SECTION ONESTRATEGY, ALIGNMENT AND ADDING VALUEBy Kutay Kalkan for Dr. DeMiccoOBJECTIVES1. Understand the concept of strategic management as applied to the serviceand hospitality industry.2. Be able to describe the coalignment model and its application to the hospitalityindustry.3. Appreciate that strategic management is a way of thinking, not a process to beperformed annually and then forgotten for a year.4. Understand the supply-and-demand and technology relationships that exist inthe service industry and how they affect strategy.5. Understand the unique elements, especially quality and value, of the serviceindustry and how they affect strategy making.6. Develop an appreciation of forces driving change in the hospitality industry and whatimpact they will have on the manager of the future.7. Understand the importance of leadership to the strategic management process.Objectives1) Understand the concept of strategic management as applied to the serviceand hospitality industry. Concept of strategic management and the manner in which it has evolved in modern times.Ex: General Motors, Atlantic TelephoneObjectives2) Be able to describe the coalignment model and its application to the hospitalityindustry.CoalignmentEnvironmentEventsFirmPerformanceStrategyChoiceFirmStructureCoalignment Model – Environment EventsStrategyChoiceFirmStructureFirmPerformanceEnvironmentEventsMajor forces driving change in theremote and immediate environments of theorganization. These forces, often referred to astrends, create opportunities and pose threats tothe firm. They shape and force change in bothpredictable and unpredictable patterns.Coalignment Model – Strategy Choice The choice of competitive methods usedby the firm to take advantage of the threatsand opportunities in the businessenvironment. These methods shouldprovide the firm with sustainablecompetitive Core Competencies. EnvironmentEventsFirmStructureFirmPerformanceStrategyChoiceCoalignment Model – Firm Structure The effective and efficient allocationof the firm’s resources to the successfulexecution of the firm’s competitivemethods. EnvironmentEventsStrategyChoiceFirmPerformanceFirmStructureCoalignment Model – Firm Performance• Cash Flow per share of equity• Aggregate value of competitive methods•ROI• Customer serviceEnvironmentEventsStrategyChoiceFirmStructureFirmPerformanceFirmPerformanceObjectives3) Appreciate that strategic management is a way of thinking, not a process to beperformed annually and then forgotten for a year. Strategic management must be imbedded in every decision, every activity and every serviceencounter with the customer.Why?Because strategic management is not temporary.Objectives4) Understand the supply-and-demand and technology relationships that exist in theservice industry and how they affect strategy.In the 1990s, the supermarket andfast–food sectors grew rapidly in Argentina.Both were dominated by multinational firms,and their growth drove profound change infood market systems and farming. Thisarticle analyses the impact of thisdevelopment on fruit and vegetables supplychains, in particular the way the advent ofMcDonald’s affected the supply chain forfrozen French fried potatoes. It shows thatthere is a tendency for such changes tofavor medium and large producers, with evidence of the exclusion of small farmers.Objectives5) Understand the unique elements, especially quality and value, of the service industry and how they affectstrategy making.Forces Driving ChanceMarketing, Distribution and Capacity Management. understand the growing strategic importance of technology and its contribution tomarketing, distribution and capacity management in the hospitality industry. Safety and Security Assets and Capital understand how an organization adds value and how value can be measured. You are going to realize that IT has the leading role in growingfirm value. Technology Ex : Lickable samples of products are being attached to magazines as a new type of advertisement. New Management Ex : understand the importance of leadership and managerial skills for a company. Sustainable Development Ex : Includes green projects such as Clean Up the World, True Green, Global Tree Planting and GreenProducts Fair. Social Issues Ex : All of the hotels in the US and Canada will become %100 smoke free. Please read article 1 for moreinformation.Objectives7) Understand the importance of leadership to the strategic management process.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 capacitycontrollers• 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 diverseworkforce consisting of more knowledge workersPorter’s Competitive Forces Model• Porter’s 5 forces analysis is a framework for the industry analysis and business strategydevelopment developed by Michael E. Porter of Harvard Business School in 1979.• It uses concepts developed in Industrial Organization (IO) economics to derive 5forcesthat determine the competitive intensity and therefore attractiveness of a market.• Strategy consultants use Porter’s five forces framework when making a qualitativeevaluation of a firm’s strategic position.• Porter’s Five Forces include three forces from ‘horizontal’ competition: threat of substituteproducts, 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 ModelIntra-IndustryRivalryStrategic Business UnitBargainingPowerof BuyersBargainingPowerof SuppliersSubstituteProductsand ServicesPotentialNew EntrantsA Buyer Has Power If : It has large, concentrated buying power that enables it to gain volumediscounts and/or special terms or services. What it is buying is standard or undifferentiated and there are multiplealternative sources. It earns low profit margins so it has great incentive to lower itspurchasing costs. It has a strong potential to backward integrate.A Supplier Has Power If : Its product is unique or at least differentiated. It has built up switching costs. It provides benefits through geographic proximity to its customers. It poses a definite threat to forward integrate into its customers’business. A long time working relationship provides unique capabilities.Possible Barriers to Entry Economies of scale. Strong, established cost advantages. Strong, established brands. Proprietary product differences. Major switching costs. Limited or restrained access to distribution. Large capital expenditure requirements. Government policy. Definite strong competitor retaliation.Substitute Threats Buyer propensity to substitute. Relative price/performance of substitutes. Switching costs.Chapter Questions1. The Co-alignment Model describes and explains how successful hospitalitymanagers respond to the environment and make strategic choices to attainsustainable 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 marketo 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 managemento Safety and securityo Standardizationo Assets and capitalo Technologyo New managemento Sustainable developmento Social issues5. The logical sequence of components of the co-alignment principle isenvironment, strategic choice, firm structure, and firm performance.o Trueo False6. Popularity is not leadership; results are what define effective leaders.o Trueo False7. Service products are produced and consumed simultaneously, so they areperishable.o Trueo False8. According to Peter Drucker, what are the four important truthsthateffective 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 ObjectivesOn completion of this chapter, you will be able to;Identify the 4 steps of co-alignment model and apply each to the hospitality industry.Develop an appreciation of the difference that strategic management is a way of thinking,rather than a process to be performed and then forgotten for a long period of time.Describe the supply-and-demand and technology relationships that exist in the serviceindustry and understand what role they play during strategy management and how theyaffect strategy.Identify the unique elements of the service industry such as quality and value and explaintheir effects on strategy making.Identify and define the 7 steps of forces driving change and give at least 1 hospitalityrelated 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 Answers1) According to Olsen, in order for McDonald’s to properly align itself with the forces drivingchange in the environment it competes in, in the detailed case study of McDonald’s, Olsen startedas by identifying the opportunities that exist for McDonalds by scanning its remote environment.Olsen identified three major value drivers within the remote environment that will impactMcDonalds’ future strategy.They are described as: Aging Population, Biotechnology and Public Opinion.McDonald’s scanned the environment, and aligned new strategies for recovery. They have used thecoalignment model efficiently to assist the firm in responding to changes in the externalenvironment and adapting its internal operations.McCafé is a good example for that. The trend of high quality cafe shops was rising, andMcDonald’s saw the opportunity in the market. To accommodate the current trend for high qualitycoffee and the popularity of coffee shops in general, McDonald’s introduced McCafés. The McCaféconcept is a café-style accompaniment to McDonald’s restaurants. McCafé is a concept ofMcDonald’s Australia, starting with Melbourne in 1993. Today, most McDonald’s in Australia haveMcCafés located within the existing McDonald’s restaurant. In Tasmania there are McCafés inevery store, with the rest of the states quickly following suite. After upgrading to the new McCafelook and feel, some Australian stores have noticed up to a 60% increase in sales. As of the end of2003 there were over 600 McCafés worldwide.Case Study Answers2) In the recovery phase of a company, leaders are very important. The McDonald’s casesupported this thesis. McDonald’s hit bottom in 2003, posted its first-ever quarterly loss. In amanagement shake-up, the fast-food chain brought veteran executive Jim Cantalupo out ofretirement 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 wideningworries about waistlines. Then, earlier 2004, he came face to face with the first case of mad-cowdisease found in the U.S., a food-safety issue that had previously hurt McDonald’s profits abroad.Still, Mr. Cantalupo pressed on with his turnaround plan, spending the year tinkering with recipesof old favorites and launching a new global tagline, “I’m lovin’ it,” with MTV-style commercials.Noting changing tastes, Mr. Cantalupo decided to make McDonald’s appetizing to healthconscious consumers by introducing fancy salads, apple slices and a low-carb menu in somemarkets.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, McDonald’s posted a fourth-quarter profit in2004.Case Study Answers3) 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 todecrease labor cost and service time.Searching the environment and according to the developments in the environment, they haveupgraded the service.New training methods. The complete training program includes seminars, conferences, andone-on-one sessions with corporate personnel. McDonald’s pays the cost of the training materials;however, McDonald’s does not pay for the time or reimburse expenses associated with training.During the course of the training, both franchisee and McDonald’s have the right to change yourminds about franchisee’s participation for any reason. You will be considered for a franchise onlywhen McDonald’s determines your training is successfully completed. Also they have improvedan employee training program. McDonald’s spent 96 millions on training in 2004 vs. 115 millionsin2003. Both years, it accounted for 5% of McDonald’s expenditures.• Remodeling and streamlining the menu.• Overhauling cooking procedures.• Enhancing the taste and consistency of the food.Case Study Answers4) McDonald’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 weredemanding. Menu items such as salads were added to the menu. The enormous success of theDollar Menu,where all items cost $1, has helped stimulate 36 consecutive months of sales growth at stores openin 2005. In three years, revenue has increased by 33 percent and its shares have rocketed 170percent, a remarkable turnaround for a company that only four years ago seemed to be goingnowhere.McDonald’s has attracted considerable attention in the last few years for introducing to its menuhealthy food items like salads and fruit. Yet its turnaround has come not from greater sales ofhealthy foods but from selling more fast-food basics, like double cheeseburgers and fried chickensandwiches, from the Dollar Menu.They have taken the advantage of technology. Using handheld devices for communication andmonitoring in order to reduce response time.


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