Strategic Management Chapter 1.ppt on Strategic Leadership

Chapter One
Strategic
Leadership:
Managing the
Strategy-
Making
Process for
Competitive
Advantage

Copyright © Houghton Mifflin Company. All rights reserved. 1 | 2
Why do some organizations
succeed while others fail?
 Strategic Leadership
• Task of most effectively managing a
company’s strategy-making process
 Strategy Formulation
• Task of determining and selecting strategies
 Strategy Implementation
• Task of putting strategies into action to improve a
company’s efficiency and effectiveness
Competitive Advantage
Results when a company’s strategies lead to
superior performance compared to competitors
Strategy is a set of related actions that managers
take to increase their company’s performance.

Superior Performance and
Sustainable Competitive Advantage
 Superior Performance
• One company’s profitability relative to that of other companies in
the same or similar business or industry
• Maximizing shareholder value is the ultimate goal of profit making
companies
ROIC (Profitability) = Return On Invested Capital
• Net profit Net income after tax
Capital invested Equity + Debt to creditors
 Competitive Advantage
• When a company’s profitability is greater than the average of all
other companies in the same industry & competing for the same
customers
=
ROIC =
Sustainable Competitive Advantage
When a company’s strategies enable it to maintain
above average profitability for a number of years

Determinants of
Shareholder Value
To increase shareholder value, managers must
pursue strategies that increase the profitability
of the company and grow the profits.
Figure 1.1

A business model encompasses how the company will:
Company’s Business Model
Management’s model of how strategy will allow
the company to gain competitive advantage
and achieve superior profitability
• Select its customers
• Define and differentiate
its product offerings
• Create value for its
customers
• Acquire and keep
customers
• Produce goods or
services
• Deliver those goods and
services to the market
• Organize activities within
the company
• Configure its resources
• Achieve and sustain a
high level of profitability
• Grow the business over
time

Differences in Industry
and Company Performance
A Company’s Profitability and
Profit Growth are determined
by two main factors:
The overall performance
of its industry relative
to other industries
Its relative success in its
industry as compared to the
competitors

Return on Invested Capital
in Selected Industries, 1997–2003
Data Source: Value Line Investment Survey
Figure 1.2

Performance in Nonprofit
Enterprises
Nonprofit entities such as government
agencies, universities, and charities:
• Are not in business to make a profit
• Should use their resources efficiently
and effectively
• Set performance goals unique to the
organization
• Set strategies to achieve goals and compete
with other nonprofits for scarce resources
A successful strategy gives potential
donors a compelling message as to
why they should contribute.

Strategic Managers
 Corporate Level Managers
• Oversee the development of strategies for the
whole organization
• The CEO is the principle general manager who
consults with other senior executives
 General Managers
• Responsible for overall company, business
unit, or divisional performance
 Functional Managers
• Responsible for supervising a particular task
or operation
e.g. marketing, operations, accounting, human resources

Levels of Strategic Management
Figure 1.3

The Five Steps of the
Strategy Making Process
 Select the corporate vision, mission, and values
and the major corporate goals and objectives.
 Analyze the external competitive environment to
identify opportunities and threats.
 Analyze the organization’s internal environment
to identify its strengths and weaknesses.
 Select strategies that:
• Build on the organization’s strengths and correct its
weaknesses – in order to take advantage of external
opportunities and counter external threats
• Are consistent with organization’s vision, mission, and values
and major goals and objectives
• Are congruent and constitute a viable business model
 Implement the strategies.

Main
Components
of the
Strategy-
Making
Process

 


Figure 1.4

 Crafting the Organization’s
Mission Statement
Provides a framework or context within
which strategies are formulated, including:
 Mission –
The reason for existence – what an organization does
 Vision –
A statement of some desired future state
 Values –
A statement of key values that an organization is
committed to
 Major Goals –
The measurable desired future state that an
organization attempts to realize

The Mission
 What is it that the company does?
 What is the companies business?
• Who is being satisfied
(what customer groups)?
• What is being satisfied
(what customer needs)?
• How customer needs are being satisfied
(by what skills, knowledge, or distinctive competencies)?
The mission is a statement of a company’s
raison d’etre, its reason for existence today.
A company’s mission is best approached from
a customer-oriented business definition.

The Mission
Customer-Oriented Examples
The mission of Kodak is to provide “customers
with the solutions they need to capture, store,
process, output, and communicate images –
anywhere, anytime.”
Ford Motor Company describes itself as a
company that is “passionately committed to
providing personal mobility for people around
the world….We anticipate consumer need and
deliver outstanding produces and services that
improve people’s lives.”

Abell’s Framework
for Defining the Business
Figure 1.5
Source: D. F. Abell, Defining the Business: The Starting Point of
Strategic Planning (Englewood Cliffs, Prentice Hall, 1980), p. 7.

The vision of Ford is “to become the world’s
leading consumer company for automotive
products and services.”
The Vision
What would the company like to achieve?
A good vision is meant to stretch a company by
articulating an ambitious but attainable future state.
Nokia is the world’s largest manufacturer of
mobile phones and operates with a simple but
powerful vision: “If it can go mobile, it will!”

Values
In high-performance organizations, values
respect the interests of key stakeholders.
The values of a company should state:
 How managers and employees should
conduct themselves
 How they should do business
 What kind of organization they need to build
to help achieve the company’s mission
 Organizational culture
• The set of values, norms, and standards that control how
employees work to achieve an organization’s mission and
goals
• Often seen as an important source of competitive advantage

Values at Nucor
 “Management is obligated to manage Nucor in such
a way that employees will have the opportunity to
earn according to their productivity.”
 “Employees should be able to feel confident that if
they do their jobs properly, they will have a job
tomorrow.”
 “Employees have the right to be treated fairly and
must believe that they will be.”
 “Employees must have an avenue of appeal when
they believe they are being treated unfairly.”
At Nucor, values emphasizing pay for performance, job
security, and fair treatment for employees help to create
an atmosphere that leads to high employee productivity.

Key characteristics of well-constructed goals:
1. Precise and measurable – to provide a
yardstick or standard to judge performance
2. Address crucial issues – with a limited
number of key goals that help to maintain focus
3. Challenging but realistic – to provide
employees with incentive for improving
4. Specify a time period – to motivate and
inject a sense of urgency into goal attainment
Major Goals
A goal is a precise and measurable desired
future state that a company must realize
if it is to attain its vision or mission.
Focus on long-run performance and
competitiveness.

External Analysis requires an assessment of:
 Industry environment in which company operates
• Competitive structure of industry
• Competitive position of the company
• Competitiveness and position of major rivals
 The country or national environments
in which company competes
 The wider socioeconomic or macroenvironment
that may affect the company and its industry
• Social
• Government
Purpose is to identify the strategic opportunities and
threats in the organization’s operating environment
that will affect how it pursues its mission.
• Legal
• International
• Technological
 External Analysis

Internal analysis includes an assessment of:
 Quantity and quality of a
company’s resources and
capabilities
 Ways of building unique
skills and company-specific
or distinctive competencies
Purpose is to pinpoint the strengths and weaknesses
of the organization. Strengths lead to superior
performance and weaknesses to inferior performance.
 Internal Analysis
Building & sustaining a competitive advantage
requires a company to achieve superior:
• Efficiency
• Quality
• Innovations
• Responsiveness to customers

 SWOT analyses help to identify strategies that align
a company’s resources and capabilities to its
environment – in order to create and sustain a
competitive advantage.
 Functional strategies should be consistent with and
support the company’s business level and global
strategies.
• Functional-level strategy – directed at operational effectiveness
• Business-level strategy – businesses’ overall competitive themes
• Global strategy – expand, grow and prosper at a global level
• Corporate-level strategy – to maximize profitability and profit growth
 Selecting Strategies: SWOT
Analysis and Business Model
When taken together, the various strategies
pursued by a company must lead to a
viable business model.

 Strategy Implementation
 After choosing a set of congruent strategies to
achieve competitive advantage, managers must
put those strategies into action:
• Implementation and execution of the strategic plans
• Design of the best organization structure
• Consistency of strategy with company culture
• Control systems to measure and monitor progress
• Governance systems for legal and ethical compliance
• Consistency with maximizing profit and profit growth
 The feedback loop – strategic planning is ongoing
• Managers must monitor strategy execution:
» To determine if strategic goals and objectives are being achieved
» To evaluate to what extent competitive advantage is being
created and sustained
• Managers must monitor and reevaluate for the next round of
strategy formulation and implementation

Planned, Deliberate, Emergent
and Realized Strategies
Source: Adapted from H. Mintzberg and
A. McGugh, Administrative Science
Quarterly, Vol. 30. No. 2, June 1985.
Figure 1.6

Intended and Emergent Strategies
 Intended or Planned Strategies
• Strategies an organization plans to put into action
• Typically the result of a formal planning process
• Unrealized strategies are the result of unprecedented
changes and unplanned events after the formal planning is
completed
 Emergent Strategies
• Unplanned responses to unforeseen circumstances
• Serendipitous discoveries and events may emerge that can
open up new unplanned opportunities
• Must assess whether the emergent strategy fits the
company’s needs and capabilities
 Realized Strategies
• The product of whatever intended strategies are actually put
into action and of any emergent strategies that evolve

Strategic Planning in Practice
 Scenario Planning
• Recognizes that the future is inherently unpredictable
• Develops strategies for possible future scenarios
 Decentralized Planning
• Involves the functional managers
• Avoids the ivory tower approach
• Perceives procedural justice in the decision making
 Strategic Intent
• Avoids the strategic fit model, which focuses too much on the
current state
• Sets ambitious vision and goals that stretch a company and
then finds ways to build to attain those goals
Recent studies suggest that formal planning does have a
positive impact on company performance – and should
include the current and future competitive environments.

Strategic Decision Making
In spite of systematic planning, companies may adopt poor
strategies if groupthink or individual cognitive biases are
allowed to intrude into the decision-making process:
 Cognitive biases:
Rules of thumb or heuristics resulting in systematic errors
• Prior hypothesis bias
• Escalating commitment
• Reasoning by analogy
• Representativeness
• Illusion of control
 Groupthink:
Decisionmakers embark on a course of action without
questioning the underlying assumptions
• Group coalesces around a person or policy
• Decisions based on an emotional rather than an objective assessment
of the correct course of action

Processes for Improving
Decision Making
Reveals problems with
definitions, assumptions,
& recommended courses
of action
To bring out all the
reasons that might
make the proposal
unacceptable
Figure 1.7

Strategic Leadership
 Vision, eloquence, and consistency
 Commitment
 Being well informed
 Willingness to delegate and empower
 The astute use of power
 Emotional intelligence
• Self-awareness
• Self-regulation
• Motivation
• Empathy
• Social skills
Good leaders of the strategy-making process
have a number of key attributes:

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