We all engage in satisficing every day. For example, suppose you are shopping for groceries and you don’t want to overspend. If you have plenty of time, you might compare prices and figure out the price by weight (or volume) to ensure that every item you select is the cheapest option. But if you are in a hurry, you might just select generic products, knowing that you are most likely getting the best deal. This allows you to finish the task quickly at a reasonably low cost.
Techniques for Making Better Nonprogrammed Decisions
For situations in which the quality of the decision is more critical than the time spent on the decision, decision makers can use several tactics. The following are steps that can be and are usually taken when quality is the top-priority in the decision-making process:
- Recognize that a decision needs to be made.
- Generate multiple alternatives.
- Analyze the alternatives.
- Select an alternative.
- Implement the selected alternative.
- Evaluate its effectiveness.
Step 1: Recognizing That a Decision Needs to Be Made
Ineffective managers will sometimes ignore problems because they aren’t sure how to address them. However, this tends to lead to more and bigger problems over time. Effective managers will be attentive to problems and to opportunities and will not shy away from making decisions that could make their team, department, or organization more effective and more successful.
Step 2: Generating Multiple Alternatives
Often a manager only spends enough time on Step 2 to generate two alternatives and then quickly moves to Step 3 in order to make a quick decision. A better solution may have been available, but, in this case, it wasn’t even considered. It’s important to remember that for nonprogrammed decisions, you don’t want to rush the process. Generating many possible options will increase the likelihood of reaching a good decision. Some tactics to help with generating more options include talking to other people (to get their ideas) and thinking creatively about the problem.
Talk to Other People
Managers can often improve the quality of their decision-making by involving others in the process, especially when generating alternatives. Other people tend to view problems from different perspectives because they have had different life experiences. This can help generate alternatives that you might not otherwise have considered. Talking through big decisions with a mentor can also be beneficial, especially for new managers who are still learning and developing their expertise; someone with more experience will often be able to suggest more options.
Be Creative
We don’t always associate management with creativity, but creativity can be quite beneficial in some situations. In decision-making, creativity can be particularly helpful when generating alternatives. Creativity is the generation of new or original ideas; it requires the use of imagination and the ability to step back from traditional ways of doing things and seeing the world. While some people seem to be naturally creative, it is a skill that you can develop. Being creative requires letting your mind wander and combining existing knowledge from past experiences in novel ways. Creative inspiration may come when we least expect it (while doing the dishes, for example) because we aren’t intensely focused on the problem—we’ve allowed our minds to wander. Managers who strive to be creative will take the time to view a problem from multiple perspectives, try to combine information in news ways, search for overarching patterns, and use their imaginations to generate new solutions to existing problems.
Step 3: Analyzing Alternatives
When implementing Step 3, it is important to take many factors into consideration. Some alternatives might be more expensive than others, for example, and that information is often essential when analyzing options. Effective managers will ensure that they have collected sufficient information to assess the quality of the various options. They will also utilize the tactics described below: engaging in evidence-based decision-making, thinking critically, talking to other people, and considering long-term and ethical implications.
Data and Evidence
Evidence-based decision-making is an approach to decision-making that states that managers should systematically collect the best evidence available to help them make effective decisions. The evidence that is collected might include the decision maker’s own expertise, but it is also likely to include external evidence—such as a consideration of other stakeholders, contextual factors relevant to the organization, potential costs and benefits, and other relevant information. With evidence-based decision-making, managers are encouraged to rely on data and information rather than their intuition. This can be particularly beneficial for new managers or for experienced managers who are starting something new. (Consider all the research that Rubio and Korey conducted while starting Away).
Talk to Other People
As mentioned previously, it can be worthwhile to get help from others when generating options. Another good time to talk to other people is while analyzing those options; other individuals in the organization may help you assess the quality of your choices. Seeking out the opinions and preferences of others is also a great way to maintain perspective, so getting others involved can help you to be less biased in your decision-making (provided you talk to people whose biases are different from your own).
Think Critically
Our skill at assessing alternatives can also be improved by a focus on critical thinking. Critical thinking is a disciplined process of evaluating the quality of information, especially data collected from other sources and arguments made by other people, to determine whether the source should be trusted or whether the argument is valid.
An important factor in critical thinking is the recognition that a person’s analysis of the available information may be flawed by a number of logical fallacies that they may use when they are arguing their point or defending their perspective. Learning what those fallacies are and being able to recognize them when they occur can help improve decision-making quality. See Table 2.3.4b for several examples of common logical fallacies.
Common Logical Fallacies | |||
Name | Description | Examples | Ways to Combat This Logical Fallacy |
Non sequitur (does not follow) | The conclusion that is presented isn’t a logical conclusion or isn’t the only logical conclusion based on the argument(s). | Our biggest competitor is spending more on marketing than we are. They have a larger share of the market. Therefore, we should spend more on marketing. The unspoken assumption: They have a larger share of the market BECAUSE they spend more on marketing. |
In this example, you should ask: Are there any other reasons, besides their spending on marketing, why our competitor has a larger share of the market? |
False cause | Assuming that because two things are related, one caused the other | “Our employees get sick more when we close for holidays. So we should stop closing for holidays.” | This is similar to non sequitur; it makes an assumption in the argument sequence.
In this case, most holidays for which businesses close are in the late fall and winter (Thanksgiving, Christmas), and there are more illnesses at this time of year because of the weather, not because of the business being closed. |
Ad hominem (attack the man) | Redirects from the argument itself to attack the person making the argument | “You aren’t really going to take John seriously, are you? I heard his biggest client just dropped him for another vendor because he’s all talk and no substance.” The goal: if you stop trusting the person, you’ll discount their argument. |
|
Genetic fallacy | You can’t trust something because of its origins. | “This was made in China, so it must be low quality.” “He is a lawyer, so you can’t trust anything he says.” | This fallacy is based on stereotypes. Stereotypes are generalizations; some are grossly inaccurate, and even those that are accurate in SOME cases are never accurate in ALL cases. Recognize this for what it is—an attempt to prey on existing biases. |
Appeal to tradition | If we have always done it one particular way, that must be the right or best way. | “We’ve always done it this way.” “We shouldn’t change this; it works fine the way it is.” |
|
Bandwagon approach | If the majority of people are doing it, it must be good. | “Everybody does it.” “Our customers don’t want to be served by people like that.” |
|
Appeal to emotion | Redirects the argument from logic to emotion | “We should do it for [recently deceased] Steve; it’s what they would have wanted.” |
|
Long-term Implications
A focus on immediate, short-term outcomes—with little consideration for the future—can cause problems. For example, imagine that a manager must decide whether to issue dividends to investors or put that money into research and development to maintain a pipeline of innovative products. It’s tempting to just focus on the short-term: providing dividends to investors tends to be good for stock prices. But failing to invest in research and development might mean that in five years the company is unable to compete effectively in the marketplace, and as a result the business closes. Paying attention to the possible long-term outcomes is a crucial part of analyzing alternatives.
Ethical/Moral Implications
It’s important to think about whether the various alternatives available to you are better or worse from an ethical perspective, as well. Sometimes managers make unethical choices because they haven’t considered the ethical implications of their actions. In the 1970s, Ford manufactured the Pinto, which had an unfortunate flaw: the car would easily burst into flames when rear-ended. The company did not initially recall the vehicle because they viewed the problem from a financial perspective, without considering the ethical implications. People died as a result of the company’s inaction. Unfortunately, these unethical decisions continue to occur—and cause harm—on a regular basis in our society. Effective managers strive to avoid these situations by thinking through the possible ethical implications of their decisions. The decision tree in Figure 2.3.4a is a great example of a way to make managerial decisions while also taking ethical issues into account.
Thinking through the steps of ethical decision-making may also be helpful as you strive to make good decisions. James Rest’s ethical decision-making model identifies four components to ethical decision-making. Note that a failure at any point in the chain can lead to unethical actions. Taking the time to identify possible ethical implications will help you develop moral sensitivity, which is a critical first step to ensuring that you are making ethical decisions.
- Moral sensitivity—recognizing that the issue has a moral component
- Moral judgment—determining which actions are right vs. wrong
- Moral motivation/intention—deciding to do the right thing
- Moral character/action—actually doing what is right
Once you have determined that a decision has ethical implications (moral sensitivity), you must consider whether your various alternatives are right or wrong—whether or not they will cause harm, and if so, how much and to whom (moral judgment). If you aren’t sure about whether something is right or wrong, think about how you would feel if that decision ended up on the front page of a major newspaper. If you would feel guilty or ashamed, don’t do it! Pay attention to those emotional cues—they are providing important information about the option that you are contemplating.
The third step in the ethical decision-making model involves making a decision to do what is right (moral motivation/intention), and the fourth step involves following through on that decision (moral character/action).
This model may sound straightforward, but consider a situation in which your boss tells you to do something that you know to be wrong. When you push back, your boss makes it clear that you will lose your job if you don’t do what you’ve been told to do. Now, consider that you have family at home who rely on your income. Making the decision to do what you know is right could come at a substantial cost to you personally. In these situations, your best course of action is to find a way to persuade your boss that the unethical action will cause greater harm to the organization in the long-term.
Step 4: Selecting an Alternative
Once alternative options have been generated and analyzed, the decision maker must select one of the options. Sometimes this is easy—one option is clearly superior to the others. Often, however, this is a challenge because there is not a clear “winner” in terms of the best alternative. There may be multiple good options, and which one will be best is unclear even after gathering all available evidence. There may not be a single option that doesn’t upset some stakeholder group, so you will make someone unhappy no matter what you choose. A weak decision maker may become paralyzed in this situation, unable to select among the various alternatives for lack of a clearly “best” option. They may decide to keep gathering additional information in hopes of making their decision easier. As a manager, it’s important to think about whether the benefit of gathering additional information will outweigh the cost of waiting. If there are time pressures, waiting may not be possible.
Talk to Other People
This is another point in the process at which talking to others can be helpful. Selecting one of the alternatives will ultimately be your responsibility, but when faced with a difficult decision, talking through your choice with someone else may help you clarify that you are indeed making the best possible decision from among the available options. Sharing information verbally also causes our brains to process that information differently, which can provide new insights and bring greater clarity to our decision-making.
Step 5: Implementing the Selected Alternative
After selecting an alternative, you must implement it. This may seem too obvious to even mention, but implementation can sometimes be a challenge, particularly if the decision is going to create conflict or dissatisfaction among some stakeholders. Sometimes we know what we need to do but still try to avoid actually doing it because we know others in the organization will be upset—even if it’s the best solution. Follow-through is a necessity, however, to be effective as a manager.
If you are not willing to implement a decision, it’s a good idea to engage in some self-reflection to understand why. If you know that the decision is going to create conflict, try to think about how you’ll address that conflict in a productive way. It’s also possible that we feel that there is no good alternative, or we are feeling pressured to make a decision that we know deep down is not right from an ethical perspective. These can be among the most difficult of decisions. You should always strive to make decisions that you feel good about—which means doing the right thing, even in the face of pressures to do wrong.
Step 6: Evaluating the Effectiveness of Your Decision
Managers sometimes skip the last step in the decision-making process because evaluating the effectiveness of a decision takes time, and managers, who are generally busy, may have already moved on to other projects. Yet, evaluating effectiveness is important. When we fail to evaluate our own performance and the outcomes of our decisions, we cannot learn from the experience in a way that enables us to improve the quality of our future decisions.
Recognize that Perfection is Unattainable
Attending fully to each step in the decision-making process improves the quality of decision-making and, as we’ve seen, managers can engage in a number of tactics to help them make good decisions. However, mistakes will still be made. Effective managers recognize that they will not always make optimal (best possible) decisions because they may not have complete information and/or don’t have the time or resources to gather and process all the possible information. They accept that their decision-making will not be perfect and strive to make good decisions overall. Recognizing that perfection is impossible will also help managers to adjust and change if they realize later on that the selected alternative was not the best option.
Attributions
"Principles of Management" by David S. Bright, Anastasia H. Cortes, OpenStax is licensed under CC BY 4.0
https://openstax.org/books/principles-management/pages/2-5-improving-the-quality-of-decision-making
Porter's 5 Forces
Learning Objectives
4m Understand the relationship between price competition and competitive business organization.
Industry Microenvironment
A firm’s microenvironment includes customers, competitors, suppliers, employees, shareholders, and media. Firms must understand their own microenvironment in order to successfully compete in an industry. All firms are part of an industry—a group of firms all making similar products or offering similar services, for example automobile manufacturers or airlines. Firms in an industry may or may not compete directly against one another, but they all face similar situations in terms of customer interests, supplier relations, and industry growth or decline.
Harvard strategy professor Michael Porter developed an analysis tool to evaluate a firm’s microenvironment. Porter’s Five Forces is a tool used to examine different micro-environmental groups in order to understand the impact each group has on a firm in an industry (see Figure 2.3.5a). Each of the forces represents an aspect of competition that affects a firm’s potential to be successful in its industry. It is important to note that this tool is different than Porter’s generic strategy typology that we will discuss later.
Industry Rivalry
Industry rivalry, the first of Porter’s forces, is in the center of the diagram. Note that the arrows in the diagram show two-way relationships between rivalry and all of the other forces. This is because each force can affect how hard firms in an industry must compete against each other to gain customers, establish favorable supplier relationships, and defend themselves against new firms entering the industry.
When using Porter’s model, an analyst will determine if each force has a strong or weak impact on industry firms. In the case of rivalry, the question of strength focuses on how hard firms must fight against industry rivals (competitors) to gain customers and market share. Strong rivalry in an industry reduces the profit potential for all firms because consumers have many firms from which to purchase products or services and can make at least part of their purchasing decisions based on prices. An industry with weak rivalry will have few firms, meaning that there are enough customers for everyone, or will have firms that have each staked out a unique position in the industry, meaning that customers will be more loyal to the firm that best meets their particular needs.
Threat of New Entrants
In an industry, there are incumbent (existing) firms that compete against each other as rivals. If an industry has a growing market or is very profitable, however, it may attract new entrants—either firms that start up in the industry as new companies or firms from another industry that expand their capabilities or target markets to compete in an industry that is new to them. For instance, during the COVID-19 pandemic, Suave began making and marketing hand sanitizer, which had been a market cornered by only a few firms, such as Purell.
Different industries may be easier or harder to enter depending on barriers to entry—factors that prevent new firms from successfully competing in the industry. Common barriers to entry include cost, brand loyalty, and industry growth. For example, the firms in the airline industry rarely face threats from new entrants because it is very expensive to obtain the equipment, airport landing rights, and expertise to start up a new airline.
Brand loyalty can also keep new firms from entering an industry, because customers who are familiar with a strong brand name may be unwilling to try a new, unknown brand.
Industry growth can increase or decrease the chances a new entrant will succeed. In an industry with low growth, new customers are scarce, and a firm can only gain market share by attracting customers from other firms. Think of all the ads you see and hear from competing cell phone providers. Cell phone companies are facing lower industry growth and must offer consumers incentives to switch from another provider. On the other hand, high-growth industries have an increasing number of customers, and new firms can successfully appeal to new customers by offering them something existing firms do not offer.
It is important to note that barriers to entry are not always external, firms often lobby politicians for regulations that can be a barrier to entry.
Threat of Substitutes
In the context of Porter’s model, a substitute is any other product or service that can satisfy the same need for a customer as an industry’s offerings. Be careful not to confuse substitutes with rivals. Rivals offer similar products or services and directly compete with one another. Substitutes are completely different products or services that consumers would be willing to use instead of the product they currently use. For example, the fast-food industry offers quickly prepared, convenient, low-cost meals. Customers can go to McDonald’s, Wendy’s, or Burger King to get a burger and fries—all of these firms compete against each other for business. However, their customers are really just hungry people. What else could you do if you were hungry? You could go to the grocery store and buy food to prepare at home. McDonald’s does not directly compete against Kroger for customers, because they are in different industries, but McDonald’s does face a threat from grocery stores because they both sell food. How does McDonald’s defend itself from the threat of Kroger as a substitute? By making sure their food is already prepared and convenient to purchase—your burger and fries are ready to eat and available without even getting out of your car.
Supplier Power
Virtually all firms have suppliers who sell parts, materials, labor, or products. Supplier power refers to the balance of power in the relationship between firms and their suppliers in an industry. Suppliers can have the upper hand in a relationship if they offer specialized products or control rare resources. For example, when Sony develops a new PlayStation model, it often works with a single supplier to develop the most advanced processor chip it can for their game console. That means its supplier will be able to command a fairly high price for the processors, an indication that the supplier has power. On the other hand, a firm that needs commodity resources such as oil, wheat, or aluminum in its operations will have many suppliers to choose from and can easily switch suppliers if price or quality is better than a new partner. Commodity suppliers usually have low power.
Buyer Power
The last of Porter’s forces is buyer power, which refers to the balance of power in the relationship between a firm and its customers. If a firm provides a unique good or service, it will have the power to charge its customers premium prices, because those customers have no choice but to buy from the firm if they need that product. In contrast, when customers have many potential sources for a product, firms will need to attract customers by offering better prices or better value for the money if they want to sell their products. One protection firms have against buyer power is switching costs, the penalty consumers face when they choose to use a particular product made by a different company. Switching costs can be financial (the extra price paid to choose a different product) or practical (the time or hassle required to switch to a different product). For example, think about your smartphone. If you have an iPhone now, what would be the penalty for you to switch to a non-Apple smartphone? Would it just be the cost of the new phone? Smartphones are not inexpensive, but even when cell phone service providers offer free phones to new customers, many people still don’t switch. The loss of compatibility with other Apple products, the need to transfer apps and phone settings to another system, and the loss of favorite iPhone features, such as iMessage, are enough to keep many people loyal to their iPhones.
Attributions
"Principles of Management" by David S. Bright, Anastasia H. Cortes, OpenStax is licensed under CC BY 4.0
Resources and Capabilities of a Firm
Learning Objectives
4m Understand the relationship between price competition and competitive business organization.
The Internal Environment
The internal environment consists of members of the firm itself, investors in the firm, and the assets a firm has. Employees and managers are good examples; they are firm members who have skills and knowledge that are valuable assets to their firms.
Resources and Capabilities
A firm’s resources and capacities are the unique skills and assets it possesses. Resources are things a firm has to work with, such as equipment, facilities, raw materials, employees, and cash. Capabilities are things a firm can do, such as deliver good customer service or develop innovative products to create value. Both are the building blocks of a firm’s plans and activities, and both are required if a firm is going to compete successfully against its rivals. Firms use their resources and leverage their capabilities to create products and services that have some advantage over competitors’ products. For example, a firm might offer its customers a product with higher quality, better features, or lower prices. Not all resources and capabilities are equally helpful in creating success, though. Internal analysis identifies exactly which assets bring the most value to the firm. Firms that can amass critical resources and develop superior capabilities will succeed in competition over rivals in their industry.
The Value Chain
Before evaluating the role of resources and capabilities in firm success, let’s take a look at the importance of how a firm uses those factors in its operations. A firm’s value chain is the progression of activities it undertakes to create a product or service that consumers will pay for. A firm should be adding value at each of the chain of steps it follows to create its product. The goal is for the firm to add enough value so that its customers will believe that the product is worth buying for a price that is higher than the costs the firm incurs in making it. Figure 2.3.6a illustrates a hypothetical value chain for some of Walmart’s activities. Note that primary activities, the ones across the bottom half of the diagram, are the actions a firm takes to directly provide a product or service to customers. And support activities, the ones across the top of the diagram, are actions required to sustain the firm that are not directly part of product or service creation.
In Figure 2.3.6a, note that value increases from left to right as Walmart performs more activities. If it adds enough value through its efforts, it will profit when it finally sells its services to customers. By working with product suppliers (procurement), getting those products to store locations efficiently (inbound logistics), and automatically keeping track of sales and inventory (information technology), Walmart is able to offer its customers a wide variety of products in one store at low prices, which is a service customers value.
Using VRIO
Successful firms have a wide range of resources and capabilities that they can use to maintain their success and grow into new ventures. And strategists evaluate these resources and capabilities to determine if they are sufficiently special to help the firm succeed in a competitive industry. Evaluating a firm’s internal environment is not just a matter of counting heads. A thorough analysis of a firm’s internal situation provides a manager with an understanding of the resources available to pursue new initiatives, innovate, and plan for future success.
The analytical tool used to assess resources and capabilities is called VRIO. This is an acronym developed to remind managers of the questions to ask when evaluating their firms’ resources and capabilities. VRIO stands for value, rarity, imitation, and organization. And each term comes with a question. If each question can be answered with a “yes,” the resource or capability being evaluated can be the source of a competitive advantage for the firm (see Figure 2.3.6b).
VRIO with Starbucks
Imagine that you are a top manager for Starbucks and you want to understand why you are able to be successful against rivals in the coffee industry. You make a list of some of Starbucks’ resources and capabilities and use VRIO to determine which ones are key to your success. See your Starbucks example list of Resources and Capabilities in Table 2.3.6a.
Starbucks’ Resources and Capabilities | |
Resources | Capabilities |
Brand name | Making quality coffee drinks |
Thousands of locations worldwide | Delivering excellent customer service |
Cash | Training excellent staff |
Loyal customers | Paying above-average wages |
Well-trained employees | Retaining quality employees |
Next, you decide to evaluate a few of your resources and capabilities with VRIO (see Table 2.3.6b):
Evaluating Starbucks’ VRIO | |||||
Resource/Capability | Is it valuable? | Is it rare? | Is it difficult to imitate? | Is Starbucks organized to capture its value? | Can it be a basis for competitive advantage? |
Brand name | Yes | Yes | Yes | Yes | Yes |
Delivering excellent customer service | Yes | Yes | Yes | Yes | Yes |
Thousands of locations worldwide | Yes | No | No | Yes | No |
According to the example evaluation above, Starbucks’ brand and level of customer service help it compete and succeed against rivals. However, simply having a lot of locations globally isn’t enough to beat rivals—McDonald’s and Subway also have thousands of worldwide locations and both can easily serve coffee. Starbucks, however, can succeed against these rivals because of their brand and customer service.
Attributions
"Principles of Management" by David S. Bright, Anastasia H. Cortes, OpenStax is licensed under CC BY 4.0
Access for free at: https://openstax.org/books/principles-management/pages/8-5-the-internal-environment
Competition and Strategy of a Firm
Learning Objectives
4m Understand the relationship between price competition and competitive business organization.
Strategic Planning Process
Businesses exist to make profits by offering goods and services in the marketplace at prices that are higher than the costs they incurred while creating those goods and services. Businesses rarely exist alone in an industry; competition is a usually a key part of any marketplace. This means that businesses must find ways to attract customers to their products and away from competitors’ products. Strategy is the process of planning and implementing actions that will lead to success in competition.
The analytical tools we discuss here are part of the strategic planning process. Managers cannot successfully plan to compete in an industry if they don’t understand its competitive landscape. It is also unlikely that a firm will be successful if they are planning to launch a new product they are not equipped to make.
Competitive Advantage
A firm is described as having a competitive advantage when it successfully attracts more customers, earns more profit, or returns more value to its shareholders than rival firms do. A firm achieves a competitive advantage by adding value to its products and services or reducing its own costs more effectively than its rivals in the industry.
In any industry, multiple firms compete against each other for customers by offering better or cheaper products than their rivals. Porter’s Five Forces model (discussed in section 2.3.5) is centered around rivalry, which is a synonym for competition. Firms use tools and research methods to understand what consumers are interested in and use VRIO (see section 2.3.6) to evaluate their own resources and capabilities so that they can figure out how to offer products and services that match those consumer interests, as well as how to offer better quality and price than their competitors.
Business-level Competition Strategies
Business-level strategy is the general way that a business organizes its activities to compete against rivals in its product’s industry. Michael Porter (the same Harvard professor who developed the Five Forces Model) defined three generic business-level strategies that outline the basic methods of organizing to compete in a product market. He called the strategies “generic” because these ways of organizing can be used by any firm in any industry. They include cost leadership, differentiation strategy, and focus. Porter’s typology assumes that firms can succeed through either cost leadership or differentiation. Trying to combine these two, Porter suggests, can lead to a firm being stuck in the middle. And Porter’s focus is where the intended market is carefully considered.
Cost Leadership
When pursuing a cost-leadership strategy, a firm offers customers its product or service at a lower price than its rivals can. To achieve a competitive advantage over rivals in the industry, the successful cost leader tightly controls costs throughout its value chain activities. Supplier relationships are managed to guarantee the lowest prices for parts, manufacturing is conducted in the least expensive labor markets, and operations may be automated for maximum efficiency. A cost leader must spend as little as possible producing a product or providing a service so that it will still be profitable when selling that product or service at the lowest price. Walmart is the master of cost leadership, offering a wide variety of products at lower prices than competitors because it does not spend money on fancy stores, it extracts low prices from its suppliers, and it pays its employees relatively low wages.
Differentiation
Not all products or services in the marketplace are offered at low prices, of course. A differentiation strategy is exactly the opposite of a cost-leadership strategy. While firms do not look to spend as much as possible to produce their output, firms that differentiate try to add value to their products and services so they can attract customers who are willing to pay a higher price. At each step in the value chain, the differentiator increases the quality, features, and overall attractiveness of its products or services. Research and development efforts focus on innovation, customer service is excellent, and marketing bolsters the value of the firm brand. These efforts guarantee that the successful differentiator can still profit even though its production costs are higher than a cost leader’s. Starbucks is a good example of a differentiator: it makes coffee, but its customers are willing to pay premium prices for a cup of Starbucks coffee because they value the restaurant atmosphere, customer service, product quality, and brand.
Focus
Porter’s third generic competitive strategy, focus, is a little different from the other two. A firm that focuses still must choose one of the other strategies to organize its activities. It will still strive to lower costs or add value. The difference here is that a firm choosing to implement a focused strategy will concentrate its marketing and selling efforts on a smaller market rather than a broader one. A firm following a focus-differentiation strategy, for example, will add value to its product or service that a few customers will value highly, either because the product is specifically suited to a particular use or because it is a luxury product that few can afford. For example, Flux is a company that offers custom-made bindings for your snowboard. Flux is a focus differentiator because it makes a specialized product that is valued by a small market of customers who are willing to pay premium prices for high-quality, customized snowboarding equipment.
Strategic Groups
When managers analyze their competitive environment and examine rivalry within their industry, they are not confronted by an infinite variety of competitors. Although there are millions of businesses of all sizes around the globe, a single business usually competes mainly against other businesses offering similar products or services and following the same generic competitive strategy. Groups of businesses that follow similar strategies in the same industry are called strategic groups, and it is important that a manager know the other firms in their strategic group. Rivalry is fiercest within a strategic group, and the actions of one firm in a group will elicit responses from other group members, who don’t want to lose market share in the industry. The examples given in Figure 2.3.7b are all in the retail industry; however, they don’t all compete directly against one another.
Figure 2.3.7b Strategic Groups in the Retail Industry (Credit: Copyright Rice University, OpenStax, under CC-BY 4.0 license)
Although some cross competition can occur (for example, you could buy a Kate Spade wallet at Nordstrom), firms in different strategic groups tend to compete more with each other than against firms outside their group. Although Walmart and Neiman Marcus both offer a wide variety of products, the two firms do not cater to the same customers, and their managers do not lose sleep at night wondering what each might do next. On the other hand, a Walmart manager would be concerned with the products or prices offered at Target; if laundry detergent is on sale at Target, the Walmart manager might lose sales from customers who buy it at Target instead, and so the Walmart manager might respond to Target’s sale price by discounting the same detergent at Walmart.
Strategic Positioning
A firm’s decisions on how to serve customers and compete against rivals is called strategic positioning. In order to develop its position, a firm combines its analysis of the competitive environment, including the firm’s own resources and capabilities, its industry situation, and facts about the macro environment. A strategic position includes a choice of generic competitive strategy, which a firm selects based on its own capabilities and in response to the positions already staked out by its industry rivals. The firm also determines which customers to serve and what those customers are willing to pay for. A strategic position also includes decisions about what geographic markets to participate in.
Competitive advantage is achieved when a firm attracts more customers or makes more profit than rivals. This cannot happen unless the firm organizes its activities to provide customers with better value than rivals. This means a firm’s strategic position should try to be unique in some way that competitors cannot imitate quickly or easily.
Attributions
"Principles of Management" by David S. Bright, Anastasia H. Cortes, OpenStax is licensed under CC BY 4.0
Access for free at: https://openstax.org/books/principles-management/pages/8-6-competition-strategy-and-competitive-advantage
SWOT Analysis
Learning Objectives
6f Employ a SWOT analysis to evaluate business strategies.
SWOT Analysis
SWOT is one of the very common tool firms use to analyze their strategic and competitive situations. SWOT is an acronym for strengths, weaknesses, opportunities, and threats. Firms use SWOT analysis to get a general understanding of what they are good or bad at, as well as which factors outside their doors might present chances for success or difficulty. Let’s take a look at SWOT analysis piece by piece (see Figure 2.3.8a).
Strengths
A firm’s strengths are, to put it simply, what it is good at. Nike is good at marketing sports products; McDonald’s is good at making food quickly and inexpensively; and Ferrari is good at making beautiful fast cars. When a firm analyzes its strengths, it compiles a list of its capabilities and assets. Does the firm have a lot of cash available? That is a strength. Does the firm have highly skilled employees? Another strength. Knowing exactly what it is good at allows a firm to make plans that exploit those strengths. Nike can plan to expand its business by making products for an athlete it doesn’t currently serve. This is why the company developed the sport hijab for Muslim women; someone analyzed the market for athletes who were underserved and realized Nike’s strengths allowed them to fulfill the needs of female athletes who adhere to Islam. Its sports marketing expertise helped Nike to successfully launch that new product line.
Weaknesses
A firm’s weaknesses are what it is not good at—things that it does not have the capabilities to perform well. Weaknesses are not necessarily faults—remember that not all firms can be great at all things. When a firm understands its weaknesses, it will avoid trying to do things it does not have the skills or assets to succeed in, or it will find ways to improve its weaknesses before undertaking something new. A firm’s weaknesses are simply gaps in capabilities, and those gaps do not always have to be filled within the firm.
SWOT analysis alerts firms to the gaps in their capabilities so they can work around them, find help in those areas, or develop capabilities to fill the gaps. For example, Paychex is a firm that handles payroll for over 600,000 firms. Paychex processes hours, pay rates, tax and benefits deductions, and direct deposit for firms that would rather not have to perform those tasks themselves. A large firm would need to have a team of employees dedicated to fulfilling that task and equip that team with software systems to do the job efficiently and accurately. For Paychex, these capabilities are a company strength—that’s what it does. Other companies can hire Paychex to fulfill their payroll and accounting needs is they do not desire for such to be a company strength; that way they can focus on the things they do desire to be strong at.
Opportunities
While strengths and weaknesses are internal to an organization, opportunities and threats are always external. An opportunity is a potential situation that a firm is equipped to take advantage of. Think of opportunities in terms of things that happen in the market. Opportunities offer positive potential; however, sometimes a firm is not equipped to take advantage of an opportunity, which makes an entire SWOT analysis essential—and not just a partial one.
For example, Daimler—the manufacturer of Mercedes-Benz and Smart cars—recently started a car-sharing service in Europe, North America, and China called Car2Go. Daimler recognized that as cities are becoming more populated parking is becoming scarcer. Younger consumers who live in cities are starting to question whether it makes sense to own a car at all, when public transportation is available and parking is not. Sometimes, however, a person might need a car to travel outside the city or transport a special purchase. Cars2Go offers a temporary car service to this new market of part-time drivers. By establishing Car2Go, Daimler has found a way to sell the use of its products to people who would not buy them outright. However, it would not make sense for Walmart to start such a business, as this particular opportunity would require them to develop new strengths that may be too costly for their established business venture.
Threats
When a manager assesses the external competitive environment, they label anything that would make it harder for their firm to be successful as a threat. A wide variety of situations and scenarios can threaten a firm’s chances of success—from a downturn in the economy to a competitor launching a better version of a product the firm also offers. A good threat assessment looks thoroughly at the external environment and identifies threats to the firm’s business so it can be prepared to meet them. Opportunities and threats can also be a matter of perspective or interpretation: the Car2Go service that Daimler developed to serve young urban customers who don’t own cars could also be cast as a defensive response to the trend away from car ownership in this customer group. Daimler could have identified decreasing sales among young urban professionals as a threat, which is what led to Car2Go as an alternative way to gain revenue from these otherwise lost customers.
The Limitations of SWOT Analysis
Although a SWOT analysis can identify important factors and situations that affect a firm, it only works as well as the person doing the analysis. SWOT can generate a good evaluation of the firm’s internal and external environments, but it is more likely to overlook key issues because it is difficult to identify or imagine everything that could, for example, be a threat to the firm. That’s why the remainder of this chapter will present tools for developing a strategic analysis that is more thorough and systematic in examining both the internal and external environments that firms operate in.
Attributions
"Principles of Management" by David S. Bright, Anastasia H. Cortes, OpenStax is licensed under CC BY 4.0
https://openstax.org/books/principles-management/pages/8-2-using-swot-for-strategic-analysis