1.6 Choosing Strategy and Goals

Based on the strengths and weaknesses of the firm and the opportunities and threats that prevail in the environment, managers must formulate a strategy and goals. There are many levels of strategy and goals that should build on one another and ultimately be consistent with the overall mission of the organization. The grand strategy is the overarching plan for the firm. Under that grand strategy umbrella, there may be corporate-level strategies and business-level strategies. Furthermore, those strategies can consist of more specific strategic goals, tactical goals, and operational goals.

Grand Strategy

Grand strategy is high-level strategy for the organization that provides basic direction and long-term goals.¹² Grand strategies typically consist of an objective to grow the business, to maintain current revenue and profit levels, or reduce the size of the business to restructure for the future. Facebook is an example of a company that is seeking high growth. Many owners of lifestyle ventures—small businesses that provide income for the owners—have the grand strategy of maintaining a stable size from year to year. General Motors recently enacted a retrenchment strategy in which it cut brands like Oldsmobile and Saturn and downsized the company in order to be more competitive in the market.

Corporate-Level Strategy

Corporate-level strategy determines the types of business in which the firm will compete. For example, Coca-Cola is in the business of making soft drinks and other beverages. Coca-Cola is focused on making and distributing beverages. On the other hand, PepsiCo competes in the same business as Coca-Cola, but PepsiCo’s management team has also determined to be a major player in snacks (Frito-Lay) and other related foods (Quaker Oats). At the corporate level, executives must determine the right business mix to create a competitive advantage for the corporation. PepsiCo executives feel that there are significant synergies between snack foods and beverages insomuch that they are able to leverage those synergies to grow both business segments in a way that they would not be able to accomplish if the segments were independent businesses.¹³ Therefore, PepsiCo has sought more diversification in its businesses than Coca-Cola has.

Diversification

Diversification is seeking to expand into related or unrelated industries. PepsiCo’s diversification strategy sought to acquire related businesses that might benefit from shared distribution and marketing efforts. In contrast, General Electric has broadly diversified the company into many unrelated industries. GE competes in kitchen appliances, commercial finance, medical technologies, and jet engines, among others. The purpose of diversification is generally to decrease risk, as it is less likely for a range of products to all experience a downturn at the same time.

Vertical Integration

Executives may also choose to diversify through vertical integration. Vertical integration is defined as the integration of new businesses that expand the range of value chain activities for the company. For example, PepsiCo could choose backward integration by moving into supplier businesses. It could purchase agriculture businesses to grow its own oranges for orange juice or sugar for soft drinks. Or it could choose forward integration by entering the retail market. PepsiCo could begin to compete in the restaurant industry (which it has done in the past) or the convenience store industry in order to emphasize the sale of the beverages and snack foods that it manufactures and distributes.

Mergers, Acquisitions, and Strategic Alliances

Managers may consider a number of strategic options to accomplish the desired business mix. Mergers, acquisitions, and strategic alliances are frequently used strategic tools. A merger happens when two or more organizations combine to become one. In 1965, Pepsi-Cola merged with Frito-Lay to create PepsiCo.¹⁴ Mergers often result in a company with a new name, but that is not a necessity. In 2001, PepsiCo participated in another merger, this time with the Quaker Oats Company, but it retained the name of PepsiCo.¹⁵ Such mergers have allowed PepsiCo to diversify its overall business mix with related but separate product lines.

An acquisition differs from a merger in details of ownership control and ongoing management control. Strictly speaking, in an acquisition, one company purchases and assimilates another company. As an example, PepsiCo acquired Tropicana in 1998, and Tropicana’s juice beverages were integrated into the PepsiCo beverage business unit. From a strategic viewpoint, mergers and acquisitions are very similar, as the net result is a combination of the resources and capabilities of the two companies.

If a firm has a deficiency in resources or capabilities but does not want to pursue a merger or acquisition, it may seek a strategic alliance with another firm. A strategic alliance is an agreement between two or more distinct companies in which they choose to share strategic resources or capabilities. Strategic alliances are commonly used in product development when one or both companies lack the needed expertise or resources to develop, manufacture, or sell a new product offering. At times, allying with a partner may be more timely and cost-effective than trying to develop that particular expertise in house. In 2012, Ocean Spray Cranberries entered a strategic alliance with PepsiCo in Latin America. As a result of this alliance, PepsiCo has the exclusive rights to manufacture and distribute some of Ocean Spray’s juice products in the Latin American market.¹⁶ Ocean Spray does not have the manufacturing and distribution resources that PepsiCo has in Latin America, and PepsiCo does not have the brand recognition or expertise in cranberry-based drinks that Ocean Spray has. The strategic alliance therefore allows both companies to benefit from sharing important resources and capabilities.

Business-Level Strategy

Business-level strategy is concerned with how the business unit competes within the industry. Business-level strategy focuses on developing the right product line within the chosen business, effectively marketing and selling the products or services, efficiently managing the operations, and so forth. Business level strategy is best accomplished by setting clear goals for the business.

Goals

A goal is a desired future result that the organization strives to achieve. Goals provide direction and motivation to members of the organization. Effective goals are specific, measurable, relevant, challenging but achievable, and linked to appropriate time periods and rewards. Goals act as a guide to action and can be used to provide direction for future decisions. Goals also help to motivate employees to work toward a common purpose.¹⁷ They provide a standard that can be used to measure the organization’s performance.

In order to achieve higher-level strategic goals, managers may set specific tactical and operational goals. Each of the lower-level goals should be directly tied to the accomplishment of a higher-level goal. For example, a strategic goal may include, “We will achieve 40 percent market share in the U.S. market by the end of 2013.” Tactical goals related to marketing, such as “Launch a new online product promotion,” might be set to help improve market share during the next quarter. Furthermore, the web-based marketing team may set an operational goal to increase the page views of the new promotion by 25 percent during the next 30 days. Such goals direct and encourage employees to develop and execute plans to achieve the stated objectives.