Chapter One

Strategic Leadership: Managing the g g StrategyMaking Process for Competitive Advantage

Chapter Outline:
Strategic Leadership, Competitive Advantage, Superior Performance Strategic Managers gy g Strategy-Making Process Strategy as an Emergent Process Strategic Planning in Practice Strategic Decision Making Strategic Leadership

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Why do some organizations succeed while others fail?

Strategy is a set of related actions that managers take to increase their companys performance. Strategic Leadership
Task of most effectively managing a co pa y s st ategy a g p ocess companys strategy-making process

Superior Performance and Sustainable Competitive Advantage

Superior Performance
One companys 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 ROIC

Strategy Formulation
Task of determining and selecting strategies

= Capital invested =

Net profit

Net income after tax Equity + Debt to creditors

Strategy Implementation
Task of putting strategies into action to improve a companys efficiency and effectiveness

Competitive Advantage
When a companys profitability is greater than the average of all other companies in the same industry & competing for the same customers

Competitive Advantage results when a companys strategies lead to superior performance compared to competitors
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Sustained Competitive Advantage

When a companys strategies enable it to maintain above average profitability for a number of years
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Determinants of Shareholder Value

Figure 1.2

Companys Business Model

Managements model of how strategy will allow the company to gain competitive advantage and achieve superior profitability
A business model encompasses how the company will: Select its customers Deliver those goods and services to the market Define and differentiate its product offerings Organize activities within the company Create value for its customers Configure its resources Acquire and keep Achieve and sustain a high customers level of profitability Produce goods or services Grow the business over Lower costs time
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To increase shareholder value, managers must pursue strategies that increase the profitability of the company and grow the profits.
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Differences in Industry and Company Performance

A Companys Profitability and Profit Growth are determined by two main factors:
The Th overall performance ll f of its industry relative to other industries Its relative success in its industry as compared to the competitors
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Return on Invested Capital in Selected Industries, 20022006

Figure 1.3

Data Source: Value Line Investment Survey Copyright Houghton Mifflin Company. All rights reserved. 1|8

Performance in Nonprofit Enterprises

Nonprofit entities such as government agencies, universities, and charities:
Are not in business to make a profit BUTstill need to use their resources efficiently and effectively y y Must meet goals Set strategies to achieve goals and compete with other nonprofits for scarce resources

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

Business-Level Managers B i L lM
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)
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A successful strategy gives potential donors a compelling message as to why they should contribute.
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Levels of Strategic Management

Figure 1.4

The Five Steps of the Strategy Making Process

1 Select the corporate mission and the major
corporate goals.

2 Analyze the external competitive environment to

identify opportunities and threats.

3 Analyze the organizations internal environment

to identify its strengths and weaknesses weaknesses. Select strategies that:
Build on the organizations strengths and correct its weaknesses in order to take advantage of external opportunities and counter external threats Are consistent with organizations mission and major goals Are congruent and constitute a viable business model

Implement the strategies. strat

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1 Crafting the Organizations Mission

Statement
Provides a framework or context within which strategies are formulated, including: Mission
The reason for existence what an organization does

The Mission
The mission is a statement of a companys
reason for existence today.

What is it that the company does?

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)?

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
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A companys mission is best approached from a customer-oriented business definition.

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Abells Framework for Defining the Business

Figure 1.6

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.

The vision of Ford is to become the worlds leading consumer company for automotive products and services.

Source: D. F. Abell, Defining the Business: The Starting Point of Strategic Planning (Englewood Cliffs, Prentice Hall, 1980), p. 7.
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Nokia is the worlds largest manufacturer of mobile phones and operates with a simple but powerful vision: If it can go mobile, it will!
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Values
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 companys mission Organizational culture
The set of values, norms, and standards that control how employees work to achieve an organizations 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. p y 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.
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In high-performance organizations, values respect the interests of key stakeholders.

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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.
Key characteristics of well-constructed goals:
1. 1 2. 3. 4. Precise and measurable to provide a yardstick or standard to judge performance Address crucial issues with a limited number of key goals that help to maintain focus Challenging but realistic to provide employees with incentive for improving Specify a time period to motivate and inject a sense of urgency into goal attainment Focus on long-run performance and competitiveness.
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2 External Analysis
Purpose is to identify the strategic opportunities and threats in the organizations operating environment that will affect how it pursues its mission.

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 Governmental Legal International Technological Macroeconomic
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Internal Analysis
Purpose is to pinpoint the strengths and weaknesses of the organization. Strengths lead to superior performance and weaknesses to inferior performance.

Selecting Strategies: SWOT Analysis and Business Model

SWOT analyses help to identify strategies that align a companys resources and capabilities to its environment in order to create and sustain a competitive advantage. Functional strategies should be consistent with and pp p y g support the companys 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

Internal analysis includes an assessment of:

Quantity and quality of a company s resources and companys capabilities Ways of building unique skills and company-specific or distinctive competencies

Building & sustaining a competitive advantage requires a company to achieve superior:

Efficiency Quality Innovations Responsiveness to customers
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When taken together, the various strategies pursued by a company must lead to a viable business model.
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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

Managers must monitor strategy execution:
To determine if strategic goals and objectives are being achieved To evaluate to what extent competitive advantage is g being created and sustained

Managers must monitor and reevaluate for the next round of strategy formulation and implementation Strategic planning is ongoing.

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Emergent and Deliberate Strategies

Figure 1.7

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 companys needs and capabilities

Realized Strategies
Source: Adapted from H. Mintzberg and A. McGugh, Administrative Science Quarterly, Vol. 30. No. 2, June 1985.
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The product of whatever intended strategies are actually put into action and of any emergent strategies that evolve
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Strategic Planning in Practice

Studies suggest that formal planning has 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.

Scenario Planning
Recognizes that the future is inherently unpredictable Develops strategies for possible future scenarios

Cognitive biases: Rules of thumb or heuristics resulting in systematic errors

Prior hypothesis bias Escalating commitment Reasoning by analogy Representativeness Illusion of control Availability error

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
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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
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Strategic Leadership
Good leaders of the strategy-making process have a number of key attributes:
Vision, eloquence, and consistency Articulation of the business model Commitment Being well informed Willingness to delegate and empower The astute use of power Emotional intelligence: self-awareness, selfregulation, motivation, empathy, social skills

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