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Choosing the Best StrategyLearning ObjectivesBy the ti

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This document discusses strategies for selecting the best strategy using a criteria matrix approach. It provides guidance on: 1. Selecting appropriate criteria to evaluate strategic alternatives, such as revenue growth, profitability, investment required, etc. The criteria chosen should represent what success means to the company. 2. Using a criteria matrix to rate how each strategic alternative performs on the selected criteria. This helps identify the best alternative and arguments to support its selection. 3. Developing detailed analyses and forecasts to supplement the criteria matrix, such as revenue and profitability projections for each alternative. This provides a more rigorous evaluation.

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Choosing the Best Strategy Learning Objectives By the time you have completed this chapter, you should be able to do the following: • Selectcriteriaappropriatetothecompanyanditspurposes,andapprec iatethatawidevarietyofcriteria exists. • Usethecriteriainacriteriamatrixtoevaluatestrategic- alternativebundlestohelpselectthebestone. • Recognizethedifferencesbetweencompany,partial,functional,and operationalobjectives,andamong objectives,goals,andstrategies. • Setcompany-wideobjectiveswithmoreconfidence. • Decideonastrategicintentforthecompanyandmajorprogramsrequir edtoimplementthestrategy. • Understandwhycontingencyplanningisnecessaryandhowtodevise meaningfultriggersandcontingencies. • Appreciatewhytheboardofdirectorshastobekeptinformedandinvol vedthroughoutthestrategic- decision-makingprocess. 7
age fotostock / SuperStock CHAPTER 7Section 7.1 Selecting Appropriate Criteria ChapterOutline 7.1 SelectingAppropriateCriteria 7.2 TheCriteriaMatrixandChoosingtheBestStrategy 7.3 DecidingonObjectives 7.4 ContingencyPlanning 7.5 KeepingtheBoardofDirectorsInvolved Thischapterexplainshowtochoosethebeststrategyforthecompanyfr omanumberofviable alternativesusingcarefullyselectedcriteriaandhowtoarguepersuasi velyforitsadoption.It alsoshowshowtoarriveattheotherstrategicdecisionsandkeepthebo ardofdirectorsinvolved throughtheprocess. 7.1 SelectingAppropriateCriteria Choosingamongalternativesbecomesalittleeasierwheneachalterna tiveiscomparedoneata timeagainstasetofcriteriaandtheresultsusedtosupportthechoi ce.B ecausesuchananaly- sisisofteninsufficienttodecideanissue,thedecisionmayeventuallyt urnonmoresubjective analysis.Whatkindsofcriteriaareappropriate?Becauseoneofthecon ditionsforcreatingagood bundleisthatifimplemented,itwouldleadtosuccessforthecompany,
thecriteriatoevaluate thebundlesshouldtogetherrepresentwhat“success”meanstothecom panyand,perhaps,the overallpurposeofthecompany. Dependingonthecompanyanditsparticularsituation,thecri - teriaexploredinthissectionarepossiblecandidatesthatcouldbeusedt oexamineacompany’s currentstandingandfutureoutlook. Shareholder value is a fairly com- moncriterion,notonlyforchoosing fromamongalternativestrategies but also from among alternative investments.Itrequiresthefirmto haveamodelforcomputingshare- holdervaluesothatthecomputa- tion for each strategic alternative or investment uses common val- uesofdiscountratesandcommon assumptionsaboutthefutureenvi- ronment. In this way, the results become comparable. Still, many managers and companies believe thatoneoftheprincipalpurposes ofstrategicplanningistoincrease shareholder value. So manag- ersshouldknowhowtocompute shareholdervalue. iStockphoto/Thinkstock One of the most important common criteria for choosing a strategy is revenue growth.
CHAPTER 7Section 7.1 Selecting Appropriate Criteria Additionally,strategicmanagementandplanningisbasedonanunder standingoftherelativecontri- butionofbrandstoshareholdervalue(Rappaport,1997).Forexample, theCoca-Colabrandaccounts for51%ofthevalueoftheCoca- ColaCompany,whichalsoincludes3,500otherbrandssuchas Dasani,Sprite,andSchweppes(CocaColaCompany,n.d.).Whenman agershaveasolidunderstand- ingofbrandvalue,theywillusethisaspectofshareholdervalueasakey criterioninplanning. Revenuegrowthisoneofthemostcommoncriteria,usedmoreoftenwh enafirm’srevenue growth has been inadequate or flat, or when issues of market share and market positioning arestrategicallysignificant.Astrikingrecentexampleofrevenuegro wthisillustratedbyIluka Resources,oneof2011’sbeststock- marketperformers.Ilukaposteda53%increaseinrevenue betweenthethirdandfourthquartersof2011(Ilukagrows,2012).Such performanceisoftena strongpredictoroftakeover,astrategicdecisionmadebasedontherev enue-growthcriterion. Profitabilityshouldbeusedwhenafirmhasinsufficientworkingcapit alorinadequateornegative cashflow,whenprofitsinrecentyearshavebeenflatornegative,orwh enitishighlyleveraged. Leveragedbuyouts(LBOs)relyonhugecashflowsandprofitsduringt hefirstyearfollowingthe LBO,sothatthehugedebtcanberapidlypaiddown.However,asanote ofcaution,itisrelatively easyto“mortgagethefuture”infavorofpresentprofits,forexample,b yreducinginvestmentin
R&Dornew- productdevelopment,sothat,asacriterion,shareholdervaluemaybes uperior,tak- ingintoaccountasitdoesa10-yearfuturestreamofearnings. Firmsvaryintheirpropensitytotakerisk.Theyaremoreinclinedtotak erisksthemorethatrisks havepaidofffortheminthepastandwhentheyhavesufficientcapitals othattheycanaffordto makemistakes.Butdegreeofriskorriskinessasacriterionismorethan this.Afirm’sculturecan, forexample,beriskaverse,inwhichcaseitwillavoidriskevenwhenth eriskhasoddsofsuccess thatappeartofavorit.Riskcanbeanalyzedandmeasured,butfewhavet heskillstoperformsuch analyses.Instead,theyprefertomakeariskydecisionaccordingtoguti nstinct,orassessriskby venturinganopinionortwo(guess- ing),orevenignoringanyunderly- ingrisk.Onewayinwhichriskcan be discussed among a group of peoplewhoarenotriskanalystsis as follows: Because all alternative bundlesexcept“statusquo”involve doingsomethingthecompanyhas never done before, “risk” can be used as a subjective measure of the likelihood that it can imple- mentthebundlesuccessfully.Some alternativesaresuretoscorehigher or lower than others when risk is viewedthisway. Amountofinvestmentrequiredis apracticalcriterion.Ifaparticular strategic alternative requires an
amount of capital the firm does not have or cannot secure, then it shouldn’t even be considered Dmitry Margolin/Hemera/Thinkstock When a company is looking at the amount of investment money required from investors, an appropriate criterion to con- sider would be return on investments and how soon the invest- ment may be recouped. CHAPTER 7Section 7.1 Selecting Appropriate Criteria abonafidealternativebecauseitfailstomeetthecriterionoffeasibilit y.Ofcourse,thefirm couldborrowmoremoneybutmustbecarefulnottoexceedsomevalue ofdebt-to-equityratio requiredbyitscreditorsorincreaseitsdebttothepointwhereitscashfl owcannotservice thedebt.Obtainingequitycapitalmayberelativelyeasyforapublicco mpanythathasbeen performingwell,butnotsoforaprivatecompany.Incertaincircumsta nces,thefirmcouldgo publicandraisesomeequitycapital;inothercircumstances,thatmayn otbepossible.Afirm couldfindapartnertosharesomeoftheriskandputupsomeofthecapita lrequired.Butin thiscase,profitsresultingfromthestrategymustalsobeshared.Finall y,beingacquiredbythe rightcompanycouldprovidethecapitalneededtofinanceastrategy,b utthisstepisdrasticand shouldbetakenonlyinthebestinterestsofthecompany,notjustasame ansofraisingcapital. Forinstance,SEOmozsoftwareCEOandfounderRandFishkinprovid
edadetailedaccountinhis blogofhisexperiencenegotiatinganacquisitionthatultimatelydidn’t makesenseforhiscom- pany(Fishkin,2011).Initsmostsimplisticapplication,allotherthing sbeingequal(whichthey neverare),itmakesmoresensetochooseabundlethatrequireslessinve stmentoveranother thatrequiresmore. Evenwhenacompanycancomeupwiththeinvestmentrequiredbyapar ticularalternative,an appropriatecriterionmightbereturnoninvestment(ROI,aprofitabili tymeasure)andhowsoon theinvestmentcanberecouped;abreakevenpointinmonthsisdesirabl e.Clearlyanalternative withamuchshorterbreakevenpointismoreattractivetoafirmwithsca rceresources,andone withahigherROIismoreattractivetoafirmforwhichROIisacriticalm easureofperformance. Itmaymakesensetochooseabundlethatrequiresahigherinvestmenti fthatinvestmentcanbe recoupedmorequicklyandyieldsahigherreturn,butnotethattheseare threeseparatecriteria andthebundlesareevaluatedoneachoneinturn. Allotherthingsbeingequal,afirmwouldchooseanalternativethatsui teditsexistingcorpo- ratecultureoveronethatneededaculturalchangetomakethestrategys ucceed.Justas“form followsfunction,”soalsodoes“culturefollowstrategy.”Thismeanst hatchangingtheculture tosupporttherightstrategymightbepreferabletolimitingacompanyt oastrategythatfits theexistingculture,orwheretheexistingcultureconstrainsthechoice ofstrategy.Havingsaid that,firmsthattrytochangetheirstrategyassumetheirculturewillalso
change,thenfindthe strategyalmostimpossibletoimplementbecausetheunchangedcultu reisimpedingit.Itiswell knownthatchangingacorporatecultureisexceedinglydifficultand,f or largeorganizations, takesalotoftime(recallthediscussioninSections2.9and2.10).Ifever yalternativeconsidered requiredtheculturetochange,thealternativethatmatchedtheexistin gcompanyculturethe mostandwouldthereforerequiretheleastchangeshould,perhaps,bec hosen.Ifafirmdoesnot haveacorecompetenceorcompetitiveadva ntage,itshouldcertainlytr ytoattainone,because competingwithoutoneresultsinbelow- averageindustryprofitsandaweakcompetitiveposi- tion.Thus,thefirmshouldlookforastrategicalternativethatwould,in time,helpitattainacore competenceandcompetitiveadvantage.Ifthefirmalreadypossessest heseattributes,thenthe alternativethatincreasesthesizeordurationofthecompetitiveadvant agethemostshouldbe preferred. Iftheindustryinwhichafirmcompeteshaslittleornobargainingpowe rwithitsbuyersorsuppli- ers,itsprofitabilitywillbeloworsubpara ndcompetitiveconditionsv erydifficult.Clearlyinsuch asituation,increasingitsbargainingpowerandgivingitsomeleverag eishighlydesirable.Oneof themosteffectivewaysofdoingthisisthroughdifferentiating.So,wo uldanyofthealternatives inquestionincreasethefirm’sbargainingpowerwitheitheritscustom ersorsuppliers?
CHAPTER 7Section 7.1 Selecting Appropriate Criteria Theremaybeissuesoftimingtoconsideramongthealternativesinque stion.Somealternatives aresensitivetowhentheyareimplemented,suchasacceleratingintrod uctionofanewproduct orenteringaparticularmarket.Ifimplementinganalternativenowinc reasesitslikelihoodofsuc- cessasopposedtodoingitlater,thismaybereasonenoughtochooseit,a llotherthingsbeing equal. Conversely, if doing it now reducesanyadvantageyouother- wisemighthave,suchasinvesting inamarketpushjustastheecon- omyturnsdownsharplyorwhena competitorintroducesabetterand cheaperproduct,thenthatmaybe reasonenoughtorejectthealter- native. However, using this crite- riontypicallyrequiresmoredata. Which alternative will most help thecompanymaintainorincrease itstechnologicalleadoveritscom- petitors?Orgiveitthetechnologi- cal lead it never had? Or help it becomemoreinnovativeandtech- nologicallycompetitive? As more companies realize that their biggest markets lie in for- eigncountries,developingaglobal presencecouldbecomeaprimefactor,whetherventuringintointernat ionalmarketsforthefirst
timeorincreasingalreadysubstantialmarketsharesincertaincountri es. Clearly,somecriteriamakesenseforsomecompaniesincertainsituati ons,soshouldbeused carefully.Others,suchasrevenuegrowth,profitability,degreeofrisk ,investmentrequired,share- holdervalue,degreeofculturalchangerequired,andcompetitiveretal iationapplytoalmostall corporatesituations. Thecriteriayouultimatelyuseinyouranalysismustfittheorganizatio nyouareanalyzing.For example,tosomeorganizations,profitistheprimaryindicatorofsucc ess.Elsewhere,success maybemeasuredbythenumberofjobsprovidedtothecommunity,the percentageofprofit donatedtocharitablecauses,orthereductionofwasteproducedduring thecourseofopera- tions.Mostofthecriteriadiscussedinthissectiondonotfitthecircums tancesofanonprofit organization.Thestrategic- planningprocessofanacademicdepartmentatastateuniversity usedthefollowingcriteriatohelpitchoosefromamongseveralalterna tives.Alternativesmust accomplishthefollowing: • Beinthebestinterestsofthedepartment’sfaculty • Raisethequalityofeducationandprograms • Enhancethedepartment’sreputationwithemployers • Increasethedepartment’sfinances • Makethedepartmentmorecompetitiveexternally Hemera/Thinkstock If there is an opportunity in foreign markets, it is important for
a company to develop a global presence, whether it is ventur - ing into the international market for the first time or increasing market share in selected countries. CHAPTER 7Section 7.2 The Criteria Matrix and Choosing the Best Strategy 7.2 TheCriteriaMatrixandChoosingtheBestStrategy Onemethodthathasbeendevelopedasatoolforevaluatingstrategybu ndlesiscalledthecriteria matrix.Itentailschoosingfiveorsixcriteriamostimportanttothefirm andassigninganumeri- calratingasameansofidentifyingthebeststrategy.Anotherbenefitof creatingandusingthe criteriamatrixistouseitasaworksheetindevelopingdefensibleandpe rsuasiveargumentsfor yourpreferredbundle. Applying the Criteria Experience has shown that using fiveorsix criteriato evaluatethe bundles makes the most sense. This range works because using toofewcriteriafailstocapturethe complexityinherentinthebundles, andusingtoomanyrunstheriskof introducingconflictingcriteriaand woulddilutetheeffectofeachcri- teriononthefinaloutcome. Whichcriteriatochooseisentirely up to your management team. “Playing”withseveralcriteriacan be a useful way to learn of the
bundles’sensitivitytovariouscom- binations of criteria. Managers should supplement this analysis withdetailedforecastsandanalyses.Forexample,toassesswhichbun dlemightyieldthemost revenuegrowthwereeachoneimplemented,theteamshouldconducta moredetailedsales forecastforeachbundleovertheplanninghorizon(threetofiveyears). Similarly,profitabilityand shareholder- valueanalysesshouldbeconducted,ratherthanguessing.Eventhoug hsuchprojec- tionsarestillestimatesandbasedonassumptions,theyrequiremorere flectionandthought,and soshouldbemorevaluable. Francisco Cruz/SuperStock The selection of criteria and rating bundles through the criteria matrix is an opportunity to develop the arguments you can use to defend your preferred choice. Discussion Questions 1. Manycandidatesforpossiblecriteriawerepresentedinthissection,an ditmakessensethatthe criteriashouldberelatedtothecompany’spurposes orwhat“success” meanstothecompany. Yet“timing”isonethatrelatestoneither.Whichothersofthecriteriadi scussedhavelittleor nothingtodowithpurposes? 2. Followingonfromquestion1,whyweresuchcriteriaincludedinthelis tofpossibilities?
3. Whichofthecriteriadiscussedwouldbeleastlikelytobeusefulindiffe rentiatingamongalterna- tivebundles? CHAPTER 7Section 7.2 The Criteria Matrix and Choosing the Best Strategy Noticealsothatmanyofthesecriteriaincludepurposestodoingstrateg icplanninginthefirst placeandwhatthefirmperceivesassuccess.Itisfittingthatcriteriause dtochartthefuture directionofthecompanybeasimportanttoanorganizationasitsfunda mentalpurposesand whatitviewsassuccess. Thecriteriamatrixisusedtoevaluatethebundlesagainstmultiplecrite riausingascoringsystem thatenablestheresultsofusingeachcriteriontobeaddedupattheend( Table7.1).Thefirst stepistochooseasetofcriteriathatmakessenseforthecompany.These mayincludesomeof thosecriteriadescribedintheprevioussectionandperhapsothersrele vanttothecompanyand itspresentcircumstances. Thenextstepistoassignaratingtoeachcriterionona10- pointscale.Somecriteriaarepositively correlatedandsomenegativelycorrelated.Anexampleoftheformeris revenues:analternative thatmightyieldhighrevenuegrowthisgoodforthecompany,butlowre venuegrowthisbad.The twogointhesamedirectionsotospeak(highgrowth=good,lowgrowth
=bad),sothecriterion “revenuegrowth”ispositivelycorrelated.Insuchinstancestherating wouldrangefrom0toplus 10.Aneutralalternativewouldbescored0whereasanalternativethat wouldbestronglyfavor- abletothecompanymightbea9ora10.Anexampleofanegativecorrela tionis“sizeofinvest- mentrequired”:analternativerequiringalotofinvestmentis“bad”for thecompany,butasmall investmentrequirementis“good.”Thetwogoinoppositedirections(a lot=bad,little=good).For anegativelycorrelatedalternative,theratingwouldrangefrom0tomi nus10.Thus,analternative thatisnotriskyatallwouldgeta0score,onethatismoderatelyriskyasc oreofperhapsminus5, andanextremelyriskyoneperhapsminus7tominus10.Table7.2listse xamplesofpositivelyor negativelycorrelatedcriteria. Theratingscoresaresubjectiveestimates;theabsolutevalueoftherati ngisnotasimportantas spacingthemaccordingtoanestimateastohowcloseorfarapartthealt ernativesare.Itisthe relativeratingsthatarecritical.Thebundlesareratedagainsteachcrit erionindependentlyofany othercriterion.Whenalltheratingsaredone,thescoresareaddeduptos eewhichalternative hasthehigher(ifevaluatingtwo)orhighesttotalscore. Table 7.1: Criteria matrix for evaluating alternative bundles Criteria Alternative A Alternative B Alternative C Revenuegrowth(P) 8.0 8.0 9.0 Profitability(P) 7.0 7.5 8.5
Shareholdervalue(P) 8.0 7.0 8.0 Riskiness(N) -8.5 -8.0 -8.5 Investmentrequired(N) -7.0 -9.0 -9.5 Changeinculturerequired(N) -6.5 -8.0 -6.0 Totals 1.0 -2.5 1.5 CHAPTER 7Section 7.2 The Criteria Matrix and Choosing the Best Strategy Arguing Persuasively InTable7.1,thealternativebundle that receives the highest total is optionC.However,optionA’stotal scoreissoclosetoC’sthatitmakes arguingforCbeingthebestalterna- tiveopentoquestion.Thisiswhere other considerations come into play.Ifmarketshareisparticularly important to the company (rev- enuegrowth),orprofitability,orif thecompanyisaversetochanging its culture a lot, then the analy- sis would suggest option C. But thetablealsoshowsthatoptionC requiresthemostinvestment,and ifthefirmmightbeunabletoraise Raymond Forbes / SuperStock
An objective is a quantitative target to be achieved within a specified time frame. Table 7.3: Criteria matrix revised from Table 7.1 Criteria Alternative A Alternative B Alternative C Revenuegrowth(P) 7** 8 9* Profitability(P) 7** 8 9* Shareholdervalue(P) 6** 7 9* Riskiness(N) -7 -8 -9 Investmentrequired(N) -7 -9** -8 Changeinculturerequired(N) -7 -9** -6* Totals -1 -3 4 *Reasonstoselect **Reasonstoreject Table 7.2: Positively and negatively correlated criteria Positively correlated Negatively Correlated Revenuesorrevenuegrowth Capitalinvestmentrequired Contributiontoshareholdervalue Changeinculturerequired Returnoninvestment Timetobreakeven Adverseeffectoncompetitors Overallriskiness Strengthofvalueproposition
Gainingorextendingacompetitiveadvantage Increasingitsbargainingpower CHAPTER 7Section 7.2 The Criteria Matrix and Choosing the Best Strategy theneededcapital,thatcouldbetheonereasontorejectit.Recall,howe ver,thatfeasibilityisone ofthesixcriteriaforcreatingbundles,sooptionCshouldnothavebeen qualifiedasabundleifthe neededcapitalcouldn’tberaised. Toavoidthesituationwheretherearetwoalternativesthatachievealm ostequalratings,the choiceofcriteriaandassignedratingsarereviseduntilthereisaclearw inner byatleastthree points.Whilethisappearstobe“fixing”theresult,theprocessisstillin “analysis”mode,which meansthatmanagersarefreetotrydifferentcriteriaandratingsuntilth eyaresatisfiedtheyhave adefensiblestrategicbundle.Afterall,de fendingandbeingcomforta blewiththechoiceofstrat- egyiswhatthiswholeexerciseisabout.Itisthatultimatedefensebefor etopmanagementorthe boardofdirectorsthatwillkeepanyonefrom“fixing”theratingstoyiel dapreordainedresult.A preordainedorpoorlyarguedresultcanbespottedamileawayandwill damageitsproponent’s credibility.Sowhilethisanalysisisbeingdone,itisimportanttoreme mbertochooseonlythat alternativethatcanbesupportedpersuasively;thescoringsystemwill helpinthatregard.The
criteriamatrixandtheassociatedprocessofselectingcriteriaandratin gbundlesagainstthemis simplyanopportunitytodevelopargumentstodefendor“sell”thepref erredchoicetoothers.It shouldbethoughtofasthinkingtime. Thedangerwithusingsuchaquantitativeyetstillsubjectivemethodto chooseastrategicalterna- tiveisthatitinvitescriticismpreciselybecauseoneperson’scriteriaa ndratingsmaynot—infact,will not— matchanyoneelse’s.Theresultsaresensitivetothecriteriachosen.Us ingsharedorconsensus ratingswithinagroupisonewaytogetaroundthisproblemandtotryout differentcombinationsof criteria.Theprincipalvalueofthecriteriamatrix,however,istoforcep lannerstotesttheirchoiceof alternativesagainstdifferentcriteriaincaseotherpeoplebelievesuch criteriaareimportant.Inthe caseofdisagreement,thepersonwhohasgonethroughthisexercisewi llhave“donetheirhome- work”andbeabletodiscuss—andperhapsrefute— anotherperson’spointofview. Effective Presentations Inthischapter,wereviewanumberoflogicalanddata- basedconcernsyoushouldhavewhenpre- sentingalternativestrategicbundlestostakeholders.Undoubtedly,in ordertobepersuasive,you musthavethedatatosupportwhatyouareadvocating.However,howy oupackageandpresent thosedataarecriticalconcerns,aswell.Theconfidenceandcompeten ceyoudemonstrateinpropos- ingastrategywillimpactyourlistenersjustasthesupportingdatado.C ommunicationresearchers andconsultantsJenniferWaldeck,PatriciaKearney,andTimothyPla
xpointtoarichbodyofresearch literaturethatexaminesthedynamicsofpersuasionandresistance.W hatfollowsisasummaryof someofthatresearchandhowitappliesinyourstrategic- planningefforts.Employtheseresearch- basedstrategiestohelpyouthinkthroughyouroralorwrittenpresentat ionstyleandcontent: 1. Assessyourstakeholders’willingnesstochange.Humans’inclinatio ntoresistchangehasbeen widelydocumented.Centraltoyourpersuasiveeffortisidentifyingyo uraudience’spresent position. a. Whentheyagreeattheoutset,yourpersuasivetaskistoreinforcetheirc ommitmentand providethemwithsomemotivationtostrengthentheircommitmentto astrategicchange. Asinconsistentwithacorporatecommunicationstrategyastheymays eem,emotional appealsarepopularandeffectivewaystoenergizeandmotivateothers .Finally,whendeal- ingwithstakeholderswhoare“with”you,youwillbenefitfrombeingd irectwiththosesup- portiveindividualsandtellingthemexactlywhatyoubelieveneedsto happen. (continued) CHAPTER 7Section 7.2 The Criteria Matrix and Choosing the Best Strategy
IncomparingTables7.1and7.3,notethatthelatterusesonlywholenu mbers;sincetheratings are“educatedguesses”intheabsenceofanydata,estimatingtoonepla ceofdecimalsbelies alevelofaccuracythatjustisn’tthere.Anargumentwhenselectingabu ndleconsistsoftwo parts:(1)reasonswhythepreferredbundlewaschosen,and(2)reasons whytheothertwowere rejected.Ratingsinthetablearehighlightedinthewinningbundlethat arethebestormostfor eachcriterionandintheotherswheretheyaretheworstorleast.Thus,in Table7.3,ifoptionA were“formingnewpartnerships,”optionBwere“developingnewpro ducts,”andoptionCwere “expandingnationally,”theargumentwouldlooklikethis: “Thecompanyshouldexpandnationallybecausedoingsowouldgener atethemost revenuegrowthandprofitability,increaseshareholdervaluethemo st ,andrequire theleastculturechange.Formingnewpartnershipswouldgeneratethe leastrev- enuegrowthandprofitabilityandincreaseshareholdervaluetheleast, whiledevel- opingnewproductswouldrequirethemostinvestmentandculturecha nge.” b. Whendealingwithahostileordisagreeableaudience,avoiddirectand overtinfluence attempts.Thesewillresultinactivationofanego- protectivedefensethatyourlistenerswill usetoguardwhattheyarealreadyinvestedin.Inthesecases,it’simport anttomodifyyour expectationsandaskforonlysmallamountsofchangeandsl ightadjust mentstothink-
ingandbehavior.Forexample,plantomoveyouraudiencefrommoret olessdisagree- mentinyourinitialdiscussions.Second,worktoestablishcommongr oundandasenseof understanding.Acknowledgeareasofagreement.Finally,beprepare dtoprovideextensive amountsofthekindsofevidenceanddatadiscussedinthischaptertosu pportyourposition. c. Whenyouraudienceisneutralorundecided,doesn’tknowmuchabout theissuesyouare presenting,orisconfusedandoverwhelmedbythefacts,yourfirstobje ctiveshouldbeto establishrelevance.Byprovidingbackgroundinformationontheissu e,youcanmakethe issueprofessionallyrelevanttostakeholdersandheightentheirattent ion.Althoughevidence isimportantwiththeseaudiences,youmustbecautiousnottooverwhel morinundate themsincethereislikelytobealearningcurveinvolved. 2. Avoidinflammatoryphrases.Steerclearofwordsandphrasesthatwill makeyourstakeholders angry,cringe,oruncomfortable.Thesesemanticbarrierswilldistract youraudiencefromlisten- ingeffectivelyandevaluatingalternativesfairly. 3. Useatwo- sidedmessagewithrefutation.As peakerismostlikelytoinfluenceana udienceby presentingbothsidesofanissueandtakingthetimetoargueagainstthe positionhe/shefinds undesirable.Whenyoudothis,yourconstituentswillperceiveyouasw ell-informed,credible,and
objective.Justbecarefultobeobjectiveinopposingo thers’pointsofvi ew,ratherthanoffensive. 4. Inoculateagainstcounterarguments.Whenyouknowthereareargum entsagainstelementsof yourstrategy(andtherealwaysare),it’sagoodideatoinoculatetheaud ienceagainstthem. Doingsoinvolvesidentifyingthoseargumentsandrefutingeachwiths olidevidence,often beforetheyareevenraised(becauseyouhaveanticipatedthem).Asare sult,youwillarmyour audiencetoresistthem. 5. Minimizeobjections.Spendingtoomuchtimeinoculatingagainstcou nterargumentsdetracts fromtheadvantagesofyourproposal.Somuchlikei t’simportanttocar efullyconsidertherange ofstrategicalternativesasyouarecreatingyourbundle,youshouldide ntifyonlythetoptwoor threecriticalobjectionstoaddressinyourproposal. 6. Repeatyourmessageusingvarioustacticsandmedia.Leveragingstak eholdersupportforapro- posedstrategyisrarelyaccomplishedinasinglemessage.Inshepherdi ngstrategychange,design amessagestrategythatwillexposeyourconstituentstotheideasmulti pletimesandinmultiple formats(e.g.,presentation,writtenproposal,podcast,interactiveWe b-basedsummary). CHAPTER 7Section 7.3 Deciding on Objectives
Afinalcommentonthebundleanalysisreflectsonhowwellyouhavecr aftedthecriteriamatrix. Itcouldbethatthebundlechosenisbestonallthecriteriaandoneoftheo thertwobundlesis worstonallthecriteria.Thismeansacoupleofthings:(a)thew inningb undleissomuchbetter thantheothersandtheonethatisworstonallcriteriaissomuchworseth antheothersthat itreflectsbadlyonhowthebundleswerecreatedinthefirstplace(theya reallsupposedtobe good,viablebundles);and(b)thethirdbundleisleftwithnoreasontore jectit,whichalsohurts theargument.Insuchacase,thecriteriamatrixshouldbereworkedsot hatthewinningbundle isstilltheonethatwouldprevailbutnotbebetterthantheothertwoonall criteria. 7.3 DecidingonObjectives Therecommendationsphaseconcludesthestrategic- planningprocessallowingtherecommenda- tions—andthestrategy— tobeimplemented.Recommendationsincludesettingobjectives,def in- ingstrategicintent,identifyingkeyprogramstoachievetheobjective s,andexploringtriggersand contingenciesifthingsdonotgoasplanned.Creatingorrevisingmissi onandvisionstatements isalsopartofthisfinalphaseiftheorganization’sexistingstatementsa renolongervalidorifit desiressuchstatementsneverhavinghadthembefore. Anobjectiveisaquantitativetargettobeachievedwithinaspecifiedti meframe.Itmayseem oddtosomethatsettingobjectivescomesafterchoosingastrategy.Th eymayfinditmorelogi-
caltofirstsetobjectivesandthenchooseastrategytoachievethem.Ide ally,theyshouldbeset together,thatis,iterativelyuntiltheyfitwitheachother.Butthatishar dtodo.Decidingona strategyfirstmakessenseforthreereasons.First,itfollowsnaturallyf romidentifyingthecompa- ny’skeystrategicissues,whichinturnfollowlogicallyfromthesituati on-analysisphase.Second, construingtheselectionofastrategicalternativebundleascreatingar oadmapordirectionfor thecompany,onecanthenturnone’s attentiontodecidinghowfarandh owfasttogoalongthat road(i.e.,objectives).Last,decidingonthestrategyfirstallowsmany criteriatobeused,enrich- ingtheassessmentandultimatelythechoiceofstrategy. Discussion Questions 1. Arethefollowingcriteriapositivelyornegativel ycorrelated? Brandreputation Economicvalueadded Changingthecoststructureofthefirm Costofmaintainingquality Salespersquarefoot Managerialturnover Weightedaveragecostofcapital(WACC) 2. Thesectionadvisesthatoneshoulduse5– 6criteriainacriteriamatrix.Discussargumentsof yourownwhyusingfeweroralargernumberofcriteriawouldworkorn otwork. 3. Wouldusingmorecriteriaproduceadifferentresult?Woulditinspire moreorlessconfidencein theresult?
4. Assumeyouhavedevelopedagoodcriteriamatrixandarenowworkin gonaconvincingargu- mentforyourwinningbundle.Butwhatthecriteriamatrixreveals,iny ouropinion,doesn’t makeforaconvincingargument.Whatdoyoudo? 5. Theoverarchingpurposeofacriteriamatrixistochooseapreferred“be st”strategyandargue persuasivelytoothers(perhapsevenyourself)thatitisthebestone.Ca nyouthinkofanother methodorprocessthatwouldleadtothesameresult?Explainit. CHAPTER 7Section 7.3 Deciding on Objectives Inaddition,therearetwoproblemswithsettingobjec- tivesfirst.Wheredoestheobjective —thequantitative target—comefrom?Otherthanthecasewherethe currentstrategyisbeingcontinued,settinganobjec- tivefirstlacksacontext.Forexample,tomeeta20% revenuegrowthobjectiveintwoyearsmaybepossi- blebyexpandinginternationally,butnotbyinvesting moreinR&D.Yetthelattermaybethebetterstrategy inthelongrun.Wouldn’titmakemoresensetoask whichofthetwowascapableofgeneratingmorerev- enuesoverthenextseveralyears?Andwheredidthat 20%numbercomefrom? The second problem with setting objectives first is that,forexample,revenuegrowthbecomesthesole criterionforpickingastrategy.Thatis,havingsetan objective, a strategy is chosen that will best enable
thecompanytomeettheobjective.Wouldn’titmake moresensetouserevenuegrowthinthisinstanceas one of several important criteria? Would one be as content to achieve the revenue-growth objective if thecompanywerealsolosingmoney? Intheend,whicheveroneisdonefirst—thestrategyortheobjectives — theymustbothmatch andbeconsistentwithoneanother.Thestrategydetermineshowtheco mpanywillcompeteand whereitisgoing,whiletheobjectivesdeterminetherateofgrowthandh owfastthecompany cango(whatitcanachieve)givenitsresources,capabilities,andaspira tions.Greatcaremust betakentodistinguishobjectivesfromstrategies.Forexample,execut ivesoftentalkof“high growth,”“moderategrowth,”and“lowgrowth”strategies.Clearly,th esegrowth“strategies”are reallyobjectivesreflectingahigh,medium,orlowincreaseinsalesorr evenues.Thefullrangeof possiblebusinessstrategieswascoveredinSection3.2. Setting Objectives Whilethismodeladvocatessettingobjectivesafterdecidingonaprefe rredstrategicalternative, thetwomustbesowellmatchedthatanobserverwouldimaginethatthe yweredonetogether. Itisimpossibletoevaluateorjudgeastrategywithoutknowingwhatth eobjectivesare,andlike- wiseimpossibletojudgewhethertheobjectivesmakesensewithoutkn owinghowtheyaretobe achieved(thestrategy)(Collis&Rukstad,2008). Considerthisexample.Acompanydecidestopursueanacceleratedpr oduct-developmentstrat- egyandatthesametimechangeitsfairlyconservativecultureintoanin
novativeonethatalsoval- uesquality.Isthisagoodstrategy?Itisimpossibletotellunlessyouals oknowwhatthecompany istryingtoachieve,thatis,knowitsobjectives.Ifyouwerenowtoldtha tinthreeyears’timethe companyexpectedsalestodoubleandprofitstoincreaseby50%andth atithadtheresourcesto Stockbyte/Thinkstock One of the steps in setting objectives is to decide on a small number of measures critical to the firm, such as revenues, profit, and debt structure. CHAPTER 7Section 7.3 Deciding on Objectives carryoutthispreferredstrategy,onenowhasabasisforeithercriticizin gthestrategyorbelieving thatitwillwork(orevencriticizingtheobjectives).Soastrategywitho utobjectivesismeaningless. Considerasecondexample.Acompanywhosesaleshavebeenflatandt hathasbeenlosingmoney fortwoyearswantstoincreasesalesby20%nextyearandatleastbreake ven.Arethesegoodobjec- tives?Again,itisimpossibletotellunlessyouknowhowthecompanyi ntendstoachievethem, whichmeansknowingitsstrategyandprograms.Merelytryingtoincre asesales,typicallythrougha market- developmentstrategy,maybeinsufficient.Thecompany’sproductm aybeoutdatedandits coststructuretoohigh.Sowiththecompetitiveenvironmentthecomp
anyfaces,itwilltakeawell- thoughtstrategytogiveanobserverconfidencethattheobjectivescou ldandwouldbeachieved. Again,objectiveswithoutastrategyaremeaningless. Settingobjectivesisathree-stepprocess. Limit the Choices Decideonasmallnumberofmeasurescriticaltofirm performance.Thesemighttypicallyincluderevenues, profit,debtstructure,andthelike.Thereisnoruleasto howmanyobjectivesafirmshouldhave.Butthemore ithas,themoredifficultitbecomestoachievethemall andthegreateristhelikelihoodthatsomeobjectives willconflictwithothers;thatis,achievingonewillresult innotachievinganother.Aboutthreetofourcompany- wideobjectivesistypical,oneofwhichisrevenues(or market share if it can be accurately measured) and somekindofprofitmeasure:EBIT,NIBT,NIAT,EPS,ROI, ROE, ROS, or ROA—NIAT being the most commonly used. The remaining one or two can be anything of critical importancetothecompanysuchassalesper squarefootforaretailer,operatingincomeperscreen foramovie-theaterchain,debt–equityratioforafairly leveragedcompany,andthelike.Donotincludecost- reductionobjectivesasoneofthembecauseanyefforts toreducecostswillshowupinimprovedprofit;cost- reduction objectives are important only at an opera- tionalnotastrategiclevel.Similarly,otheroperational or programmatic objectives, such as number of new productsproduced,percentageofinternationalsales,numberofretail outletsserved,orincreasing productioncapacityorthroughputbyX%,whileimportant,shouldnot bepartofthisset. Set Annual Objectives
Decideonannualvaluesforthesecriticalmeasuresforthenextthreeye ars. Thisisdifficultto dowell.Theorytellsusthatobjectives,tobeeffective,shouldbesetata “challenging”level;set toohigh,theyde- motivatebecausepeopleconsiderthemimpossibletoachieve,andsett oolow, theyalsode- motivatebecausetheyaretooeasilyachieved.Howdoesacompanyfin dthatperfect level?Thefollowingfive-stepprocessmayhelp. First,extrapolatefromhistoricaldatatoestablishinitialvaluesforeac hobjectiveforthenextthree years.Thisiseasiertodowhenyouhaveatleastfiveyearsofhistoricald ataavailable.Second, Stockbyte/Thinkstock Companies have goals because they inspire employees and external constituents to perform better. CHAPTER 7Section 7.3 Deciding on Objectives makealistofexternalandinternalforcesorchangesthatmightacttode creasethesebeginning valuesovertime,suchasintensifyingcompetition,scarcityofborrow edfunds,aconservativecul- ture,rapidlyacceleratingtechnologicalinnovationintheindustrywit hwhichthefirmcannotkeep up,andsoon.Foreachitem,indicate,howeversubjectively,thestreng thofthenegativeeffecton theobjective(high,medium,orlow).Third,makealistofexternalandi
nternalforcesorchanges thatmightacttoincreasethesebeginningvaluesovertimesuchasanew strategy,company- widetraining,anewCEO,achangetoamoreproductiveculture,newqu alityprograms,strategic alliances,anewadvertisingcampaign,andsoon.Foreachitem,indicat e,howeversubjectively, thestrengthofthepositiveeffectontheobjective(high,medium,orlo w).Fourth,comparethe twolistsanddecide,foreachobjective,whethertheinitialvaluedeserv estobeincreasedor decreasedandbyhowmuch,dependingontheextenttowhichthepositi veeffectsoutweighthe negativeeffectsorviceversa.Inthisway,createa“firstcut”ofeachobj ectiveforeachofthenext threeyears. Finally,getfeedbackfromthosewhoaregoingtobeheldaccountablef orachievingtheobjecti ves whetherthe“first- cut”objectivesarechallengingyetachievableinthecircumstances.In fact,get theseotherpeopleinvolvedintheotherstepstoo.Forsomecompanies, decidingonstrategicobjec- tivescannotbedoneunlessthewholerangeofoperational objectiveshavebeencreated,thought through,andapproved,tomakesurethattheresourcestoachievethem areavailableandthatthey arefeasibletoachieveinthetimeframespecified.Whentheyhavebeen welldesigned,achieving theoperationalobjectivesshouldresultinautomaticallyachievingth ecompany-wide objectives. Match Objectives to Strategy Checkthattheobjectivesmatchthepreferredstrategy.Thepreferreds trategyandthesetofobjec-
tivesmustbeconsistentwitheachother.Forexample,ifthestrategyde cideduponisaggressive, theobjectivessetshouldalsobeaggressive.Ifthestrategyisaturnarou nd,theobjectivesshould reflectthisunusualstate,showingfirststabilizationatalowerlevelfol lowedbygrowthconsistent withthenewstrategy.Ifthestrategyisdesignedtomaintainmarketpos itioninahighlycompeti- tive,maturemarket,theobjectivesshouldnotshowhighgrowth,butre flectcurrentconditionsto ahighdegree.Ifthestrategyrequiresaperiodofheavyinvestmentbefo reitpaysoff,theobjec- tivesshouldreflectthatreality.Remember,theobjectivesindicatewh atthecompanyconsiders tobesuccessfulperformanceovertimegiventhechangingreal itiesoft heindustry,marketplace, andthecompany’sownstrategies,resources,andcommitments.Thus ,notachievingtheseobjec- tives(indicators)meansless-than- successfulperformance,whilemeetingorexceedingthemindi - catesintendedorsuperlativeperformanceinthecircumstances. Types of Objectives Theprecedingdiscussionimplicitlyassumesthatthesearecompanyo rcompany-wideobjectives. Therearealsoothertypesoflimitedobjectives.Partial objectives coveronlypartofsomeactivity, likeinternationalsalesversustotalsales.Functional objectivespertainonlytoaparticularfunc- tion,likeasalesandmarketingdepartmentincreasingthenumberofsal esmen.Operationalobjec- tivesareeithersubsumedbyhigher- orderobjectives(likereducingcosts)orarecross-functional, forexample,securityorsystemsorplantmaintenance,none ofwhichc omeunderany“function” (Table7.2).Alloftheseothertypesofobjectiveswillshowupduringim
plementationofastrategy. Thevalueofunderstandingthedifferencesisthatatthestrategiclevel, weneedcompany-wide objectives,notfunctionaloroperationalobjectives. CHAPTER 7Section 7.3 Deciding on Objectives Table 7.4: Partial, functional, and operational objectives Kind of objective Objective Explanation Partial Increaseinternationalsalesby10%/yr Doesnotaddressdomesticsales Increasesalesfromnewproducts introducedduringthepastthree yearsto40%oftotalsales Doesnotaddresssalesfromexisting products Increasesalestomassmerchandisers by30%/yr Doesnotaddresssalestootherretail channels Functional Doublethenumberofretailoutlets Concernsonlymarketing Increasethroughputby5%/yr Concernsonlyproduction Redesigntheproducttoreduce purchasingcostsby5%
Concernsonlyengineering Operational Reducecostsby12%/yr Thehigher- orderobjectiveofNIATtakes thisintoaccount Improvequalitybyreducingthecosts ofqualityby30% Insofarasqualityismeasuredthisway,itis subsumedbyNIAT Improvethesales“hitrate”from2% to6%atyear-end Thisisanoperationalobjectivefor marketing Typically,themostcommoncompany- wideobjectivesarerevenues,NIAT(orotherprofitobjec- tive),andoneortwootherratiosornonfinancialmeasurestha tthecom panyasawholecommits toachieving.Thesemightbevolunteerhoursdonatedbyemployeestot hecommunity,alowered numberofqualitydefects,aloweredturnoverrate,orimprovedsafety andaccidentrates. Objectives vs. Goals Inmanycompanies,whatwenowunderstandtobeanobjectiv eisoftenr eferredtoasagoal(and viceversa).Tounderscorethedifferenceasusedhere,agoalisdefined asaqualitativeend-state acompanytriestoachieve,forexample,“tobecomemoreinnovative.” Notethatprogresstoward itcannotbemeasured,anditdoesnotincludeaspecifiedtimeframe.
Why,then,docompanieshavegoals?Becausetheyareintendedtoinsp ire.Theyshouldsound stirringtoemployeesandtoexternalconstituents.Thefollowingares omeexamplesofgoals: • Becomemoreinnovative • Makethecustomer#1 • Takecareoftheenvironment • Producebetterproducts • Bethereforourcustomers • We’regoingtogrow • Developanationalpresence • Becomemoreefficient CHAPTER 7Section 7.3 Deciding on Objectives • Becomeleanandmean • Streamlineouroperations Atthesametimegoals,preciselybecausetheyarenotamenabletomeas urement,letmanage- mentoffthehook.There’snoincentivetofollowthrough.Managemen tisn’taccountable. Objectivesarewritteninsuchafashionthatorganizationalmembersw illbeabletoanswerthe question“Willweknowitwhenweseeitorwhenithappens?”Organiza tionalconsultantsand authorsBeebe,Mottet,andRoachusefourcriteriaforobjectives(2003 ).First,accomplishmentof theobjectivemustbeobservable;weshouldbeabletoseetheresults.Se cond,objectivesmust bemeasurable;thatis,someobjectivemetricmustyieldusefuldataind
icatingthatanobjective hasbeenmet.Third,objectivesmustbespecific;aclearlywrittenobjec tiveincludespreciseguide- linesfordescribingthenatureoftheobjectiveandthestrategiesandtac ticsrequiredtoaccom- plishit.Finally,aswe’vemadeclearinourdiscussionssofaraboutstrat egicthinking,talking,and management,objectivesmustbefeasibleandattainable.Organizatio nsmustdevelopobjectives basedonarealisticunderstandingofbothinternalandexternalbarrier stoaccomplishment. Thus,aCEOmightbewelladvisedtorunacompanyonobjectivesalone .Ithasbeensaidthat“you can’timprovewhatyoucan’tmeasure,”andthereismuchtruthinthat. Goalsimplyprograms (forexample,“producebetterproducts”impliesmoreR&D,engineeri ng,betterqualitycontrol, andconstantcustomerfeedback)andoperationalaswellascompany- wideobjectives.Incentives forimprovedperformanceandresultsaretiedtoachievingobjectives. Settlingforagoalinstead implieslazinessandanaversiontoaccountability. Discussion Questions 1. Companies,bothintheirpublicstatementsandinthewaytheyaremana ged,makeextensive useofgoalsandobjectives.Assumingthattheyaredefinedast heyarei nthispresentation,do youthinkthatacompanycouldbemanagedusingjustgoals?Whyorwh ynot? 2. Imagineacompanywhosemanagerscollectivelysetobjectivesataver
yconservativelevel, knowingfullwelltheobjectiveswouldbeexceededandallofthemwou ldgetheftybonusesasa result.Howcouldthissituationbeavoided? 3. Isitpossibleforcompany- wideobjectivestobesetlast,ineffectaddingupallthepartialand functionalobjectives?Ifitis,mightthatbebetterorworsethansettingt hemfirst? 4. Atabusinessschool,overallobjectives(thingslikenumberofcourses taughtbyfull-timefaculty, ratiooffull- timefacultytototalfaculty,totalfundingreceived,etc.)arederivedfr omannual plansofeachdepartment(finance,operations,accounting,HR,etc.);t hatis,thedepartmental objectivesarecombinedtoproducetheschool’soverallobjective s.Ye ttheschoolmaintainsthat itdoesstrategicplanning.Howwouldyouexplaintotheschoolthatitis mistaken? 5. Companies’rewardandincentivesystemsareattachedtoattainingore xceedingcertainobjec- tives,assumingthatprofitswerealsoachieved.Butlittleissaidorpubl icizedaboutwhathap- penswhensuchobjectivesarenotachieved.Whatkindsofpenaltieswo uldyousuggestfornot achievingcompany- wideobjectivesandfunctionalobjectives?Howwouldyougainevery one’s agreementinthefirstplaceforasystemofpenaltiesaswellasbonusesa ndotherrewards?
6. Ifitdidn’talreadyexistinacompany,woulddevelopingasystemforpe nalizingfailuretomeet companyobjectivesbeworthwhile? 7. Recallanorganizationyouwerepartof(needn’tbeacompany).Didyo uhavegoalsandobjec- tives?Whatwerethey?Weretheytakenseriously? CHAPTER 7Section 7.4 Contingency Planning 7.4 ContingencyPlanning Awell- knownadage,Murphy’sLawstates,“Ifanythingcangowrong,itwill.” Anextensionofthis isthatitalwaysseemstohappenattheworstpossibletime.Itisagoodid eatocontemplatewhat couldgopotentiallywronginthefuture,whichistermedatrigger,and whatthecompanywould dodifferentlywerethattohappen,referredtoasacontingency. Wethereforetalkabouttrigger- contingencypairs,typicallyoneortwothatpertaintonextyear — theshortterm—andoneortwothatcouldoccurthreeyearsfromnow— thelongterm.Inreality, companiesmayhaveasmanyas20triggersandcontingencies“active” atanytime,assuming theydocontingency planning.Theplanninghorizon,however,canvaryconsiderablyacco rdingto thesizeofthecompanyandtheindustry.Forexample,acompanylikeB oeingviewsthenextsev- eralyearsas“short-term,”about10–
15yearsas“mediumterm,”and20–30yearsas“longterm.” Companiesinthefashionbusinessviewtwoweeksas“shortterm,”and aseason(3–4months)as “longterm.”Formostcompanies,however,the“standard”longtermo ffiveyearshasnowshrunk tothreeyearsbecauseoftherapidpaceofchange,especiallyinhigh- technologyindustries. Triggers Triggers should be external, spe- cific,andquantitative.Absentthese three qualifiers the company will notknowwhentoinvokethecon- tingency plan. It is no use saying, forexample,“Ifprofitsdecline,”or “When things get tough.” Decline howmuch?Gethowtough?Even whentryingtoaddressphenomena thatcannotbemeasured—suchas a competitor infiltrating your ter- ritory, or, for the Carmike movie- theater case discussed in the previous chapter, “worse” movies being made in a certain year—try togaugetheireffectonyoursales. Forexample,iftheunknownphe- nomena were to cause your sales todecline,wouldyoudosomething differentlyifyoursalesfellbelowtargetprojectionsby10%,15%,or2 0%?Inthisway,youwill monitorsomethingyouconstantlymeasure,andsocanbringintoplayt hecontingencyplanatjust therightmoment. Triggersalsocomefromassumptionsyoumakeaboutthefuturethatar
e“soft”—thatis,about whichyoulackconfidenceandwhichareexternaltothecompany.Fore xample,ifyouareengaged instrategicplanningandyourcompanyissensitivetointerestrates,yo umightnotknowwhatis goingtohappentointerestratesnextyear.Youmayhavetriedtoobtaini nformationfromvari- ouseconomicforecastsonthisvariablebut,frustratingly,allofthemdi fferintheirpredictions.So hereissomethingyoucando.Simplymaketheassumptionthatinterest ratesarenotgoingup nextyear(ifeconomicindicatorsmakethatatleastplausible),andbase yourplanningonthat. Creatas/Thinkstock In contingency planning, companies tend to look at the short term, medium term, and long term. The standard range for “long term” used to be five years, but due to the rapid pace of technology, it has been reduced to three years. CHAPTER 7Section 7.4 Contingency Planning However,becausetheassumptionis“soft,”createatriggerthatadmits thepossibilitythatinterest ratescouldgoup:“IfinterestratesgoupbymorethanXpercentagepoin ts,then. . .”thecontin- gencyplantakeseffect. Triggerscanalsoemergefromthetimingofvariousimminentoccurre nces.Forexample,ifnew federallegislationisbeingcreatedtonationalizehealthcare,youmay beunsureifthiswouldtake placenextyearortwotothreeyearsfromnow.Socreateyourplanswith
yourbestassumption inmind— forexample,nohealthcarelegislationwillbeenactedduringtheperio doftheplanning horizon.However,becausetheassumptionis“soft,”createatrigger,t oo,thatspecifies,“Ifhealth carelegislationwereenactedwithinthenexttwoyears,then. . .”thepairedcontingencywill beenacted.Noticethatthistriggerisquantitative.Youcantellexactly whenithappensandcan thereforeinvokethecontingencyplan.Similarly,youmaywanttodos omethingdifferentlyiftwo competitorsmergeorifquotarestrictionsintosomeforeigncountryar eimposedorlifted. Forcompaniesfocusedonincreasingsalesormarketshare,itistempti ngandunderstandable tocreatetriggershavingtodowithnotmeetingrevenueobjectives.To dothisonceisperfectly fine,buttohavesuchatriggereveryyeargivestheimpressionofobsess ivefocusinonearea. Management’sroleisdirectingandcoordinatingthemanyaspectsofa companytoworktogether seamlesslytocreatevalue,andindeedthingscouldgowronginmanyar eas,notjustinfailingto makearevenueobjective.Abetter approachistomakealistofallthe possiblethingsthatcouldgowrong or where your assumptions are soft,andchoosethemostlikelyof themasyourtriggers.Trytochoose adifferenttriggerforthelongterm fromwhatischosenfortheshort term. A useful training exercise is to create one trigger-contingency
pairbasedonwhatmightcausea revenueshortfallandoneanNIAT shortfall, stating one in the short term and the other in the long term,justtopracticecreatingreal- istictrigger-contingencypairs. Contingencies Contingencies are precursors to contingency plans. They are a response to a particular trigger; whatacompanyshoulddodifferentlyifthattriggeroccurred.Later,w henthestrategicplanhas beenpreparedforoperationalimplementation,thecontingencyshoul dbetranslatedintoacontin- gencyplancompletewithdetailsastowhoisresponsibleforit,itsbudg etandschedule,andwho mustkeepitrelevantasconditionschange. Goodcontingenciesshouldfollowthreeguidelines: • Donotrenegeontheadopted“best”strategy.Forexample,supposethe companychose amarket- expansionstrategicbundle,butthereisreasontobelieveitwouldbedif ficult age fotostock/SuperStock Good contingency plans depend on three guidelines: not reneg- ing on your adopted “best strategy,” not planning for some- thing the company is already doing, and making the contin- gency a solution to the problem.
CHAPTER 7Section 7.4 Contingency Planning toimplementandpulloff.Ifsalesweretodropmorethan10%fromtarg etprojectionsat anytime,itshouldnotsetasacontingency,“Cancelthemarket- expansionstrategyand implementadifferentiationstrategy.”Ifonedoesthat,itisineffectsay ingthatthestrate- gicbundlechosenwasnotagoodchoice,anditsproponentswillinstant lylosecredibility. Besides,companiescannot—andshouldnot— beinthehabitofchangingtheirstrategies atthefirstsignofadversity.Strategiestypicallytakeanywherefromt wotofiveyearsto implement,andtheorganizationmustgivethechosenstrategyachanc etosucceedbynot changingituntilthereisabsolutecertaintyitisnotworking.Foranyne wormodifiedstrat- egybeingimplementedthatdoesnotseemtobeworking,itis advisable alwaystosuspect firsttheexecutionofthestrategy,notthestrategyitself.Thatwaytheco ntingencyshould focusonoperationalchangesthatcouldbemadetoenablethestrategyt osucceed,not changingthestrategyitself.Thefollowingareexamplesofpossibleop erationalchanges: » Changetheadcampaignortheadvertisingagency. » ReplacetheVPMarketing(oranyseniormanager). » Givethesalespeopleadditionalormoretechnicaltraining. » Doadditionalandspecificmarketresearch. » Broadenthedistributionchannels. » Increaselinkstoyourcustomersandi ncreasetheirswitchingcosts. » Seekalternativesuppliers.
• Donotmakesomethingthatthecompanyisalreadydoingthecontinge ncy.Thinkabout it.Whatthecompanyhasbeendoinguptothetimethetriggerisinvoked iswhatgot thecompanyintotroubleinthefirstplace.Ifsalesarenotmeetingexpec tations,donot setasacontingency,“Continueadvertising”or“DomoreR&D.”Thec ompanyisalready doingthosethings,and,clearly,salesarestilldown.Sothinkofsometh ingitcandodiffer- ently,thatis,anadjustmenttoitsoperationsorexecution,onethatcanb eimplemented quickly,say,inacoupleofmonths. • Makethecontingencyasolutiontotheproblemimpliedinthetrigger.I finadequateprof- itsaretheproblem,thecontingencyshouldbedirectedtowardsincreas ingprofits,not sales.Ifmarketshareistheproblem,donotsuggestloweringcostsasth econtingency, evenifitisamatterofdoingsomethingdifferent;thetwoareunrelated. Becausecontingenciesareinfactback- upplans,theyhavetobespelledoutingreatdetail,and thoseresponsiblefordevelopingthemandcarryingthemoutmustkno wwhotheyareandwhat theymustdo.Thosedetailsareaddedduringtheoperationalphaseprio rtoimplementation. Companiesthatgothisextramileofcontingencyplanningwillreapre wardsinthreeways.First, theywillbebetterpreparedforspecificuncertaintiesthancompaniest hathavenotriggersand contingencies,especiallyiftheyworktoadjustthecontingenciesover
timeasconditionschange tokeepthemcurrentandworkable.Second,theywillbecomemoreade ptatanticipatingwhat mightgowrongandcomeupwithbettertriggersandcontingenciesove rtime.Third,theywill appreciatetheneedtobealerttokeychangesintheenvironmentandthe ircompanyand,over time,createamoreflexiblecompanyculture. Itiseffectivetoexpressatrigger/contingencypairintheformofathree -partsentence.Forexample: • Theexternalcauseofthetrigger:“Ifcompetitorsloweredtheirprices,. . .” • Thequantitativetrigger:“causingrevenuestolagprojectionsby15%, . . .” • Thecontingency:“thenthecompanyshouldincreaseadvertisingandp romotions.” Stringingthosethreepartstogether— “Ifcompetitorsloweredtheirprices,causingrevenuesto lagprojectionsby15%,thenthecompanyshouldincreaseadvertising andpromotions”—youwill findthatthissimplesentencemeetsallcriteriaforcreatingagoodtrigg erandcontingency. CHAPTER 7Section 7.5 Keeping the Board of Directors Involved 7.5 KeepingtheBoardofDirectorsInvolved Strategicplanningisacriticalpartofstrategicmanagementandsingul
arlyresponsiblefordirect- ingorkeepingthecompanyontherightpath.Incompaniesthatdostrate gicplanning,atop- managementteam,ledbytheCEOandideallyincludingkeyoperation almanagers,isresponsible fordoingstrategicplanningandimplementingthedecisionsmadeduri ngtheprocess. In public companies, however, the board of directors is directly responsibletotheshareholdersfor makingstrategicdecisionsthatulti- matelybenefitthecompanyand,by extension,itsstockholders.Sowhat istheroleoftheboardinstrategic planning and decision making? The role and level of involvement rangesfromalmostnothingatone endofthescaletotakingovercom- pletelyattheother,andvariesfrom companytocompany. There are two scenarios where board involvement is nonexistent orwhereit“rubberstamps”execu- tivedecisions. Inthefirstthereis ahighdegreeoftrustbetweenthe boardandtheCEOandtopman- agement.Inthesecondtheboardmembershavebeenhandpickedbythe CEOandagreewithall hisdecisions.Inmanysuchcases,theCEOisalsothechairpersonofthe board,makingtherela- tionshipevencozier.Whilesomecompaniesarefortunatetoenjoymut ualtrust,nothingiswrong withthelattertechnicallyorlegally.Whetheritis“right”isamatterofo pinion.
Attheotherendofthescale,takeoverbidsandacquisitionsdemandfull boardinvolvement,and resultantdecisionsaremadesolelybytheboard.BearinmindthattheC EO,CFO,andoneortwo otherkeyexecutivesareusuallyalsomembersoftheboard. Kablonk/Thinkstock In public companies, it is important to keep the board of direc - tors involved in the process because they are directly respon- sible to the shareholders for making strategic decisions. Discussion Questions 1. If“value”impliesbenefitsaccruingforacertainlevelofcosts,trytoart iculatethetruevaluetoa companyofcontingencyplanning. 2. Contingencyplanningisneededpreciselybecausecertainassumptio nsaboutthechangingenvi- ronmentmightbe“soft”anduncertain.Yet,becauseofchangingcondi tionsbothinsideandout- sidethecompany,contingencyplans — bothtriggersandcontingencies—rapidlygooutofdate. Howoftenshouldacompanyreviewitscontingencyplanningandkeep thingscurrent? 3. Triggersassumethatprogresstowardobjectivesismeasuredconstant lyandthatactualperfor- mancecanbecomparedtoplanperformance,say,everymonth.Inyour opinion,isthistrueof mostcompanies?CommentspecificallyaboutNIATperformance.
4. Typically,profitsarecomputedatmos tquarterlyandaredonesousing accountingprinciples.To theextentyouagreewiththis,shouldprofitseverbeusedasatrigger?D iscuss. CHAPTER 7Summary Mostcompaniesoperatesomewhereinbetweenthesetwoextremes.B ecausetheefficacyofthe board- managementrelationshipdifferssomuch,itisdifficulttogeneralize. Whatwouldbeuseful insteadwouldbetosummarizesomethingsaboardcouldandshoulddo tobeinvolvedinthe strategic-planningprocess: • If at all possible, the board should nominate a strategic- planning committee whose responsibilitywouldbetomonitorthestrategicdecisionsbeingmade bytopmanage- mentandinvolvethewholeboardifcircumstanceswarrant. • Intheabsenceofastrategic- planningcommittee,itmaybeadvisabletohaveatleastone boardmemberpresentatallstrategic- planningmeetingsasanobserver. • Havethedirectorofstrategicplanning— ortheCEOifonedoesn’texist—sendsummaries ofallreportsandresearchdoneinpreparationforstrategic- planningmeetings.
• AskprobingquestionsatboardmeetingsoftheCEOandCFOespeciall yduringthestra- tegic- planningprocess.Iftheboardgetsani nklingofthedirectiontheCEOw antstotake thecompanyanditdisagrees,ifeachsideisadamantthatitsdirectionis right,itisthe CEOwhogetsdismissed. • Aboveall,itistheboard’sfiduciaryresponsibilitytoensurethatthedir ectionandstrat- egythecompanymovesinisinitsbestinterestandthatofthestockholde rs;ithastodo whateveritmusttocarryoutthatduty. Summary Thischapterdescribedausefulmethod—thecriteriamatrix— forevaluatingalternativebundles onanumberofcriteriainordertoselectthebestone.However,choosin gwhichcriteriatouseis subjectiveandcouldaffecttheoutcome.Theyshouldberelatedtothep urposesthecompanyis tryingtoachieveandwhat“success”meanstothecompany.Ittherefor emakessensethatusing suchcriteriawouldinfactresultinthebestbundleforthecompany.Ina ddition,onlyfivetosix criteriashouldbeused,astoofewwouldfailtocapturethecomplexityo fafuturestrategicdirec- tionandtoomanywoulddilutetheimpactthateachcriterionwouldhav eontheoutcome. Thecriteriamatrixconsistsofatablewiththealternativebundlesascol umnsandthecriteriaas
rows.Puttingnumbersorratingsdownine achcellmustbedonecareful ly.Positivelycorrelated criteriashouldberatedonascaleof0toplus10,10beingbest,whileneg ativelycorrelated criteriashouldberatedonascaleof0tominus10,0beingbest.Themagn itudeoftherating isnotnearlyasimportantastherelativeratingsacrossbundles.Criteri aforwhicheverybundle getsthesameratingshouldbedeleted;thepurposeofchoosingcriteriai ncludestheirabilityto Discussion Questions 1. Somehow,theboardofdirectorshastomaintaingoodrelationshipswit hthetopmanagement ofthecompanyandyetstayatarm’slength,sotospeak,toproperlyperf ormitsroleofoverseer. Howcanitbestmanagethistension? 2. Imagineyourselfasaboardmember:Younoticethatallisnotrightbet weentheCEOandthe CFOandcertainotherboardmembers.Whatwouldyoudo? 3. Alsoasaboardmember,youhaveasuddeninsightastowhatthecompa nymightdostrategi- callyinthefuture.Whatdoyouwiththisidea? 4. IftheCEOandCFOareinsidermembersoftheboard,isthereanyjustifi cationfortheboard appointingastrategic-planningcommittee?
CHAPTER 7Summary differentiatethebundles.Finally,the“winning”bundlemustwinbyat leastthreepointsorthere willbedifficultyarguingforitasthebestbundle.Ifthishappens,therat ingsandeventhecriteria needtobechangeduntilitmeetsthatcondition. Afterdeterminingthebundlewiththehighestscore,apersuasiveargu mentmustbecreatedto convinceothersofthechoice.Thebestargumentconsistsoftwoparts: whythewinningbundle wasselectedandwhytheotherswererejected.Reasonsforselectingth ewinningbundleinclude thosecriteriaforwhichithadthebestrating.Reasonsforrejectingany bundleincludethosecri- teriaonwhichithadtheworstrating.Ifthereasonsare“unbalanced”(i. e.,thewinningbundle wasbestonallthecriteriaandanotherbundlewasworstonallcriteria),i tmeansthatthebundles werepoorlyformedorbadlyratedinthefirstplace.Ifallthebundleswe regoodtobeginwithand theratingsarerealistic,thewinningbundleshouldbebestonasubsetof criteriaandtheothers theworstonothersubsets. Besideschoosingawinningstrategyandbundle,thecompanyneedsto makestrategicdecisions thatincludecompany- wideobjectives,strategicintent,majorprograms,andtriggersandcon - tingencies.Company- wideobjectivesaretargetsthewholecompanyisresponsibleforprodu c- ing,whereasfunctionalobjectivesapplyonlytofunctionaldepartmen
ts,partialobjectivesare subsumed under other objectives, and operational objectives are other kinds of nonstrategic objective.Thelatterthreetypesofobjectivesareoperational,notstrat egic.Objectivesarequan- titativetargetstobeachievedinaspecifiedtimeframe,whereasgoalsa resimplyqualitativeend- statestobeachievedinthefutureand,whiletheymaysoundinspiration al,lackincentivesand accountability. Becausethingsmaygowrongdespitethebestplanning,well- managedcompanieswilldocontin- gencyplanning.Thisinvolves,foreachcontingency,identifyinganex ternalassumptionthatmight be“soft”oruncertain(whatcouldgowrong),aquantitativetrigger(wh enshouldthecompanydo somethingdifferenttocorrectthesituation),andwhatthecompanywo ulddoifthetriggerwere reached.Companieswhopreparethemselvesinthiswayfarebettertha nthosethatdon’t. Finally,theboardofdirectorshastobekeptinformedandinvolvedthro ughoutthestrategic- decision- makingprocess.Whiletheirinvolvementvariesfromhands- offallthewaytotakingover thestrategicdecisionmakingcompletely(aswhenrespondingtoatake overbidormakingan acquisitionoffer),boardswoulddowelltodosomeofthefollowing:str engthentheirrelationship withtheCEOandCFO(insiderboardmembers),appointastrategic- planningcommittee,sitinon strategic- planningmeetings,orreceivesummariesofallreportsandresearchdo neinpreparation
forstrategic-planningmeetings. Key Terms argument Theargumentforselectingapre- ferredbundleconsistsoftw oparts:(1)reasons whythepreferredbundlewaschosen,and(2) reasonswhytheothertwowererejected.The reasonsaredrawnfromthecriteriamatrix. company-wide objectives Setduringthe strategic-planningprocessthatthewholecom- panymustachieve. CHAPTER 7Summary contingencies Back-upplansandprecursors tocontingencyplans.Theyarearesponseto aparticulartrigger,whatacompanymightdo differentlyifthattriggeroccurred. contingency planning CounteractsMurphy’s Law(“Ifanythingcangowrong,itwill”)bycon- templatingwhatcouldgowronginthefuture (trigger)andwhatthecompanywoulddodif- ferentlywerethattohappen(contingency). contingency plans Differfromcontingencies onlyinaddingoperationaldetails,likewho isresponsible,thebudgetandschedule,and whomustkeeptheplancurrentovertime. criteria matrix Amatrixforevaluatingalterna- tivebundlesusing5–6criteriaimportantto
thefirm.Usesascoringsystemthatenables theresultsofusingeachcriteriontobeadded upattheend.Absoluteratingsarenotimpor- tant,butrelative ratingsare.Thewinning bundlemusthaveat least three points more thananyotherbundle,otherwisethewinning bundlecannotbedefendedadequately. criteria Conditionsusedtoevaluatealterna- tivebundlesderivedfrompurposestodoing strategicplanningandwhatthefirmperceives as“success.”Mustbeclassifiedaseitherposi- tivelyornegativelycorrelated. criteria, negatively correlated Solabeled becauseabundlehavinglessofsomethingis “good”(opposites)—likeriskinessoramount ofinvestmentrequired.Bundlesusingsuch acriterionareratedonascaleof0to–10,0 beingbest. criteria, positively correlated Solabeled becauseabundlehavingmoreofsomethingis “good”(reinforcing)—likerevenuegrowthor profitability.Bundlesusingsuchacriterionare ratedonascaleof0to10,10beingbest. functional objectives Objectivesthatpertain onlytoaparticularfunction,likeincreasing thenumberofsalespeople(marketing/sales), increasingthroughputorproductioneffi- ciency(production),reducingpurchasingcosts throughredesign(engineering),orreducing theweightedaveragecostofcapital(finance). objective Aquantitativetargettobeachieved
withinaspecifiedtimeframe. operational objectives Objectivesthatare eithersubsumedbyhigher-orderobjectives (likereducingcosts)orconcerning,forexam- ple,securityorsystemsorplantmaintenance, noneofwhichcomeunderany“function.” partial objectives Objectivesthatco verpartof someactivity,likeinternationalsalesvs.total sales,salesfromnewproductsvs.allprod- ucts,salestomassmerchandisersvs.allretail channels. triggersShouldbeexternal,specific,and quantitative. Creating Strategic-Alternative Bundles Learning Objectives By the time you have completed this chapter, you should be able to do the following: • Developstrategicissuesfromhavingdoneafullsituationalanalysis. • Understandwhatitmeanstodevelopstrategicalternativesandwhyma nycompaniesdon’tdoit. • Developstrategicalternativesfromthelistofkeystrategicissues. • Createstrategic-alternativebundlesthatmeetcertaincriteria. • Understandwhythekeystrategicissuesandbundleelementsshouldm
atch. 6 Image Source / SuperStock CHAPTER 6Section 6.1 Key Strategic Issues ChapterOutline 6.1 KeyStrategicIssues 6.2 StrategicAlternatives 6.3 CreatingStrategicAlternatives 6.4 CreatingStrategic-AlternativeBundles 6.5 ClosingtheLoopwithStrategicIssues Thischaptershowshowtodevelopasetofkeystrategicissuesthatsum marizethemostcritical elementsoftheentiresituationanalysis,andfromsuchissuescreateas mallnumberofviable strategicalternatives,orbundles,forthecompanytoseriouslyconsid er. 6.1 KeyStrategicIssues Identifyingkey strategic issuesisanactofsynthesis,thatis,takingwhatyouknowabou ttheorga - nizationanditschangingenvironment(thesituationanalysis)andpin pointingthekeyquestions andconcernstheorganizationmustaddressinitsstrategicplan.Strate
gicissuesderivefromboth externalandinternalsources.Theformerincludesthecompany’sindu stry,competitors,customers, suppliers,opportunitiesandthreats,andotherenvironmentalforces. Thelatterincludeskeyorga- nizationalresources,culture,technology,orstrategicdecisionsthatt hecompanymustaddress. Forexample,consideramedium- sizedprivateuniversitybasedintheUnitedStates.Somecritical external strategicissuesmayincludethenatureofprivatehighereducationinth eUnitedStates; theattitudetowarditofthesurroundingcommunity;legislationandpo licygoverninghigheredu- cation;thepoolofgraduatingPhDs,whichrepresentspotentialfacult y;economicforcesinfluenc- ingeducationingeneralandprivateeducationmorespecifically;thec omparableuniversitiesthat prospectivestudentsconsider;andtheprofileofstudentstheuniversit yattracts.Someinternal issuesmayincludethesizeoftheuniversity’sfinancialendowment,sc holarshipmoniesavailable, aspectsoftheuniversity’shistoryandculture,therelationshipbetwee nfacultyandadministration, resourcesavailableforfacultyresearchandteaching,andtechnologie savailabletostudentsand faculty. Together,thesestrategicissuesformthebasisforgeneratingthestrate gicalternatives.Toooften, alternativesaregeneratedfromonlyasubsetofthesecategories,whic hmeansleavingoutalot ofinformationthatisprobablyknownandshouldbeconsidered. Therearetwokindsofstrategicissues:externalandinternal.Externali ssuesmaytaketheformofa
trend,forexample,likelyincreasesintheinterestrate,priceofacritica lrawmaterial,orthefrequency andseverityofterroristacts.Anotherformofexternalissueisanimpen dingeventsuchaslegislation thatisabouttobeenactedoralargecompetitorabouttoenterthecompet itivearena,perhapswith strategicconsequencesforthefirm.Internalissuesmaypresentasa strategicdecisionorchoice, somethingthatwillhaveadramaticimpactonthefirmandthewayitdoe sbusiness.Forexample,a companymayneedtodecidewhethertomergeoracquireanotherfirm, gopublic,formstrategicalli- ances,gointernational,verticallyintegrate,changeitsvisionandcore character,andsoon. Evenafteridentifyingastrategicissue,determiningwhetheritisreall ycriticalisstilldifficult.Itis usefultothinkofastrategicissueassomethingthatkeepstheCEOupat night. CHAPTER 6Section 6.1 Key Strategic Issues AndyGroveistheauthorofOnly the Paranoid SurviveandformerchairmanandCEOofIntel.In thebook’spreface,Grovedescribeshimselfasaworrierwhowasconc ernedwitheverythingfrom manufacturingissuesandcompetitiontotheabilitytoattractandmain taintalentedemployees. Whilesuchconcernskepthimawakeatnight,hebelievedstronglyinth e“valueofparanoia.”So whenreviewingalistofstrategicissues,usethisimageryasawayofpru ningfromthelistthose thatdonotmeritsuchobsessiveattention.Tryalsolookingataparticul arstrategicissueinrela-
tiontoothersonthelist;isitasimportantorlessimportant?Ultimately, thefinaldecisionissub- jective;whatonepersonmightconsidercriticalanothermightcrossof fthelist.Moretothepoint, aCEOortopmanagershouldrelyongutinstinctswhencreatingthelist ofstrategicissues:What aretherealissues,problems,ordilemmasfacingthefirm(Roberto,200 9)? Case Study Riverbank University Wehavejustdescribedhowthelistofstrategicissuesusedbyanorgani zationtoformulateaplan maybeeithertoolimitingortoobroadandthattoinformstrategyeffecti vely,theissuesmustbe thoughtfullygeneratedandedited.Thefollowingbriefcasestudysum marizeshowarecentlyhired universitychancellorandhercabinetwrestledwiththestrategicissue sneedingtobefacedbya small,privateliberalartscollegeintheNorthwes tUnitedStates.(Thei dentityofboththeuniversity andtheindividualshasbeenmasked.) RiverbankUniversitywassituatedinametropolitanareawithmanypu blicandprivatehighereduca- tioninstitutions.Ithadalongtraditionofexcellentundergraduateteac hingthatprimarilyattracted localandin- statestudents.Professorswereknownforthelonghourstheyspentadv isingstudents onbothcourse- relatedandpersonalissues,andfortheirstrongmentoringskills.Rese archwasnot partofthelandscapeforeitherprofessorsorstudentsatthisundergrad uate-onlyinstitution.Fac-
ultyatRiverdaleregularlyinvitedstudentstotheirhomesformealsan dparticipatedinon-campus eventsthataffordedtheminformalopportunitiestomeetandgettokno wstudents.MostRiverbank facultyhadspenttheirentirecareersthere,andturnoveramongprofes sorsandadministrationwas verylow. Inthelate1990s,asRiverbank’sboardoftrusteesandadministrationd esignedastrategicplanfor thenewmillennium,therewastalkaboutthedesiretobecomeanationa lly,ratherthanregionally, knownandrespecteduniversity.Officialsreasonedthatattractingam orediversepoolofstudentsas wellasbenefactorswouldenhancetheuniversity’sprofileandsetthes tageforcontinuedgrowthand competitivenessintothe2000s.Withthisgoalinmotion,asearchensu edforaqualifiedchancellor (chiefacademicofficer)thathadexperienceinleadingthetransformat ionfromaregionallytonation- allyrecognizedinstitutionandeventually,onewasselected. WhenDr.IreneCarsonarrivedoncampustobeginassessingtheclimat eandidentifyingthecritical issuesathand,shequicklybecameoverwhelmedwiththeinternalande xternalfactorsthatboth inhibitedandencouragedgrowth.Professorsatisfactionandmoralew erehugeissues:FacultyatRiv- erbanklikedthingsthewaytheywereandhadnoexperiencewithan“ou tside”administratorbeing hiredandsettingtheagendaforthem.Universityrelationshipswithke ystakeholders—donors,board members,andother“friends”oftheschool— weredelicateandneededtobecarefullymanaged. Thecitywheretheschoolwaslocatedwasresistanttogrowthofthephy sicalsizeoftheuniversity.
Thestructureoftheuniversity’sacademicschoolsanddepartmentsse emedunbalancedandillogi- cal.Manyprofessorswereusingoutdatedandoutmodedteachingmet hods.Theuniversityoffered noonlinecoursesinanerawhenallotherschoolsdid.Physicalinfrastr ucture,suchastechnologyand (continued) CHAPTER 6Section 6.1 Key Strategic Issues Thestrategydevelopmentprocessisnotatimetopullpunchesorshyaw ayfromthetruth.As DennisRheault, formervicepresidentresponsibleforcorporatestrategyanddevelop mentat Motorola,wrote,“Thepurposeofaneffectivestrategy- developmentprocessisnottoavoidbutto confrontuncertainty:toposethereallytoughquestionsthatyoudonot havetheanswersto—the issuesandopportunitiesthatcanmakeorbreakthebusiness”(Rheault, 2003,p.33).Thisisnota timetoparrotwhattheCEOwantstohear.Unlesstheseissuesarerealan dphrasedinplainterms, theresultingstrategicalternativesthataredesignedwillbesuboptima l—thatis,notthebestones thatcouldbedevisedandthusnotinthecompany’sbestinterests.Havi ngstrategicconversations withcolleaguesoroutsideexpertsoverthecourseofayearwillhelptou nearththerealissues thatthecompanymustconfront.Ashasbeenemphasizedearlier,thisp rocessismostfruitfulifit isundertakenonanongoingbasisratherthanasanannualexercise.
labspace,waslacking.Moreover,Dr.Carsonknewthatuniversitiesdo n’trisetonationalprominence basedonexcellentteaching.Sheknewthatsheneededtheresourcestoa ttractsomestarresearchers. So,Dr.Carsonsetabouthavingstrategicconversationswithkeyconsti tuents:membersoffacultysen- ate,deans,boardmembers,students,communitymembers,andotheru niversityofficials.Through theseprivatemeetings,informalconversations,andpublictownhalle vents,Dr.Carsonandher teambegantoclarify,prune,andprioritizethelistofstrategicissuesint omanageable,realistic,and relevantorder.ThisbundleofstrategicissuesallowedRiverbanktom oveforwardtowarditsgoalof nationalrecognition. First,Dr.Carsonidentifiedstructuralproblemsandcorrectedt hemby movingsomeacademicdepart- mentstodifferentschoolswithintheuniversitywheretheymademore senseandstoodabetter chanceofbecomingaccredited.Forexample,aSchoolofPerforming Artswascreatedtohousethe- atreanddance,becauseRiverbank’sdancedepartment’sprimarybarr iertonationalaccreditation wasthelackofsuchaschool.Next,thechancellorleveragedimportant andlongstandingrelationships withkeybenefactorsandtheboardoftrusteestogaincommitmentstow ardnewfacilitiesthatwould enhancetheuniversity’sgoalofattractinghigh-profile,high- achievingresearchfaculty.Withthesetwo criticalstrategicissuescovered,thenewchancellorandherteamthenf ocusedonrecruiting“stars.” Withinfiveyears,Riverbankwashometoagrowingnumberofgraduat eprograms,aNobellaure-
ate,numerousprestigiousfacultymembersrecruitedfromwell- knownresearchuniversities,and astudentbodythat,forthefirsttime,representedall50statesintheUnit edStates.Allconcerned acknowledgedthattheuniversity’sstrategywasworking. Questions for Critical Thinking and Engagement: 1. WhenyouconsiderRiverbank’shistoryandthecasepresented,doyou believethatDr.Carson’s eventuallistofpriorities(keystrategicissues)wasappropriate?Why orwhynot?(Notethatthe questionusestheterm“appropriate”ratherthan“successful.”) 2. Basedonyourreadingandanalysisofthisbriefcase,wasthelistofcriti calissuesthorough enough?Wasanythingleftoffthelistthatshouldhavebeenthere? 3. Withoutanyadditionalpersonalknowledgeofthisinstitution,contin uewritingthecasestudy. Thecaseendsonanoteofsuccess,butwhat“fallout”mightyouexpectb asedontheback- groundyouweregiven?Beasspecificaspossible. 4. CommentonDr.Carson’spracticeofstrategicconversationswithkey constituents.Basedonyour readingofthischaptertothispointandyourownexperience,didshedot herightthing?Whyor whynot?
CHAPTER 6Section 6.1 Key Strategic Issues Strategic Conversations Astrategicconversationisafree- rangingdiscussiononatopicofstrategicinteresttoanorganiza- tion.Becauseofitscharacteristic“no-holds- barred”freedomtosaywhateverneedstobesaid,it invariablyproducesideasandthinkingthatareultimatelyusefulinthe strategic-planningprocess andthatmightnotbecapturedinanyformalprocess. All major strategic planning, according to Peter Schwartz,cofounderoftheGlobalBusinessNetwork, does not, in fact, take place during the strategic- planningprocess(Abraham,2003).Whatgoesonina formalprocessisalmostalwaysaratificationofwhat hasalreadyhappened.Astrategicconversationisan attempt to understand the real strategic-planning process and often takes place entirely informally. Schwartz’scolleaguesatBellSouthusedtocallitthe HERs process—hallways,elevators,andrestrooms— becausethat’swherethemostinterestingconversa- tionstakeplace.Whilerealdecisionsgotmade,real issuesgotconfronted,realknowledgewasdeveloped, andsoon,almostallofittookplaceinthisconver- sational mode. And that is how real learning also takes place. If you are going to have good strategy, it involvesgoodlearning—learningaboutnewreali- ties,newfacts,newcompetition,newopportunities, newdirections—andchallengingoldknowledge.Sim- plywritingastrategicplanasanactoflistingasetof newobjectivesforthecomingyearasifnothinghad changedispointless.Theproblemisthatifeverything haschangedandyouneedtocomeupwithaplan, howareyougoingtolearnaboutthosechanges?
Furthermore, again paraphrasing Schwartz, it is one thingtodothisforanindividual,buthowdoyo uget agroupofdecisionmakers,whoalmostalwayshave to act together, to acquire that knowledge and to developandimplementstrategicplans?Hemaintainsthattheonlyway youlearntogetheris throughconversations(Abraham,2003).Whetherformalorinformal, astrategicconversationis thelearningvehiclethroughwhichthegroupadjuststoanewworldvie wtoenablestrategicplans tobedevelopedandimplemented.Thestepsintheprocessfollowthiss equence:sharedconver- sations,sharedlearning,changeone’smentalmodels,thendevelopbe tterstrategicplans.Tony ManningechoesSchwartzinendorsingthevalueofinformaldialogue : Strategicconversationisfarmorethanjustanoccasionalpracticethat canbe adoptedorabandonedatwill:itiswithoutdoubtthecentralandmostim portant executivetool. . . .Whatseniormanagerstalkabout— clearly,passionately,and consistently— tellsmewhattheypayattentiontoandhowsuretheyareofwhat theymustdo.(Manning,2002) Comstock Images / Stockbyte / Thinkstock One informal strategic planning process involves “HERs”—hallways, elevators and restrooms. These informal meetings can be where the most interesting conversations take place.
CHAPTER 6Section 6.1 Key Strategic Issues TheviewpointofmoststrategicanalysesisassumedtobethatoftheCE Oorleaderoftheorga- nizationandmayincludethetop- managementteam.Whenexaminedfromtheviewpointofa boardofdirectors,othervariablescouldbeaddedtothelistofstrategici ssues,suchaswhether togopublic,andevenwhetheritistimetoreplacetheCEO. Thereisonefinalcheckonwhetheryouaredealingwiththepropersetof strategicissues.Because theyconstitutethecriticalquestionsandissuesacompanyshouldaddr ess,theyshouldallbe takenintoaccountexplicitlywhenformingstrategicalternatives.Inth eeventthatthealternatives failtotakeintoaccountoneofthestrategicissues,itcouldmeanthateit her(a)thestrategicalter- nativeshavenotbeenproperlyformulatedandshouldbefurthermodif iedtotakeitintoaccount, or(b)theissueinquestionisnotasimportantaswasinitiallyassumed,a ndthuscouldbedeleted. While it is possible that a firm could have any number of stra- tegic issues at a given point, the larger the number of issues pro- posed,thehigherthechancesare thatsomeofthemarenotascriti- calasothers.Longlistsofover12 items should be pruned down to about 8–10 priority issues, elimi- natingthosethatarenotsocriti- calorcombiningsomeofthem.If thelistcannotbereducedatthis
stage,anotherchancetodosowill bewhenthestrategicalternatives have been created if it is found thattheyhavestillnottakeninto accounteveryissue. Strategicissuesaretypicallyexpressedinoneoftwoforms:eitherasas tatementorasaquestion. Forexample: • WhetherthecompanyshouldacquireXYZCorporation. • ShouldthecompanyacquireXYZCorporation? Thesecondisphrasedasaquestionandistherecommendedformbecau se,iftheoutcomeis knownwithcertainty— ”Yes,thecompanyshouldacquireXYZCorporation”— thentheissueisnot astrategicissue;itisadecisionthecompanyhasalreadytaken.Itisnots ufficient,however,that onesimplyposeaquestiononamatterofstrategicconcern.Considerth efollowing: • Shouldthecompanytrytolowercosts? • Howcanthecompanyloweritscosts? Thestrategicissueisnotwhethertolowercosts;thea nswertothatquest ionisthatofcourseit should.Rather,thestrategicissuemightbe“Howcanthecompanylow eritscosts?”becausethat answermaybeuncertain,soitcouldbeincludedasabonafidestrategici ssue. Thus,onecriterionforastrategicissueisthattheanswertotheissueisu ncertain.Thewayin whichthatuncertaintyisresolvedisthroughthedesignofstrategicalte
rnativesandchoosinga SOMOS / SuperStock When considering strategic issues, lists of 12 items or more should be reduced to 8–10 items by the CEO and/or the top management team. CHAPTER 6Section 6.2 Strategic Alternatives preferredone.Givenastrategicissue,“Shouldthecompanybroadenit sproductline?”onealter- nativebundlecouldsay,“Broadenit”andanother,leaveitoutaltogeth er(notbroadenit).Thus, throughdecidingwhichalternativeispreferred ,theonethatischosena utomatically“resolves” theuncertaintyinherentintheissue. 6.2 StrategicAlternatives Anordinaryalternativeisoneofseveralmeansbywhichagoalisattain edoraproblemsolved.A strategic alternativeisoneofmanyroutesacompanymighttaketogainmarketa dvantage,real- izeitsgoals,or,ifnospecificgoalhasbeendeclared,decidewhereitmi ghtgoandwhatitmight accomplish.Noticetwothingsaboutthedefinition:(a)Thedesignatio n“strategic”isnecessary becausealternativesarefashionedinacompetitiveenvironment,whe reactionsandretaliations ofcompetitorsmustbetakenintoaccount;and(b)thealternativesarec reatedatthelevelofthe wholefirmandnotanyoneofitsfunctionsorunits.Inaddition,theypro videchoicesaboutmar-
ketplacestrategyoraboutconfiguringtheorganization,addressissue sofcentralimportanceto theorganization,haveuncertainoutcomes,andrequireresourcestode velopbeforeactioncanbe taken(Lyles,1994). Alternativesareofthreegeneraltypes.“Obvious”alternativesarisefr omcurrentstrategiesor simpleextrapolationsofwhattheorganizationiscurrentlydoing.For example,utilizingFacebook, Twitter,andablogtocommunicatewithconsumersrepresentsanobvi ousstrategicalternative. “Creative”alternativestakedifferentconceptualapproachesthanexi stingstrategiesdoandbreak away,tosomeextent,fromtheassumptionsandbeliefsunderlyingcur rentstrategies.Atraining- and- developmentorganizationspecializinginthecreationandfacilitatio nof live,face-to-face, trainer- ledinstructionmightpursueacreativealternativebyenteringthee- learningmarket. “Unthinkable”alternativesreflectaradicaldeparturefromtheorgani zation’shistoricmindset (Lyles,1994).Forinstance,asaresultoftheorganization’sorganizati onalcultureandvalues,alco- holicbeverageshaveneverbeenmadeavailableforsalewithinDisney themeparks.Theideathat thesaleofliquorcouldenhanceprofitorattractnewcustomerswouldr epresentanunthinkable strategicalternative.AsintheDisneyexample,anunthinkablealterna tivemightbeappropriately labeledassuchbecauseitviolatessomedemonstrated,effectivecorev alueoftheorganization. However,sometimesalternativesareunthinkablesimplybecausenoo
nebeforehasbothered tobreaktherulesofwhatisappropriateforhowanorganizationdoesbu siness—evenwhen experimentingwithsuchalternativesmightbetherightmove.Typical ly,suchalternativeshave littlechanceofbeingacceptedbymanagementunlessargumentsforth eiradoptionarepersua- siveandmadebysomeonewhocommandsrespectintheorganization. Unthinkablealternatives Discussion Questions 1. Havingdoneathoroughsituationanalysis — bothexternalandinternal—doyouagreethatit makessensetosynthesizetheresults?Explainyouranswer. 2. Inyourview,wouldtheexternalanalysispreviouslydonebemoreusef ulinscenarioplanning thaninformingstrategicissues?Whyorwhynot? 3. It’spossiblethatmanagersdon’tgothroughaprocessofcomingupwit hstrategicissuesbecause itinvolvesphrasingquestionstowhichtheanswersareunclear(should n’tmanagersknowallthe answers?).Couldtherebeanytruthtosuchaview? 4. Suggestwaysofshorteningalistof20strategicissuestoamoremanage ablenumberofabout12. CHAPTER 6Section 6.2 Strategic Alternatives
illuminatethecurrentsituationinaradicallydifferentlighta ndinspire othermanagerstopropose creativesolutions.However,thistypology,whileinsightful,istypica llynotadvocatedasaframe- worktogeneratealternatives. Forsomecompanies,thedecision- makingabouttheirfuturemayinvolvetweakingtheirpresent strategyslightly.Thismightbesomethingassimpleasaddingadistrib utionchannelorstartingto advertiseontelevision.Althoughthecompanymightclaimthatthisre presentsachangeinstrat- egy,itisinfactsimplyachangeinimplementation.Dutchdigital - navigation-equipmentdeveloper TomTomrecentlyannouncedthatitwouldscalebackthepersonal- navigation-devicedivisionthat hadmadeitfamousandshiftfocustoitsbuilt-inautomotive- navigationsystems.TomTomhad consistentlylostprofitonthesmallpersonal- navigationdevicessinceconsumersbeganrelyingon freeorlowcostmappingapplicationsonsmartphonesandtablets.Con versely,financialreports suggestedthestrategyshift:Thebuilt-in- automotivesystemsisthefastestgrowingdivisioninthe company(TomTomshares,2011). Forothercompanies,thestrategyitselfmayremainunaltered,buttheo bjectivesmaychange, suchasfrom10%peryearto15%peryeargrowthinrevenuesorprofits. Companiesmaymis- takenlycharacterizethisasachangeinstrategy;however,ifthebasicw ayinwhichthecompany competeshasnotchanged,thenthisisnotachangeinstrategy. Obstacles to Creating Strategic Alternatives Whatmanycompaniesdowhenplanningahead,itwouldappear,invol
vessimplemindedextrapo- lationsofpastaccomplishmentsinvolvingnochangeinstrategy,orthe ymakethefirstchangethat occurstothemthatmakessenseatthetime.Sometimesitworksorwork sonlyforashorttime, butmoreoftenitdoesnot.Asnaïve as this sounds, how else can we accountforsomanypoordecisions made by various companies over theyears?Eventhebestdecision madeatagiventimecanleadtoa poorresultbecauseofunforeseen eventsandactions.Poorresultsare notoriouslytheinevitablebyprod- uctofpoorexecution,evenwithan otherwisesoundstrategyinplace. Ineachofthesecases,isthestrat- egy the company chose the best one it could have adopted in the circumstances? The only way to tell,really,istohaveanalyzedthe subset of all plausible alternative strategiesandchosenoneforvery good,defensiblereasons.Ifthisis done,thenanychallengeorques- tion about what else might have Business Wire via Getty Images Pep Boys, an auto-service firm in Southern California, created a strategic alternative to their business strategy when they decided to start advertising on television.
CHAPTER 6Section 6.2 Strategic Alternatives beendonecanbepreemptedbecauseonecanargueconvincinglywhyt hechosenstrategyis superiororatleastpreferabletoanyotherthatmightbeproposed. Focus on Perceived Costs Whydon’tcompaniesdevelopalternativestrategiesroutinely?Many companiesforegodeveloping strategicalternativesbecausetheyperceiveobstacles,realorimagine d.Anexcusecommonlyheard isthatittakesalotofeffortandtime:“We’reinahurryandcan’taffor dto wait.” Infact,todosome- thingwelldoesrequiretimeandeffort,soclaimingtobeinahurryisjust aconvenientexcuse.True, circumstancessometimesdemandaquickdecision,butevenso,makin gadecisionwithoutconsider- ingalternativesisfoolhardy.Besides,tomakeanydecisionatall, onen eedsatleasttwoalternatives. Anotherreasonofferedfornotconstructingstrategicalternatives isthattheexercisedoesn’t guaranteethe“right”answer,soitmaybeawasteoftimeandresources. Itistruethatnoone canguaranteethecorrectnessofadecisionwhoseconsequencesplayo utinthefuture,butby consideringthesignificanttrendsandimpacts,includingtherelevant variables,assessingthefit withthecompany’scapabilitiesandresources,andconsideringplausi blestrategicalternatives, thechancesofmakingthe“right”decisionforthecompanyaresubstan tiallyenhanced.Only when3,5,oreven10yearshavepassed,canyoulookbackinhindsighta ndknowwhetherastra- tegicdecisionwasgoodornot.Otherwise,onehastomakethedecision whilenotknowinghow
thingswillactuallyturnout.Allonecandointhecircumstancesisone’s best.Butcompaniesthat skiptheprocessentirelyforlackofcertaintydonotgivethemselvesafi ghtingchancetomakethe bestdecisiontheycan;theyshort-changethemselves. Focus on the Past Manymanagersaremorecomfortablethinkingaboutandanalyzingth epastthanthefuture. They seemtofindnothingwrongaboutexaminingpastdataandthenmaking adecisionthatwillplayout inthefuture.Thepastiscertain;the futureisnot.Inthesedaysofrapid, even discontinuous change, past dataareoftenirrelevant.Whatwe needtoexaminearetrendsabout everything that is changing and likelyfuturemovesofcompetitors. Howareindustrieschanging?What will merging industries become? Howwilltechnologyaffectourlives, whatwebuy,howweuseproducts, howwethink,howwedobusiness? Peoplearelesscomfortableinthe future because they are unable topredictorforecastit,unableto extrapolate,andunusedtoambigu- ityanduncertainty.Anoft-repeated jokeisthatpeoplewouldratherbe certainlywrongthannotsure Comstock / Stockbyte / Thinkstock Small groups of managers sometimes brainstorm ideas that later become strategic alternatives. This process must begin
with framing a problem and identifying a list of alternatives. CHAPTER 6Section 6.2 Strategic Alternatives whethertheywereright.Thethoughtthattheymighteveninfluencethe outcomeoffutureevents evenescapesthem.Manypeoplesimpl yregardthefutureassomething beyondtheircontrol. Complacency Therearemanagerswhodon’ttaketheresponsibilityforstrategicplan ningseriouslyenough,or theydon’tdevoteenoughtimetoaskthemselvesreallytoughquestion sthatmightputtheircom- paniesonastronger,albeitdiffer entcourse.Itismucheasiertokeepdoi ngwhatthecompanyhas beendoing,particularlyifthecompanyisperformingreasonablywell. Setbackscanbeblamedon acompetitor,anunexpectedpieceofnewlegislation,adownturninthe economy,orariseinsup- plierprices.True,theunexpectedoftenhap pens,butinhindsight,man y“unexpected’occurrences couldhavebeenanticipatedandtakenintoaccounthadstrategicplanni ngbeenproperlydone. Insufficient Training Manypeoplewhodon’tknowhowtodostrategicplanningwouldrather avoidadmittingsoto savefaceandwillinsteaddowhattheythinkisstrategicplanning— astheyhavealwaysdoneit. Thismaybeavalidreasonbut,ifthatisthecase,thecompanyisatriskun lessanduntilithas managementinplacethatistrainedinstrategicplanning.Whiletherei snofoolproofwayofcom-
ingupwithagoodstrategy,theprocessreliesto averylargeextentonstr ategicthinking,andthe resultsachieveddependinlargepartonone’sstrategic- thinkingabilityandonexperiencewith andcommitmenttotheapproach.Evenafteracompanyhasdecidedon astrategy,itmustbefully investedinmakingitsucceed.Itwillrequiretheleaders ofthecompany toprovideideas,motiva- tion,arguments,andskillatimplementationthatwillbringtheresultsd esired.So,althoughitis moreconvenienttohidebehindignoranceandstayinone’scomfortzo ne,itmaynotbethebest waytochartthecompany’sfuturecourse. Inmanycompanies,staffplannersandevensomelinemanagerswhova luetheprocessofstra- tegicplanningfindonlylipservicepaidtoitbecauseofdisinterestoral ackofcommitmenton thepartoftopmanagement.Thismightbetheproductofatraditionorcu ltureofriskavoidance orentrenchedandthreatenedinterestgroupsraisingimpedimentstoth eprocess.Finally,top- management’sreluctancetoembracetheprocessmaystemfromsimpl eignoranceaboutwhat strategicplanningreallyisandissupposedtodo. Myopia Finally,companiesformanyreasonsputafargreateremphasisonshort -termfinancialresults than on longer-term strategic performance. While short-term financial performance is impor- tant,itshouldnevercomeattheexpenseoflonger- termperformance.CEOswhofeelthreatened withlosingtheirjobsorwhosejudgmentmaybeinfluencedbythevalu eoftheirstockholdings maytendtofocusontheshortterm.Boardsofdirectorsconcernedprinc
ipallywiththecom- pany’sstockpriceorthecompany’simmediatesurvivalalsorepresent instanceswhereshort- termconsiderationsdominate.Inthisenvironment,thecompany’slon g-termfutureandpotential areoftensacrificed,aswhenexpendituresforR&D,new- productdevelopment,advertising,and trainingprogramsareslashedtoshowprofitsforthequarterlyandyear -endreports.Clearly,such decisionsaresuboptimalandnotmadeinthelong- termbestinterestsofthecompany.Suchdeci- sionsalsoadverselyaffectanystrategicalternativesthecompanymay considerandthestrategic directionthecompanypursues. CHAPTER 6Section 6.3 Creating Strategic Alternatives 6.3 CreatingStrategicAlternatives Onetypicalwaythatstrategicplanningisconductedis forasmallgrouporteamofmanagerstobrainstorm ideas that later become alternatives. Some follow a specific process, some don’t. Marjorie Lyles (1994), Professor of International Strategic Management at Indiana University’s Kelley School of Business, sug- gestsaprocessthatbeginswithframingaproblem, identifyinganinitiallistofalternatives,extendingthe listifresourcesandtimepermit,thennarrowingthe listthroughaprocessofevaluationandconsolidation. However,whoistosaythattheresultinglistcontains goodratherthanmediocreorunimaginativealter na- tives?Clearly,aworthwhilestrategycannotcomefrom poorly conceived alternatives. Lyles specifies certain criteriaastowhatmakesalistofalternativesuseful:
• Thevarietyofalternatives • Differences among them compared to the presentsituation • Thecostsanddifficultiesofimplementation; iftheyarealltooeasytoimplement,theorga- nizationisnotstretchingitselforbeingambi- tiousenough • Thedegreetowhichtheychallengeexisting goals,aspirations,long-heldassumptions,and beliefs(Lyles,1994) EdwarddeBono(1992)makesthedistinctionbetween choosingfromalternativesthatalreadyexist,suchas tiesinaclosetormenuchoicesatarestaurant,and alternativesthatdonotexistandneedtobefound.In thelattercase,onecannotsuggestjustanyalternative Blend Images / SuperStock To unlock your imagination and visualize ideal solutions, consider the future needs of your ideal company or industry, the per- fect product and packaging, and the ideal service or system for your company. Discussion Questions 1. Whichoftheobstaclestocreatingviablestrategicalternativesaremos teasilyremoved?Which onesmightbethemostdifficulttomitigate?Discuss. 2. Thinkofapersonaldecisionyoumadeforwhichyouactuallyconsider
edatleastoneotheralter- native.Couldyouhavemadethedecisionwithoutconsideringthealter native?Ifso,whydidyou considerthealternative?Wasyourdecisionaffectedbyhavingconsid eredthealternative? 3. Ifyoufollowsports,trytoimagineyourfavoriteteam.Ashardasitmay beforthatteamtowin games,therealstrategicdecisionsaremadeawayfromthearenaandpr obablyintheoff-season. Whichplayerstotrade?Whowouldimprovetheteam,andcouldthetea macquirethatper- son?Howtolowerthetotalpayrollandstillfieldawinningteam?Descr ibewhichpeopleinthe organizationparticipateinsuchstrategicdecisionmakingandwhethe rinyouropiniontheygo throughasystematicprocessofcreati ngandweighingdifferentaltern atives. CHAPTER 6Section 6.3 Creating Strategic Alternatives andhavethatalternativemakesense.Ithastoberelatedtoareferencep oint.Forexample,what alternativesaretheretoachievingthispurposeorcarryingoutthisfunc tion? Tohelpincomingupwithalternatives,deBonosuggeststhinkingofgr oups,resemblances,simi- larities,orconcepts.Forexample,asanalternativetoanorange,doyou searchforothercitrus fruit,domesticfruit,refreshingbeverages,orcolors?Histechniqueof lateralthinkingisdirectly
concernedwithchangingconceptsandperceptions,especiallywhenu sedtocomeupwithalter- nativesinsolvingproblems(deBono,1992).Itisasystematicwayofge neratingnewideasand newconcepts.Besidesleadingtoadefensiblestrategy,comingupwith suitablestrategicalterna- tivesisanexcellentopportunitytoexplore,viastrategicthinking,whe thertheorganizationshould beheading inanotherdirectionordoingbusinessadifferentway.Ofcourse,comp aniesthat havebeenoperatinginacertainwayforyearsexperiencingsatisfactor yresultsarenotinclinedto changetheirwayofdoingbusiness,becausethereisnoperceivedneedt odoso.Oneoverlooked reasonforcomplacencyisthatitisalmostimpossibleeventothinkabo utdoingbusinessinadif- ferentwayorheadinginadifferentdirectionwhenyouareanintrinsicp artoftheorganizationand havebecomeusedtodoingthingsthewayyoudo.Infact,thisisanideal, ifsomewhatcounter- intuitive,timetoexploreotheroptions.Manycompaniesfallintothem indsetof“Ifitain’tbroke, don’tfixit,”andtheyaredifficulttopersuadeotherwise.Theyaddresst heissueonlywhentheir strategyfalters,orwhencompetitorsovertakethem,orsomeotherthre atlooms,bywhichtime it’softentoolate.Opportunitiesgounrecognizedbecausetheyareseld omsoughtorconsidered, whichisyetanotherreasontobedoingstrategicthinkingallthetime.In caseslikethis,theorga- nizationmaywellbenefitfromanoutsidefacilitatorandspecificexerc isestostimulatecreativity. JamesBandrowski,PresidentofStrategicActionAssociates,offerso neofthemostpowerfultech-
niquesforusingcreativeimaginationtofindalternativesor,moreaccu rately,breakthroughs(Band- rowski,1990).Hesuggestsvisualizingtheidealsolutionandthen“fill inginthefeasibility”afterwards, thatis,figuringouthowtoachievethatidealsolution(Figure6.1).The advantagesincludecoming upwithsomethingradical,leapfroggingthecompetitioninsteadofjus tcatchingup,gettingreadyfor tomorrow’smarkets,andinjectingnewlifeintoapossiblycomplacent andmentallytiredorganization. Ideal Solution Current Situation Improved Situation Strategic Blocks Leap over blocks
Solve problem backwards Problem Problem Figure 6.1: The creative leap CHAPTER 6Section 6.3 Creating Strategic Alternatives Ratherthanjustblindlysearchingforidealsolutions,Bandrowskioffe rsthefollowingsuggestions formakingacreativeleap,allofwhichwillimproveyourabilitytothin kstrategicallyandsupple- menttheideasdiscussedinChapter3: • Year 2020— Pickadateinthefuturesuchastheyear2020.Callit“Challenge2020,”a techniqueemployedby3M.Unlockyourimaginationandvisualizewh
atyourindustry, products,services,markets,andsoonwillbelikethen.Bandrowskisa ys,“Thefuturewill beinventedbythosewhoseeittoday.” • Ideal company— Whatwouldtheidealcompanylooklike?Whoisthebestcompetitorin theindustry?Whatdoyoumostcovetinthiscompetitor?Whatcompan ywouldyoumost liketoacquireandwhy?BandrowskiquotesLeeIacocca’sdescription ofanidealautomo- bile company: “It would combine German engineering, Japanese production efficiency, and Ameri- canmarketing.” • Ideal industry—Reconceptualize yourentireindustry.Howcould itbecomemoreprofitable?How could technology revitalize it? Would it make sense for it to merge with another industry? How could you tilt the playing fieldinyourfavor?
• Sweeping solution—Start with ablankcanvasandtrytofinda totalsolution,ratherthantrying toimprovevariouscomponents such as production, marketing, anddistribution.Isthereacom- pletely different way of doing businessthatisbetter? • Perfect product— Whatidealproductscouldbeprovidedtoeitherexistingornewcus - tomers,assumingnofiscalortechnicalconstraints?Customersshoul dbeincludedinthis fantasyexploration;infact,howmightcustomersbepersuadedtohelp co-createvalue? Oneplacetostartmightbetolistorcollectdataaboutalltheshortcomin gsofexisting products. • Perfect package—How could packaging most benefit the product? Could it make the producteasiertouse,lastlonger,moreconvenient,moretransportable ,andthelike? Coulditbecombinedwiththeproductoreveneliminated?
• Ideal service—Ask what customer needs are directly or even indirectly related to the productthecustomerbuys.Anytimeyoucanmakeyourproducteasiert ouse,saveyour customermoneyortime,orincreaseyourcustomer’ssales,itmayprov ideanopportunity toimproveyourservicetothatcustomer. • Ideal information— Whatinformationmustyouhavetowin?Whatdon’tyouknowthat ishamperingyoureffortsorcausingyoutobeuncompetitive?Includei nformationalso abouttrendsandthefuture.Rankthelistintermsofimportancetotheco mpany,notin termsofwhatispossibleorwhatcoststheleast. • Ideal system— Focusonnewwaysofincreasingthroughput,reducingcosts,reducing cycle time,orbringingnewproductstomarketfaster.Thisisanareainwhich business-process reengineeringtraditionallytakesplace.Butwhatdoyoudoforanencor eafteryourreen- gineeringhastakenplace?
Spencer Platt / Getty Images Hyundai’s cars were once considered inferior products until the company retooled its strategic intent and upgraded the quality of its cars. It paid off with increasing market share. CHAPTER 6Section 6.4 Creating Strategic-Alternative Bundles 6.4 CreatingStrategic-AlternativeBundles Theprocessproposedherestartswiththelistofkeystrategicissuesdis cussedintheprevious section.Becausethesestrategicissuesrepresentthemostpressingand importantproblemsand issuesfacingtheorganization,anysubsequentplanorstrategythatisd evelopedshouldaddress allofthem.So,startingwiththatlist,createtwotofouralternativesthat meetcertaincriteria. Mostorganizationsmanagetocomeupwiththree;identifyingmoret h anfourisextremelydif- ficult.Youmustbewondering,“Surelyonecancomeupwithmanymor ethanfour?”Readon, thesearenot“ordinary”alternatives.
Becauseofthelargenumberofpossiblestrategiesavailable,mystude ntshavealwaysfoundit extremelydifficulttocreategoodstrategical ternativesotherthanthe obvious“safe”ones.Con- siderforamomentthefullrangeofstrategiesdiscussedinSection3.2, whichareorganization- wide “master” or “grand” strategies, and do not include functional or operational strategies, classifiedas programs inthisbook.Anorganizationcouldchooseaparticularcombinationof strategiestoadopt,butinordertoshowthatitisthebestchoiceatthetim e,itwouldhaveto compareittoallothercombinationsofstrategies,aHerculeanandimpr acticaltask.Ittookseveral yearstomaketheconceptualleapandask,“Whati ftherewereonlyasm allnumber,saytwoto fourchoices,available?Andwhatiftheyconstituted“either/or”choic essuchaschoosingAorB orC,ratherthansayingthatA+BtogetherwasbetterthanAalone,orA+ BwasbetterthanC+ D?Asthetechniquetookshape,itseemedtomakemoreandmoresense, butmakingitpractical provedtobeelusiveforawhile.
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