SECTION ONE STRATEGY ALIGNMENT AND ADDING VALUE By

SECTION ONE STRATEGY, ALIGNMENT AND ADDING VALUE By Kutay Kalkan for Dr. De. Micco

OBJECTIVES 1. 2. 3. 4. 5. 6. 7. Understand the concept of strategic management as applied to the service and hospitality industry. Be able to describe the coalignment model and its application to the hospitality industry. Appreciate that strategic management is a way of thinking, not a process to be performed annually and then forgotten for a year. Understand the supply-and-demand technology relationships that exist in the service industry and how they affect strategy. Understand the unique elements, especially quality and value, of the service industry and how they affect strategy making. Develop an appreciation of forces driving change in the hospitality industry and what impact they will have on the manager of the future. Understand the importance of leadership to the strategic management process.

Objectives 1) Understand the concept of strategic management as applied to the service and hospitality industry. v Concept of strategic management and the manner in which it has evolved in modern times. Ex: General Motors, Atlantic Telephone v Please read pages 2 through 5 in the text book for further information.

Objectives 2) Be able to describe the coalignment model and its application to the hospitality industry. v Please read pages 6 through 9 in the text book for further information. Environment Events Strategy Choice Firm Structure Coalignment Firm Performance

Coalignment Model - Environment Events Strategy Choice Firm Structure Firm Performance Major forces driving change in the remote and immediate environments of the organization. These forces, often referred to as trends, create opportunities and pose threats to the firm. They shape and force change in both predictable and unpredictable patterns.

Coalignment Model – Strategy Choice Environment Events Strategy Choice Firm Structure Firm Performance The choice of competitive methods used by the firm to take advantage of the threats and opportunities in the business environment. These methods should provide the firm with sustainable competitive Core Competencies.

Coalignment Model – Firm Structure Environment Events Strategy Choice Firm Structure The effective and efficient allocation of the firm’s resources to the successful execution of the firm’s competitive methods. Firm Performance

Coalignment Model – Firm Performance Environment Events Strategy Choice Firm Structure Firm Performance • Cash Flow per share of equity • Aggregate value of competitive methods • EPS, ROA, ROI • Customer service

Objectives 3) Appreciate that strategic management is a way of thinking, not a process to be performed annually and then forgotten for a year. v Strategic management must be imbedded in every decision, every activity and every service encounter with the customer. v Please read pages 9 through 13 in the text book. v Please read article 5 to see the performance statistics of 1000 major US companies compared with their peers in 75 industry groups. You are going to realize that top companies are familiar to us. Why? Because strategic management is not temporary.

Objectives 4) Understand the supply-and-demand technology relationships that exist in the service industry and how they affect strategy. v Please read pages 13 through 18 in the text book. v Please read article 6 for an example of supply and demand relationships in the service industry. In the 1990 s, the supermarket and fast–food sectors grew rapidly in Argentina. Both were dominated by multinational firms, and their growth drove profound change in food market systems and farming. This article analyses the impact of this development on fruit and vegetables supply chains, in particular the way the advent of Mc. Donald’s affected the supply chain for frozen French fried potatoes. It shows that there is a tendency for such changes to favor medium and large producers, with evidence of the exclusion of small farmers.

Objectives 5) Understand the unique elements, especially quality and value, of the service industry and how they affect strategy making. v Please read pages 18 through 21 in the text book.

Objectives 6) Understand the unique elements, especially quality and value, of the service industry and how they affect strategy making. Forces Driving Chance (See page 22 in the text book) v Marketing, Distribution and Capacity Management. Ø Please read article 7 and article 10 to understand the growing strategic importance of technology and its contribution to marketing, distribution and capacity management in the hospitality industry. v Safety and Security Ø Please read article 9 to understand the impact of 9/11 on the hospitality industry. v Assets and Capital Ø Please read article 8 to understand how an organization adds value and how value can be measured. You are going to realize that IT has the leading role in growing firm value. v Technology Ø Ex : Lickable samples of products are being attached to magazines as a new type of advertisement. Please read article 3 for more information. v New Management Ø Ex : Please read the Mc. Donalds case at the end of this chapter and try to understand the importance of leadership and managerial skills for a company. v Sustainable Development Ø Ex : Includes green projects such as Clean Up the World, True Green, Global Tree Planting and Green Products Fair. Please read article 2 for more information. v Social Issues Ø Ex : All of the hotels in the US and Canada will become %100 smoke free. Please read article 1 for more information.

Objectives 7) Understand the importance of leadership to the strategic management process. v Please read pages 24 through 26 in the text book. v Please read article 4(case study of chapter 1) or article 5 for examples of turnaround strategies. v Subject of article 4 is “Turnaround at Mc. Donald’s”. v Subject of article 5 is “Turnaround in East Asian firms: Evidence from ethnic overseas Chinese communities”.

Tomorrow’s Hospitality Manager • A strategist - less craft skills, more business skills • A multifunctional manager • A change agent - boundary spanner • Visionary • Technologist • A Knowledge worker - information manager • Marketing on the information highway • How to buy and sell your way into the information highway • Evaluating and maintaining the best strategic alliances • Recognize, interact with, and utilize the resources of those who will own the information systems (information highway) • Capable of receiving, analyzing, synthesizing incredible amounts of information regarding: guest, internal operations, external data from capacity controllers • Utilize information to adjust to the speed of change • Monitor changes in an increasingly diverse/complex demand curve • Provide information to guest to satisfy their needs for safety and security • New leadership skills to motivate a more diverse workforce consisting of more knowledge workers

Porter’s Competitive Forces Model • Porter's 5 forces analysis is a framework for the industry analysis and business strategy development developed by Michael E. Porter of Harvard Business School in 1979. • It uses concepts developed in Industrial Organization (IO) economics to derive 5 forces that determine the competitive intensity and therefore attractiveness of a market. • Strategy consultants use Porter's five forces framework when making a qualitative evaluation of a firm's strategic position. • Porter's Five Forces include three forces from 'horizontal' competition: threat of substitute products, the threat of established rivals, and the threat of new entrants; and two forces from 'vertical' competition: the bargaining power of suppliers, bargaining power of customers. Each of them will be discussed in the following slides.

Porter Competitive Forces Model Potential New Entrants Bargaining Power of Suppliers Intra-Industry Rivalry Strategic Business Unit Substitute Products and Services Bargaining Power of Buyers

A Buyer Has Power If : v It has large, concentrated buying power that enables it to gain volume discounts and/or special terms or services. v What it is buying is standard or undifferentiated and there are multiple alternative sources. v It earns low profit margins so it has great incentive to lower its purchasing costs. v It has a strong potential to backward integrate.

A Supplier Has Power If : v Its product is unique or at least differentiated. v It has built up switching costs. v It provides benefits through geographic proximity to its customers. v It poses a definite threat to forward integrate into its customers’ business. v A long time working relationship provides unique capabilities.

Possible Barriers to Entry v Economies of scale. v Strong, established cost advantages. v Strong, established brands. v Proprietary product differences. v Major switching costs. v Limited or restrained access to distribution. v Large capital expenditure requirements. v Government policy. v Definite strong competitor retaliation.

Substitute Threats v Buyer propensity to substitute. v Relative price/performance of substitutes. v Switching costs.

Readings v Article 1 – A Breath for Fresh Air --- Marriott Goes 100% Smoke-Free in North America v Article 2 – Reducing Marriott’s Environmental Footprint v Article 3 – Marketers Salivate Over Lickable Ads v Article 4 – Turnaround at Mc. Donald’s(textbook) v Article 5 – Turnaround in East Asian firms: Evidence from ethnic overseas Chinese communities v Article 6 – Impact of Supermarkets and Fast-Food Chains on Horticulture Supply Chains in Argentina v Article 7 – Information Technology Strategy in the Hospitality Industry v Article 8 – Investing in Information Technology to Grow Firm Value v Article 9 – The Impact of 9/11 on the Hospitality Industry v Article 10 – The Internet as a Distribution Channel v Case Study Answers (Please check this after you write your own responses for the case study)

Chapter Questions 1. The Co-alignment Model describes and explains how successful hospitality managers respond to the environment and make strategic choices to attain sustainable competitive advantage. The environment here refers to: o external. o internal. o both external and internal. o none of the above. 2. Which statement is false? Competitive methods are: o made up of portfolios of products and services to achieve advantage in the market o place. o used in order to add value to the organization. o having an expected long life in the context of a changing environment. o chosen based on a consistent environment analysis. o all of the above.

3. Effective leaders are defined by: o popularity. o results. o followers. o responsibility. 4. Which is not a force driving change? o Marketing, distribution, and capacity management o Safety and security o Standardization o Assets and capital o Technology o New management o Sustainable development o Social issues

5. The logical sequence of components of the co-alignment principle is environment, strategic choice, firm structure, and firm performance. o True o False 6. Popularity is not leadership; results are what define effective leaders. o True o False 7. Service products are produced and consumed simultaneously, so they are perishable. o True o False

8. According to Peter Drucker, what are the four important truths that effective leaders should understand? 9. What are the secrets of the effective leader? 10. What are the seven major forces driving change? 11. What are the important points for strategic leaders to be successful? 12. What are the seven major forces driving change?

Student Learning Objectives On completion of this chapter, you will be able to; v Identify the 4 steps of co-alignment model and apply each to the hospitality industry. v Develop an appreciation of the difference that strategic management is a way of thinking, v v v rather than a process to be performed and then forgotten for a long period of time. Describe the supply-and-demand technology relationships that exist in the service industry and understand what role they play during strategy management and how they affect strategy. Identify the unique elements of the service industry such as quality and value and explain their effects on strategy making. Identify and define the 7 steps of forces driving change and give at least 1 hospitality related example for each of them. Identify the characteristics of a successful hospitality manager. Achieve a more practical understanding of strategy and decision making in hospitality. (Case Study) Comprehend the challenges of Porter’s Competitive Forces Model.

Case Study Answers 1) According to Olsen, in order for Mc. Donald’s to properly align itself with the forces driving change in the environment it competes in, in the detailed case study of Mc. Donald’s, Olsen started as by identifying the opportunities that exist for Mc. Donalds by scanning its remote environment. Olsen identified three major value drivers within the remote environment that will impact Mc. Donalds’ future strategy. They are described as: Aging Population, Biotechnology and Public Opinion. Mc. Donald’s scanned the environment, and aligned new strategies for recovery. They have used the coalignment model efficiently to assist the firm in responding to changes in the external environment and adapting its internal operations. Mc. Café is a good example for that. The trend of high quality cafe shops was rising, and Mc. Donald’s saw the opportunity in the market. To accommodate the current trend for high quality coffee and the popularity of coffee shops in general, Mc. Donald's introduced Mc. Cafés. The Mc. Café concept is a café-style accompaniment to Mc. Donald's restaurants. Mc. Café is a concept of Mc. Donald's Australia, starting with Melbourne in 1993. Today, most Mc. Donald's in Australia have Mc. Cafés located within the existing Mc. Donald's restaurant. In Tasmania there are Mc. Cafés in every store, with the rest of the states quickly following suite. After upgrading to the new Mc. Cafe look and feel, some Australian stores have noticed up to a 60% increase in sales. As of the end of 2003 there were over 600 Mc. Cafés worldwide.

Case Study Answers 2) In the recovery phase of a company, leaders are very important. The Mc. Donald’s case supported this thesis. Mc. Donald's hit bottom in 2003, posted its first-ever quarterly loss. In a management shake-up, the fast-food chain brought veteran executive Jim Cantalupo out of retirement to turn around the world's largest restaurant company (Leung, 2004). As CEO, Mr. Cantalupo faced some big problems: a tired brand, a saturated fast-food market and widening worries about waistlines. Then, earlier 2004, he came face to face with the first case of mad-cow disease found in the U. S. , a food-safety issue that had previously hurt Mc. Donald's profits abroad. Still, Mr. Cantalupo pressed on with his turnaround plan, spending the year tinkering with recipes of old favorites and launching a new global tagline, "I'm lovin' it, " with MTV-style commercials. Noting changing tastes, Mr. Cantalupo decided to make Mc. Donald's appetizing to health-conscious consumers by introducing fancy salads, apple slices and a low-carb menu in some markets. He got results, most impressively in the saturated U. S. market, where sales had slumped for years. By the help of faster service and menu changes, Mc. Donald's posted a fourth-quarter profit in 2004.

Case Study Answers 3) The key decisions that have resulted in that turnaround are as follows : Using technology by means of remodeling stores with automated machines in the kitchen to decrease labor cost and service time. Searching the environment and according to the developments in the environment, they have upgraded the service. New training methods. The complete training program includes seminars, conferences, and one-on-one sessions with corporate personnel. Mc. Donald’s pays the cost of the training materials; however, Mc. Donald’s does not pay for the time or reimburse expenses associated with training. During the course of the training, both franchisee and Mc. Donald’s have the right to change your minds about franchisee’s participation for any reason. You will be considered for a franchise only when Mc. Donald’s determines your training is successfully completed. Also they have improved an employee training program. Mc. Donald’s spent 96 millions on training in 2004 vs. 115 millions in 2003. Both years, it accounted for 5% of Mc. Donald’s expenditures. ◦ Remodeling and streamlining the menu. ◦ Overhauling cooking procedures. ◦ Enhancing the taste and consistency of the food.

Case Study Answers 4) Mc. Donald’s changed their menu. They have added dollar menu. And after the documentary –Super Size Me--, they have taken healthier foods more seriously because people were demanding. Menu items such as salads were added to the menu. The enormous success of the Dollar Menu, where all items cost $1, has helped stimulate 36 consecutive months of sales growth at stores open in 2005. In three years, revenue has increased by 33 percent and its shares have rocketed 170 percent, a remarkable turnaround for a company that only four years ago seemed to be going nowhere. Mc. Donald's has attracted considerable attention in the last few years for introducing to its menu healthy food items like salads and fruit. Yet its turnaround has come not from greater sales of healthy foods but from selling more fast-food basics, like double cheeseburgers and fried chicken sandwiches, from the Dollar Menu. They have taken the advantage of technology. Using handheld devices for communication and monitoring in order to reduce response time.