Module 2

The Three Strategy-Making Tasks

Module Outline
Developing a Strategic Vision and Mission Establishing Financial and Strategic Objectives Crafting a Strategy Factors Shaping a Companys Strategy Linking Strategy With Ethics Tests of a Winning Strategy Approaches to Performing Strategy-Making Tasks

First Direction-Setting Task: Developing a Vision and Mission

Forming a vision involves
Understanding what business firm is in Communicating vision and mission in clear, exciting, and inspiring ways Deciding when to alter firms strategic course and change mission

Characteristic of a Strategic Vision and Mission

A Strategic Vision
Identifies activities firm intends to pursue Sets forth long-term direction Provides big picture perspective of
WHO we are, WHAT we do, WHERE we headed

A Mission Statement
Set firm apart from others Arouse strong sense of organizational identity and business purpose

Characteristic of a Strategic Vision and Mission

Strategic leadership starts with
Concept of what a firm should and should not do Vision of where a firm needs to be headed

Example of a Strategic Vision

Delta Airlines
.. we want Delta to be the WORLDWIDE AIRLINE OF CHOICE

Example of a Strategic Vision

Delta Airlines
WORLDWIDE, because we are and intend to remain an innovative, aggressive, ethical, and successful competitor that offers access to the world at the highest standards of customer service. We will continue to look for opportunities to extend our reach through new routes and creative global alliances.

Example of a Strategic Vision

Delta Airlines
AIRLINE, because we intend to stay in the business we know best air transportation and related services. We wont stay from our roots. We believe in the long-term prospects for profitable growth in the airline industry, and we will continue to focus time, attention, and investment on enhancing our place in that business environment.

Example of a Strategic Vision

Delta Airlines
OF CHOICE, because we value the loyalty of our customers, employees, and investors. For passengers and shippers, we will continue to provide the best service and value. For our personnel, we will continue to offer an ever more challenging, rewarding, and resultoriented workplace that recognized and appreciates their contributions. For our shareholders, we will earn a consistent, superior financial return.

Defining a Companys Business

Three factors to consider Costumer needs
What is being satisfied

Customer groups
Who is being satisfied

Technologies used and functions performed

How customer needs are satisfied

Defining a Companys Business

Looking outward at customer needs makes the business definition
Customer-driven Market-driven

Looking inward at technologies and functions indicates scope of firms operations

Specialized Fully Integrated Partially Integrated

Examples: Business Definitions

Polaroid
Perfecting and marketing instant photography to satisfy the needs of more affluent U.S. and West European families for affection, friendship, fond memories, and humor.

McDonalds
Serving a limited menu of hot, tasty food quickly in a clean, friendly restaurant for a good value to a broad base of fast-food customers worldwide.

Broad or Narrow Mission Statements?

A well-crafted mission statement
Must be narrow enough to specify real arena of interest Serves as boundary of what to do and not do Serves as beacon of where top management intends to take firm

Overly broad mission statements provide no practical guidance in strategy-making They dont help managers manage! Diversified companies have broader business definitions than single business enterprises

Example: Mission Statement of Diversified Firm

Alcan
Alcan is determined to be the most innovative diversified aluminum company in the world. To achieve this position, Alcan will be one, global, customer-oriented enterprise committed to excellence and lowest cost in its chosen aluminum business, with significant resources devoted to building an array of new businesses with superior growth and profit potential.

Example: Mission Statement of Diversified Firm

Times Mirror Corporation
Time Mirror is a media and information company principally engaged in newspaper publishing; book, magazine and other publishing; and cable and broadcast television.

Example: Mission Statement of Diversified Firm

John Hancock
At John Hancock, we are determined not just to compete but to advance, building our market share by offering individuals and institutions the broadest possible range of products and services. Apart from insurance, John Hancock encompasses banking products, full brokerage services and institutional investment, to cite only a few of our diversified activities. We believe these new directions constitute the right moves the steps that will drive our growth throughout the remainder of this century.

Mission Statement for Functional Departments

Functional area mission statements spotlight
Departments contribution to firms mission Departments role and scope within firm Direction which department needs to be moving

Examples: Mission Statements of Functional Departments

Human Resources
To contribute to organizational success by developing effective leaders, creating high performance teams, and maximizing the potential of individuals.

Corporate Claims Department

To minimize the overall cost of liability, workers compensations and property damage claims through competitive cost containment techniques and loss prevention and control programs.

Communicating the Vision

Communicating an exciting vision can
Inspire, challenge, and motivate workforce Arouse strong sense of organizational purpose, build pride, and induce employee buy-in Bring workforce together, galvanize people to act, and cause people to live the business

The best-worded mission statements

Are simple and concise Speak loudly and clearly Generate enthusiasm for firms future Elicit personal effort and dedication from everyone

Role of Entrepreneurship: Changing the Mission

Entrepreneurial Challenge Knowing when events require revising mission to avoid
Getting trapped in a stagnant core business or Letting new growth opportunities slip away

Good strategy-makers are alert to

Shifting customer wants and needs Emerging technological capabilities Changing international trade conditions Signs of growing or shrinking opportunities

Managerial Value of a Strategic Vision and Mission

Crystallizes top managements view of firms long-term direction Helps managers avoid visionless or rudderless decision-making Conveys organizational purpose motivating employees to do their very best Helps keep direction-related actions of lower-level managers of common path A well-chosen mission prepares a company for the future!

Second Direction-Setting Task: Establishing Objectives

Objectives
Represent managerial commitment to achieve specific and measurable performance targets by a certain time Spell-out how much of what kind of performance by when Direct attention and energy to what needs to be accomplished Establishing objectives converts firms mission into concrete performance outcomes!

Managerial Value of Objectives

Objectives serve two purposes
Subsequent strategic decision-making for aimlessness over what to accomplish Provide benchmarks for judging organizational performance

Managerial Value of Objectives

Principle Companies whose managers set objectives for each key results area and then aggressively pursue actions calculated to achieve their performance targets typically outperform companies whose managers have good intentions, try hard, and hope for success!

What Kind of Objectives to Set?

Required for Every Key Result Area Financial Objectives
Relate to firms financial performance Acceptable financial performance is critical to firms survival

Strategic Objectives
Relate to firms competitiveness and market position Tend to be competitor focused Acceptable strategic performance is essential for long-term competitive success

What Kind of Objectives to Set?

Required for Every Key Result Area
Short-Run Objectives Focus on short-term performance Long-Run Objectives Focus on long-term performance

Strategic Management Principle

Every company needs both strategic and financial objectives!

Example: Corporate Objectives

McDonalds To achieve 100 percent total customer satisfaction everyday in every restaurant for every customer.

Example: Corporate Objectives

Rubbermaid
To increase annual sales from $1 billion to $2 billion in 5 years. To enter a new market every 18 to 24 months. To have 30% of sales each year come from products not in the companys product line 5 years earlier. To be the lowest cost, highest quality producer in the household products industry, To achieve a 15 percent average annual growth in sales, profit, and earnings per share.

Strategic Vs. Financial Objectives

Pressures to opt for better near-term financial performance are pronounced when
Firm is struggling financially Resource commitments for strategic moves will detract from bottom-line Proposed strategic moves are risky

A firm passing up opportunities to strengthen longterm gains for near-term financial gains risks
Diluting its competitiveness Losing momentum in its markets Impairing its ability to stave off rivals challenges

Strategic Management Principle

Pursuing the strategic objectives of building a stronger long-term competitive position benefits shareholders more lastingly than pursuing the financial objectives of improving short-term profitability!

Example: Financial Objectives

Achieve revenue growth of 10% per year Increase earnings by 15% annually Increase dividends per share by 5% per year Increase net profit margins 2% to 4% Boost annual returns on invested capital from 15% to 20% Stronger bond and credit ratings Recognition as a blue chip company A more diversified revenue base Stable earnings during recessionary periods

Example: Strategic Objectives

A bigger market share Lower costs relative to key competitors Broader or more attractive product line than rivals A stronger reputation with customers than rivals Better customer service than rivals Recognition as a leader in technology and / or product innovation Ability to compete in international markets A higher, more secure industry rank

Concept: Strategic Intent

Basic Concept A company exhibits Strategic Intent when it relentlessly pursues a certain long-term strategic objective and concentrates its strategic actions on achieving that objectives

Concept: Strategic Intent

Strategic objectives indicate firms strategic intent to stake out a particular position Time horizon of strategic intent is long-term A firms strategic intent
Serves as rallying cry for employees to do their very best Signals deep-seated commitment to winning

Concept: Strategic Intent

A capably managed company steadfastly committed to achieving strategic objectives well beyond its present reach and resources is potentially a more formidable competitor than a company with modest strategic intent!

Objectives Need to be Time-Based

SHORT-RUN objectives
Performance targets to be achieved soon usually this year or next

LONG-RUN objectives
Performance targets to be achieved later within 3 to 5 years

Short-Range and Long-Range Objectives

SHORT-RANGE objectives
Spell out near-term results to achieve Indicate speed of progress and level of performance being aimed for Serve as star steps for reaching long-range performance

LONG-RANGE objectives
Prompt actions now that will permit reaching targeted long-range performance later Push managers to weigh impact of todays decisions on future performance

Strategic Management Principle

For the establishment of objectives to have value as a management tool, they must be stated in quantifiable or measurable terms and specify a deadline for achievement!

All Managers Need Objectives

The process is TOP-DOWN 1. Start with organization-wide objectives 2. Next, set business and product-line objectives 3. Then, establish functional area and department objectives 4. Individual objectives come last

Strategic Management Principle

Objective-setting should be a top-down process in order to achieve unity and cohesion throughout the organization!

Three Rules for Stating Objectives

1. Spell out in quantifiable or measurable terms 2. Specify deadline for achievement 3. Be challenging but achievable

Rule for Stating Objectives

Setting challenging but achievable objectives requires managers to judge what performance is possible in light of external condition against what performance the organization is capable of achieving when pushed!

Why Have Performance Objectives?

Two reasons 1. To substitute purposeful, strategic decisionmaking for aimless actions over what to accomplish 2. To provide benchmarks for judging just how good firms actual strategic performance turns out to be

Strategic Management Principle

Companies whose managers set objectives for each key results area and then aggressively pursue actions calculated to achieve their performance targets are strong candidates to outperform companies whose managers operate with hopes, prayers, and good intention!

Examples: Strategic Objectives

Federal Express
To continue global expansion by providing service to additional countries, increasing number of flight destinations, expanding fleet of aircraft, adding new hubs, adding U.S. distribution gateways, and merging dissimilar networks.

Alcan Aluminum
To be the lowest cost producer of aluminum.

Examples: Strategic Objectives

General Electric
To become the most competitive enterprise in the world by being the #1 or #2 in market share in every business the company is in.

Atlas Corporation
To become a low-cost, medium-size gold producer, producing in excess of 125,000 ounces of gold a year and building gold reserves of 1,500,000 ounces.

Examples: Strategic Objectives

Ford Motor Company
To be a low-cost producer of the highest quality products and services that provide the best customer value.

Eastman Kodak
To be the worlds best in chemical and electronic imaging.

Examples: Strategic Objectives

Apple Computer
To offer the best possible personal computing technology. To put that technology in the hands of as many people as possible.

Quaker Oats Company

To be a leading marketer of strong consumer brands and improve the profitability of low-return businesses or divest them.

Third Direction-Setting Task: Crafting a Strategy

A firms strategy consists of combined actions management has taken and intends to take in
Achieving strategic and financial objectives Pursuing organizations mission

Characteristics of Strategy-Making
Action-oriented, concerning
What to do When to do it Who should be involved

Characteristics of Strategy-Making
Evolves over time, responding to
Dynamics of competition Changing customer needs and expectations Changes in costs New regulations and changes in trade barriers Other opportunities and threats

Characteristics of Strategy-Making
Never-ending, resulting in firms actual strategy being a blend of its
Intended or Planned strategy As-Needed Reactions to new developments and unforeseen conditions

A Diversified Company
Corporate-Level Managers Corporate Strategy Two-Way Influence Business-Level General Managers Business Strategies Two-Way Influence Heads of Major Functional Areas Functional Strategies Two-Way Influence Plant Managers, Lower-Level Supervisors Operating Strategies

A Single Company

Senior Managers

Business Strategies Two-Way Influence

Heads of Major Functional Areas

Functional Strategies Two-Way Influence

Plant Managers, Lower-Level Supervisors

Operating Strategies

Strategy-Making Pyramid: Diversified Firms

Corporate Strategy
Formulated company as a whole

Business Strategies
Formulated for each separate business units

Functional Strategies
Formulated by functional-area managers within each business units

Operating Strategies
Formulated by plant managers, geographical unit managers, and lower-level managers

Strategy-Making Pyramid: Single-Business Firms

Business Strategies
Formulated for each separate business unit by business-level managers

Functional Strategies
Formulated by functional-area managers within each business unit

Operating Strategies
Formulated by plant managers, geographic unit managers, and lower-level managers

Identifying the Corporate Strategy of a Diversified Company

Kind of Diversification How Much Diversification Responses to Changing Conditions

Approach to Capital Allocation

Corporate Strategy

Moves to Build Competitive Advantage Via Diversification Moves to Strengthen Positions and Profits in Existing Businesses

Moves to Divest Weak Units Moves to Add New Businesses and Build New Positions

What Is Corporate Strategy?

Overall game plan for diversified company Consists of
Moves to establish business positions in different industries Approaches to managing group of businesses company has diversified into

Tasks of Corporate Strategy

Making moves to achieve diversification Initiating actions to boost performance of business company has diversified into Finding ways to capture synergy among related business units

2 + 2 = 5 effects!
Establishing investment priorities and steering corporate resources into most attractive business units

Identifying the Corporate Strategy for a Single-Business Company

Responses to Changing Conditions Basic Competitive Approach Approach to Vertical Integration

Manufacturing Strategy Marketing Strategy Human Resources Strategy R&D Strategy

Corporate Strategy

Moves to Secure Competitive Advantage

Moves to Strengthen Competitive Positions and Improve Performance Finance Strategy

What Is Business Strategy

Game plan for one line of business Central thrust is how to build and strengthen firms long-term competitive position Task separating powerful from weak business strategies is forging a series of moves capable of producing
Sustainable competitive advantage

What Business Strategy Involves?

Forming responses to changes in
Industry Economy Regulatory and political arena Crafting competitive moves that lead to sustainable competitive advantage Uniting strategic initiatives of functional areas Addressing strategic issues related to firms competitive position and internal situation

Functional Strategies
Game plan for running a particular function within a business Adds detail to business strategy and governs how key activities will be managed A business needs as many functional strategies as it has major functional activities Roles of functional strategies
Provide support for overall business strategy Specify how functional managers plan to achieve functional area performance objectives

Operating Strategies
Concern even narrower strategic approaches for managing key operating units Designed to achieve strategy-critical performance targets of operating-level units Add detail to overall business plan and functional strategies but are of lesser scope

Example: Operating Strategy

Boosting Worker Productivity To boost productivity by 10%, managers of firm with low-price, high-volume strategy took following actions:
Recruitment manager developed selection process designed to weed out all but best-qualified candidates Information systems manager devised way to increase office productivity by installing computerized workstation for clerical workers Benefit manager devised improved incentive compensation plan Purchasing manager obtained new efficiency-increasing tool and equipment

Example: Operating Strategy

Improving Delivery and Order-Filling Manufacturer of plumbing equipment emphasizes quick delivery and accurate order-filling as keystones of its customer service approach. Warehouse manager took following approaches:
Inventory stocking strategy allowing 99% of all orders to be completely filled without backordering any item Staffing strategy of maintaining workforce capability to ship any order within 24 hours

The Networking of Missions, Objectives, and Strategies

Level 1
Corporate-Level Managers Overall Scope and Strategic Mission Two-Way Influence Corporate Level Objectives Two-Way Influence Business Level Objectives Two-Way Influence Functional Area Objectives Two-Way Influence Field Unit Objectives Corporate Level Strategy Two-Way Influence Business Level Strategies Two-Way Influence Functional Area Strategies Two-Way Influence Operating Strategies

Level 2
Business-Level General Managers

Business Level Mission Two-Way Influence

Level 3
Heads of Major Functional Areas

Functional Area Mission Two-Way Influence

Level 4
Plant Managers, Lower-Level Supervisors

Operating Mission

Uniting Strategy-Making Effort

A firms strategic plan is a collection of strategies Separate strategies must be unified into a cohesive, company-wide action plan Pieces and layers of strategy should fit together like pieces of a puzzle Consistency among business, functional, and operating strategies comes from strategymakers allegiance to business objectives

Strategic Management Principle

Objectives and strategies that are unified from top to bottom do not come from an undirected process where managers at each level have the freedom to set their own objectives and strategies independently!

Factors Shaping the Choice of Company Strategy

External Factors
Societal, Political, Regulatory Factors Industry Attractiveness Opportunity and Threat

Companys Strategic Situation

Conclusion about how internal / external factors matter

Identification and evaluation of alternatives

Crafting Strategy for Overall Situation

Internal Strength and Weakness

Key Executives Influences

Shared Values and Cultures

Internal Factors

Factors Shaping Strategy

External
Societal, political, regulatory, citizenship considerations Industry attractiveness and competitive conditions Specific company opportunities and threats

Internal
Company strengths and weaknesses Personal ambitions, business philosophies, and ethical principles of key executives Influence of shared values and company cultures

Societal, Political, Regulatory, and Citizenship Factors

External factors impacting strategic choices
Health and nutrition concerns Concerns about alcohol and drug abuse Sexual harassment Impact of plant closings on communities New tax laws Rising / falling interest rates Recessionary economic conditions Trade restrictions, tariffs, and import quotas

Corporate Social Responsibility

Social responsibility with respect to strategy entails
Conducting company activities within bounds of what is considered ethical and in public interest Responding positively to emerging societal priorities and expectations Demonstrating a willingness to take needed action ahead of regulatory confrontation Balancing stockholder interests against larger interest of society as a whole Being a good citizen in community

Industry Attractiveness and Competitive Conditions

Assessing industry and competitive environment affects how a firm should
Try to position itself in its industry Determine its basic competitive approach

Factors affecting selection of strategy

Pace of market growth Kinds of changes occurring in industry Competitive forces Moves of rival competitors

Strategic Management Principle

A companys strategy ought to be closely matched to industry and competitive conditions!

Company Opportunities and Threats

For strategy to be successful, it has to be well matched to
Company opportunities Threats to company

Strategic Management Principle

A well-conceived strategy aims at capturing a companys best growth opportunities and defending against external threats to its well-being and future performance!

Company Strengths and Weaknesses

A firms strategy must be well-matched to its
Internal strengths and weaknesses Competitive capabilities

Does firm have core competencies? Core competencies are critical to strategymaking because of
Capabilities provided in capitalizing on a particular opportunity Competitive edge yielded in marketplace Potential for being a cornerstone of strategy

Strategic Management Principle

A well-conceived strategy attempts to build upon company strengths and correct important weaknesses!

Ambitions, Philosophies, and Ethics of Key Executives

Managers generally stamp strategies they craft with their own personal
Ambitions Values Business philosophies Attitudes toward risk Ethical beliefs

Shared Values and Company Cultures

Values and culture can dominate kinds of strategic moves a company will automatically
Consider, or Reject

An organization should not undertake strategic moves which are in conflict with
Its culture, or Values widely shared by managers and employees

Example: Hewlett-Packard
HPs basic values the HP ways
Sharing firms success with employees Showing trust in and respect for employees Providing customers with products / services of greatest values Being genuinely interested in providing customers with effective solutions to their problems Making profit a high stockholder priority Avoiding use of long-term debt to finance growth Individual initiative, creativity, and teamwork Being a good corporate citizen

Linking Strategy With Ethics

Ethical and moral standards go beyond
Prohibition of law Language of thou shalt not to issue of duty and language of should and should not do Every action a company takes should pass test of being ethically acceptable!

Linking Strategy With Ethics

Ethical responsibilities of firm to stakeholders Owners / shareholders
Expect some form of return on their investment

Employees
Expect respect for their worth and devoting their energies to firm

Customers
Expect reliable, safe product or service

Suppliers
Expect equitable relationship with firm

Community
Expect business to be good citizens in their community

Test of a Winning Strategy

Goodness of Fit Test
Hoe well is strategy matched to firms situation?

Competitive Advantage Test

Does strategy lead to sustainable competitive advantage?

Performance Test
Does strategy boost firm performance?

Strategic Management Principle

A strategy is not a true winner unless it passes all three of the tests!

Approaches to Performing StrategyMaking Task

Master strategist
Manager personally functions as chief strategist

Delegate it to others
Manager delegates strategy-making to others

Collaborative
Manager enlist help of key subordinates in hammering out consensus strategy

Champion
Manager encourages subordinates to develop and implement strong strategies

End of Module 2