Theory of Strategic Management with Cases, 8eHills, JonesChapter One

Leadership, Strategy & Competitive Advantage

Chapter Outline:Strategic Leadership, Competitive Advantage, Superior PerformanceStrategic ManagersStrategy-Making ProcessStrategy as an Emergent ProcessStrategic Planning in PracticeStrategic Decision MakingStrategic Leadership

Why do some organizations succeed while others fail? Strategic LeadershipTask of most effectively managing a companys strategy-making process Strategy FormulationTask of determining and selecting strategies Strategy ImplementationTask of putting strategies into action to improve a companys efficiency and effectivenessCompetitive Advantage results when a companys strategies lead to superior performance compared to competitorsStrategy is a set of related actions that managers take to increase their companys performance.

Superior Performance and Sustainable Competitive Advantage Superior PerformanceOne companys profitability relative to that of other companies in the same or similar business or industryMaximizing 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 AdvantageWhen a companys profitability is greater than the average of all other companies in the same industry & competing for the same customers

= Sustained Competitive AdvantageWhen a companys strategies enable it to maintain above average profitability for a number of years

Determinants of Shareholder ValueTo increase shareholder value, managers must pursue strategies that increase the profitability of the company and grow the profits.Figure 1.2

Companys Business ModelA business model encompasses how the company will:Managements model of how strategy will allow the company to gain competitive advantage and achieve superior profitabilitySelect its customersDefine and differentiate its product offeringsCreate value for its customersAcquire and keep customersProduce goods or servicesLower costsDeliver those goods and services to the marketOrganize activities within the companyConfigure its resourcesAchieve and sustain a high level of profitabilityGrow the business over time

Differences in Industry and Company Performance A Companys 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, 20022006Data Source: Value Line Investment SurveyFigure 1.3

Performance in Nonprofit Enterprises Nonprofit entities such as government agencies, universities, and charities:Are not in business to make a profitBUTstill need to use their resources efficiently and effectivelyMust meet goalsSet strategies to achieve goals and compete with other nonprofits for scarce resourcesA successful strategy gives potential donors a compelling message as to why they should contribute.

Strategic ManagersCorporate-Level ManagersOversee the development of strategies for the whole organizationThe CEO is the principle general manager who consults with other senior executivesBusiness-Level ManagersResponsible for overall company, business unit, or divisional performanceFunctional-ManagersResponsible for supervising a particular task or operation (e.g. marketing, operations, accounting, human resources)

Levels of Strategic ManagementFigure 1.4

The Five Steps of the Strategy Making ProcessSelect the corporate mission and the major corporate goals.Analyze the external competitive environment to identify opportunities and threats.Analyze the organizations internal environment to identify its strengths and weaknesses.Select strategies that:Build on the organizations strengths and correct its weaknesses in order to take advantage of external opportunities and counter external threatsAre consistent with organizations mission and major goals Are congruent and constitute a viable business modelImplement the strategies.

Crafting the Organizations Mission StatementProvides a framework or context within which strategies are formulated, including:

Mission The reason for existence what an organization doesVision A statement of some desired future stateValues 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? 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 companys reason for existence today. A companys mission is best approached from a customer-oriented business definition.

Abells Framework for Defining the BusinessFigure 1.6Source: D. F. Abell, Defining the Business: The Starting Point of Strategic Planning (Englewood Cliffs, Prentice Hall, 1980), p. 7.

The VisionWhat would the company like to achieve?A good vision is meant to stretch a company by articulating an ambitious but attainable future state.

ValuesIn high-performance organizations, values respect the interests of key stakeholders.The values of a company should state:How managers and employees should conduct themselvesHow they should do businessWhat kind of organization they need to build to help achieve the companys missionOrganizational cultureThe set of values, norms, and standards that control how employees work to achieve an organizations mission and goalsOften seen as an important source of competitive advantage

Values at NucorManagement 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.

Major GoalsKey characteristics of well-constructed goals: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 focusChallenging but realistic to provide employees with incentive for improvingSpecify a time period to motivate and inject a sense of urgency into goal attainment

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 AnalysisExternal Analysis requires an assessment of:Industry environment in which company operatesCompetitive structure of industryCompetitive position of the companyCompetitiveness and position of major rivalsThe country or national environments in which company competesThe wider socioeconomic or macroenvironment that may affect the company and its industrySocialGovernmentalPurpose is to identify the strategic opportunities and threats in the organizations operating environment that will affect how it pursues its mission. Legal International Technological Macroeconomic

Internal AnalysisInternal analysis includes an assessment of:Quantity and quality of a companys resources and capabilitiesWays 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.

Selecting Strategies: SWOT Analysis and Business ModelSWOT 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 support the companys business level and global strategies.Functional-level strategy directed at operational effectivenessBusiness-level strategy businesses overall competitive themesGlobal strategy expand, grow and prosper at a global levelCorporate-level strategy to maximize profitability and profit growth

When taken together, the various strategies pursued by a company must lead to a viable business model.

Strategy ImplementationAfter choosing a set of congruent strategies to achieve competitive advantage, managers must put those strategies into action:Implementation and execution of the strategic plansDesign of the best organization structureConsistency of strategy with company cultureControl systems to measure and monitor progressGovernance systems for legal and ethical complianceConsistency 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 being created and sustained Managers must monitor and reevaluate for the next round of strategy formulation and implementation

Strategic planning is ongoing.

Emergent and Deliberate StrategiesSource: Adapted from H. Mintzberg and A. McGugh, Administrative Science Quarterly, Vol. 30. No. 2, June 1985.Figure 1.7

Intended and Emergent StrategiesIntended or Planned StrategiesStrategies an organization plans to put into actionTypically the result of a formal planning processUnrealized strategies are the result of unprecedented changes and unplanned events after the formal planning is completedEmergent StrategiesUnplanned responses to unforeseen circumstancesSerendipitous discoveries and events may emerge that can open up new unplanned opportunitiesMust assess whether the emergent strategy fits the companys needs and capabilitiesRealized StrategiesThe product of whatever intended strategies are actually put into action and of any emergent strategies that evolve

Strategic Planning in Practice Scenario PlanningRecognizes that the future is inherently unpredictableDevelops strategies for possible future scenarios Decentralized PlanningInvolves the functional managersAvoids the ivory tower approachPerceives procedural justice in the decision making Strategic IntentAvoids the strategic fit model, which focuses too much on the current stateSets ambitious vision and goals that stretch a company and then finds ways to build to attain those goalsStudies 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. Cognitive biases: Rules of thumb or heuristics resulting in systematic errorsPrior hypothesis bias Escalating commitmentReasoning by analogyRepresentativenessIllusion of controlAvailability error Groupthink: Decisionmakers embark on a course of action without questioning the underlying assumptionsGroup coalesces around a person or policyDecisions based on an emotional rather than an objective assessment of the correct course of action

Strategic Leadership 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, self- regulation, motivation, empathy, social skillsGood leaders of the strategy-making process have a number of key attributes: